What it means
In a master-feeder structure, investors do not invest directly in the master fund. Instead each feeder fund collects money from its own type of investor and then buys shares in the master fund, which holds the actual securities.
The structure solves a practical problem. A manager may want to serve taxable investors in one country and tax-exempt or foreign investors in another, each needing a different legal wrapper, and the feeders handle those differences while the master fund keeps the strategy identical for everyone.
Costs are shared and the investment process is more efficient. The manager trades once at the master level, so all feeders receive the same trades at the same prices, which avoids having to split orders across several separate funds.
Gains, losses and expenses are allocated to each feeder in proportion to its stake. Fees may be charged at the feeder level, at the master level or both, so investors should read the documents to see where each charge sits.
Because the master fund holds everything, its administrator must keep careful records of each feeder's subscriptions and redemptions. Errors in these records can lead to one group of investors paying too much or too little.
There are some points to watch. If one feeder faces large redemptions, the master may have to sell holdings, which can affect the others, and the structure is more complex to account for and audit, so some investors prefer simpler funds.
In practice
Real-world examples.
Example
A hedge fund manager launches a master fund with a US feeder for taxable investors and a Cayman feeder for foreign and tax-exempt investors. Both feeders hold stakes in the master, so every investor has exposure to the same trades. The manager reports one set of performance figures with feeder-level adjustments for fees.
Example
A pension consultant reviews a fund of funds and finds that three of its holdings invest through the same master fund. She flags that the manager's true exposure to that one strategy is larger than it first looks.
Example
A fund administrator prepares monthly statements for a master and two feeders. She allocates income, expenses and gains in line with each feeder's percentage of the master's net assets, and reconciles the totals to the master fund's accounts every month.
Formula
Calculation
Feeder's share of master fund = Feeder's investment / Total master fund assets
Feeder's profit = Feeder's share x Master fund profit
Two feeders invest in a master fund with total assets of $100,000,000. The onshore feeder holds $60,000,000 and the offshore feeder holds $40,000,000.
The onshore share is $60,000,000 / $100,000,000 = 60% and the offshore share is 40%. If the master fund earns an 8% gross return of $8,000,000, the onshore feeder is allocated 60% x $8,000,000 = $4,800,000 and the offshore feeder 40% x $8,000,000 = $3,200,000, before the fees charged at each level. The two allocations add up to $8,000,000, which confirms nothing has been missed.Case study
Seen in the real world.
Quayside Capital is an illustrative, fictional fund manager that ran two separate funds with the same strategy, one for domestic investors and one for international investors. Trading the same portfolio twice meant duplicated costs, and the two funds sometimes received slightly different prices.
The firm restructured into a master-feeder model. The new master fund held all the investments, and the two existing funds became feeders, each keeping its own investor base, legal terms and tax position.
In this illustrative story trading costs fell by about a fifth and performance between the two groups lined up. The firm also found it needed stronger reporting, because auditors had to check the allocation between feeders each month. It hired an additional fund accountant to handle the extra reconciliation work.
Watch out
Common mistakes.
- Assuming the feeder fund holds the investments directly, when it normally owns shares in the master fund and receives its results through that holding.
- Overlooking fees charged at both levels, which together can reduce returns.
- Ignoring the effect of other feeders' redemptions on the master fund's liquidity, which can force asset sales that affect every investor in the structure.
Questions
People also ask.
Why do managers use master-feeder structures?
They let different investor groups, such as taxable and tax-exempt or domestic and foreign, invest in one portfolio with suitable legal and tax wrappers.
Are all feeders treated identically?
Each feeder has its own terms, fees and tax position, but they share the same underlying investments and are allocated results in proportion to their holdings in the master.
How does an investor know whether a fund is a feeder?
The offering documents will describe the structure and name the master fund in which the feeder invests.
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