What exactly is a feeder fund?
A feeder fund is one of numerous sub-funds that invest all their capital in a master fund, which has a single investment advisor for portfolio investments and trading. Hedge funds utilize a master fund to aggregate investment resources and build a more extensive portfolio.
The feeder funds receive a proportional share of master fund profits based on their investment capital.
Understanding Feeder Funds
Investors bear the payment of management and performance fees.
The feeder fund-master fund combination effectively mitigates trading and operating expenditures. The master fund demonstrates cost efficiency compared to individual feeder funds due to its ability to leverage a substantial pool of investment capital sourced from several feeder funds.
Utilizing a two-tiered fund structure can provide advantages when feeder funds exhibit shared investing objectives and techniques. However, putting together feeder funds with different investment goals or strategies into a master fund would make them incompatible because their unique qualities would be lost.
Mastery and structures
Feeder funds invest in master funds as autonomous legal entities and may invest in several. Expense fees, investment minimums, and net asset values vary for master fund feeder funds. Many feeder funds can invest in numerous master funds and vice versa.
The master fund of U.S. feeder funds is generally abroad. This lets the master fund accept U.S.-taxable and tax-exempt investments. For U.S. tax reasons, an offshore master fund may pick a partnership or LLC. Onshore feeder funds avoid double taxation by passing through their share of the master fund’s earnings or losses.
New International Feeder Fund Rules
In March 2017, the SEC they have enabled international feeder funds to invest in open-end master funds (U.S. Master Funds), making it more straightforward for global managers to offer their investment products abroad.
The letter modified 1940 Act parts 12(d)(1)(A) and (B) that banned foreign feeder funds in U.S.-registered funds. Many factors drove the SEC to limit the practice. It wanted to limit master fund power over acquired funds. It also protected fund investors from high fees and convoluted structures.
- Many minor investment funds pool client money under a single master fund.
- Consolidating feeder funds into a master fund reduces operating and trading expenses, and a more extensive portfolio offers economies of scale.
- Fees are pro-rated and disbursed to feeder funds in master-feeder hedge funds.