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Master Feeder Structure

The document explains the master feeder structure used by hedge funds, where investors pool capital in feeder funds that invest in a master fund, sharing profits and losses based on investment amounts. It highlights the advantages of this structure, such as reduced trading and operating costs, and contrasts feeder funds with funds of funds (FOFs) in terms of investment strategies and operating expenses. Key differences between feeder funds and FOFs include alignment in investment goals, operational independence, and fee structures.

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83 views3 pages

Master Feeder Structure

The document explains the master feeder structure used by hedge funds, where investors pool capital in feeder funds that invest in a master fund, sharing profits and losses based on investment amounts. It highlights the advantages of this structure, such as reduced trading and operating costs, and contrasts feeder funds with funds of funds (FOFs) in terms of investment strategies and operating expenses. Key differences between feeder funds and FOFs include alignment in investment goals, operational independence, and fee structures.

Uploaded by

kothapremkumarreddy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Master Feeder structure:

Explanation:

An investment structure generally used by hedge funds

Investors pool their capital in feeder funds, which invests in master fund.

Feeder funds are the funds which are actively invested in.

Master funds pools capital from both feeders and invests in different securities.

 The profits and losses generated by the master fund are shared among the feeder funds
according to the amount invested
 The feeder funds then allocate these profits and losses to individual investors.
Flow of funds:

Investors A subscribes to feeder fund and feeder subscribes in master.

A Capital Feeder fund issues units

100000 to Investor A

To Feeder

Feeder invests this 100000

In Master Fund

When investor A wants to redeem his units, places a redemption request to Feeder.

Feeder redeems from master fund and gets the money into it. Then transfer the amount to A.

Points:

 A feeder can invest in any number of masters


 A master fund can accept investments from any number of feeders
 There will some feeder specific expenses which are paid and accrued at feeder’s end. For
example, if the master is in Luxembourg and the feeder is in France, French investors will
have to pay of the Luxembourg subscription tax

UNDERSTANDING FEEDER FUNDS:


In a feeder fund arrangement, all management fees and any performance fees due are paid by
investors at the feeder fund level.

The primary purpose served by the feeder fund-master fund structure is the reduction of trading
costs and overall operating costs. The master fund effectively achieves economies of scale through
having access to the large pool of investment capital provided by a number of feeder funds, which
enables it to operate less expensively than would be possible for any of the feeder funds investing
on their own.

The use of this two-tiered fund structure can be very advantageous when the feeder funds share
common investment goals and strategies but are not appropriate for a feeder fund with a unique
investment strategy or aim since those unique characteristics would be lost in the combination with
other funds within a master fund.

Fund of funds: A widely used term in mutual fun industry where a fund invests in another funds.

Means its portfolio contains different underlying portfolios of other funds.

 The fund of funds strategy aims to achieve broad diversification and minimal risk.
 Funds of funds tend to have higher expense ratios than regular mutual funds.

How do you know if a fund is feeder fund or FOF?

We can decide the nature of the fund based on how its operating, how its portfolio, investment
strategy.

1. Feeder fund and master fund generally are aligned for same investment strategy and goals.
That means the Risk of master fund is total risk of Feeders.
2. FOFs – Basic nature of FOF is diversification eliminating the risk as much as possible in high
volatility as well.
3. Feeders do not operate by themselves. They only must incur those expenses at master level.
However, FOF must pay management fee to multiple funds it invests in. FOFs have high
operating expenses.
4. Feeders invest major proportion of their capital in master fund and cannot operate
individually. FOF can operate individually and invests in other multiple funds.
5. There might be overlapping in holdings in FOFs

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