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A master-feeder fund structure is commonly used in a hedge fund to pool assets and capitals from the United States and foreign countries into a central investment vehicle called the master fund. The master-feeder fund is simply called “feeder”, it is a method of structuring investment funds, whereby, separate investment vehicles are created for a group of investors. Asset managers using the master-feeder fund are able to effectively maximize the larger pool of assets comprised in the feeder.
Typically, a master-feeder fund structure allows the accumulation of both taxable and tax-exempt funds raised by U.S investors and those raised by non-U.S investors.
A Little More on What is a Master-Feeder Fund
The master-feeder structure is used by hedge funds to pool taxable and tax-exempt investment capital from the U.S and overseas. In a master-feeder fund structure, investors place their capital into feeder funds which are then invested into a master fund.
While the feeder fund purchases the shares of the matter fund, the master fund conducts all trading in the market and makes all portfolio investments. A master-feeder fund structure allows the accumulation of a mass of tradable assets, which will improve operational efficiencies and help minimize costs. It also helps asset managers benefit from a large pool of assets or capital.
Structure of a Master-Feeder Fund
A typical master-feeder fund has one master fund, one onshore feeder and another offshore feeder. Feeder funds vary in structure, investment minimum, types of investors and others, given that they are not necessitated to align to a specific master fund. Feeder funds function independently and can be invested in any master fund, this means that a single feeder fund can fit into any master fund, depending on the choice of the fund manager.
Advantages and Disadvantages of the Master-Feeder Fund Structure
The advantages of the master-feeder fund are;
- A master-fund gives room for the consolidation of several investment portfolios into one solid portfolio.
- The master-feeder fund structure allows a fund manager to pool several sources of capital into a centralized vehicle known as a master fund.
- The master-feeder fund structure is cost-effective and helps to achieve economies of scale.
The disadvantages of the master-feeder fund include the following;
- The master-feeder fund structure combines both offshore and offshore feeder funds. The dividend on the offshore feeder funds is subject to tax and this is a drawback.
- The fund also pools together capital from various investors in which creating a middle ground for investment goals is somewhat unachievable.