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CandleFocus Glossary Editor
The Master-Feeder Structure is a type of fund structure used by hedge funds and international financial organizations. It is designed to separate investor capital into two distinct investment funds, the master fund and the "feeder" fund. This structure is typically used when a fund manager expects more than one group of investors with US and non-US tax status wishing to access the same investment vehicles.
The master fund contains the majority of pooled investor capital, while feeder funds are repositories for smaller individual clients. Each feeder fund will have a different legal structure in accordance with the tax regulations of various countries, but they all feed into the master fund. This provides the fund manager with multiple investments from different sources.
The main advantage of using a master-feeder structure is that it allows the fund manager to achieve economies of scale, as the size of the master fund is usually large compared to the individual feeder funds. This results in lower operating costs for the fund manager, which eventually gets passed on to investors in the form of higher returns.
Furthermore, the master-feeder structure also offers favorable “pass-through” tax treatment for funds located outside the US. With this structure, the master fund is taxed, instead of its individual feeder funds, allowing for a more efficient tax management regime. This is particularly important when the internal revenue service has different rules and regulations in different countries.
Though master-feeder structures are mostly used by hedge funds and international financial organizations, they are also applicable to other types of funds. As with any investment vehicle, investors should ensure they understand the associated risks before committing to any fund. Investors should prioritize their own tax structures, residency obligations, and other financial needs when considering the master-feeder structure. In addition, they should always take professional advice on the details of any fund before investing.
The master fund contains the majority of pooled investor capital, while feeder funds are repositories for smaller individual clients. Each feeder fund will have a different legal structure in accordance with the tax regulations of various countries, but they all feed into the master fund. This provides the fund manager with multiple investments from different sources.
The main advantage of using a master-feeder structure is that it allows the fund manager to achieve economies of scale, as the size of the master fund is usually large compared to the individual feeder funds. This results in lower operating costs for the fund manager, which eventually gets passed on to investors in the form of higher returns.
Furthermore, the master-feeder structure also offers favorable “pass-through” tax treatment for funds located outside the US. With this structure, the master fund is taxed, instead of its individual feeder funds, allowing for a more efficient tax management regime. This is particularly important when the internal revenue service has different rules and regulations in different countries.
Though master-feeder structures are mostly used by hedge funds and international financial organizations, they are also applicable to other types of funds. As with any investment vehicle, investors should ensure they understand the associated risks before committing to any fund. Investors should prioritize their own tax structures, residency obligations, and other financial needs when considering the master-feeder structure. In addition, they should always take professional advice on the details of any fund before investing.