Master-Feeder Structure

A Master-Feeder structure is a fund management setup commonly used in the hedge fund industry to pool capital from multiple investors into a single investment entity, the “Master Fund.” This arrangement enables efficient management, scaling, and regulatory compliance, accommodating investors from various jurisdictions.

Components of the Master-Feeder Structure

  1. Master Fund: The central fund where all investment activities occur. The Master Fund holds the portfolio of securities and other assets, and conducts trading activities. Its performance is the cumulative result of all investments made within it, and it provides the basis for calculating returns for the Feeder Funds.

  2. Feeder Funds: These are individual funds through which investors contribute capital. Feeder Funds invest virtually all of their assets into the Master Fund, receiving shares or units in return. Different Feeder Funds can be designed to cater to various investor bases, such as U.S. taxpayers, non-U.S. investors, or tax-exempt entities.

Key Advantages of the Master-Feeder Structure

  1. Operational Efficiency: Centralizing the trading operations in the Master Fund streamlines the investment management process, reducing operational redundancies and costs. This single trading entity manages the portfolio directly, which can lead to better trading terms and execution.

  2. Economies of Scale: By pooling assets from multiple Feeder Funds into one Master Fund, funds can achieve greater scale, leading to more favorable trading conditions, reduced transaction costs, and broader investment opportunities.

  3. Segregation of Investors: Feeder Funds can be tailored to the specific regulatory and tax needs of different groups of investors. This allows the hedge fund to comply with various legal requirements while still pooling investments in a single Master Fund.

  4. Simplified Administration: Administrative tasks, such as accounting and reporting, are centralized at the level of the Master Fund, easing the burden on each Feeder Fund and facilitating more efficient reporting and auditing processes.

Example of a Master-Feeder Structure

Diagrammatic Representation:

[Investor](../i/investor.html) Group A (Domestic)
     |
 [Feeder Fund](../f/feeder_fund.html) A (U.S. Investors) 
     |
     v
     |
Master [Fund](../f/fund.html) (Global Portfolio)
     |
     v
[Feeder Fund](../f/feeder_fund.html) B (Foreign Investors)
     |
[Investor](../i/investor.html) Group B (International)

Practical Application

A hedge fund might set up a Master Fund domiciled in a tax-neutral jurisdiction like the Cayman Islands. The Feeder Funds could consist of a U.S. Feeder Fund structured as a limited partnership for taxable U.S. investors and an offshore Feeder Fund structured as a corporation for non-U.S. investors. Both Feeder Funds invest their assets into the Cayman Islands Master Fund, which executes the investment strategy on a global scale.

Regulatory and Tax Considerations

  1. U.S. Tax Considerations: Feeder Funds that cater to U.S. taxable investors typically need to be structured as partnerships to pass through tax implications directly to investors, avoiding double taxation.

  2. Offshore Tax Considerations: Offshore Feeder Funds are designed to attract non-U.S. investors and tax-exempt U.S. investors. These funds are often established in jurisdictions that offer tax neutrality, ensuring that the Master Fund’s gains are not subject to local taxes, which can then be distributed to the offshore investors without an additional tax layer.

  3. Compliance: The Master-Feeder structure must comply with the regulatory requirements of each investor’s jurisdiction. This includes adhering to securities regulations, investor disclosure standards, anti-money laundering (AML) rules, and more.

Conclusion

The Master-Feeder structure is a versatile and efficient fund management setup that allows hedge funds to pool resources, reduce operational costs, and comply with varying regulatory requirements across jurisdictions. By centralizing investment activities in the Master Fund, hedge funds can achieve economies of scale, simplify administrative processes, and cater to a wide range of investors.

For more detailed information, you can explore specific case studies and examples provided by hedge fund service providers, such as Harneys and Maples Group.