Feeder Fund - Explained
What is a Feeder Fund?
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Table of ContentsWhat is a Feeder Fund?How Does a Feeder Fund Work?Structure of Feeder Funds and Master FundsNew Rules on International Feeder Funds
What is a Feeder Fund?
A feeder fund is a type of investment fund that funds most of its investments through a master fund. A feeder fund has all of its investment capital in the master fund. The relationship between a feeder fund and a master fund is primarily used by hedge funds to pull more capital together so as to have a larger account. Profits gained from the master fund are then shared among other feeder funds depending on their contribution to the master fund.
How Does a Feeder Fund Work?
The primary goal of the feeder fund and master fund structure is to reduce trading costs and the overall cost of operations. Basically, the master fund mainly meets economies of scale by having access to the investment capital pool provided by different feeder funds. This saves the cost of operation of any independent feeder funds. Performance fees and management fees are however incurred by the investors at the feeder fund level. There are different structures if the feeder fund, a two-tiered fund structure is beneficial to a feeder fund who shares similar interests in terms of investment goals and strategies unlike a feeder fund with different or preferred goals.
Structure of Feeder Funds and Master Funds
A master fund can have investments from different feeder funds, as this is possible, it is also possible for a feeder fund to have more than one master funds. The feeder fund is a legal entity on its own. Most of the feeder fund is invested in a master fund are different in terms such as expense fees or investment minimums, and possess no identical net asset values (NAV). Master fund in United States is commonly established outside the country. This permits the fund to accept investment capital from both tax-exempt and U.S. taxable investors. However, when a master fund outside the country is taxed as a result of partnership with US investors then investors in US are exempted from being taxed and they receive either their gains or losses. This is done to avoid paying double taxes.
New Rules on International Feeder Funds
It is a new regulation enacted in March, 2017 that foreign feeder funds can invest in the U.S master fund. This is regulation is made by the Securities and Exchange commission. The regulation allows for foreign marketing of investment products through the master fund. This was a rectified part of the 1940 Act, 12(d)(1)(A) and (B), before the modification, it restricted the use of foreign feeder funds into U.S. registered funds. This was due to the facts that SEC aimed at reducing the influence of mutual fund over acquired fund, prevent investors in the funds from layered fees and the complex nature of the mutual fund-feeder relationship.