Feeder Fund
What Is a Feeder Fund?
A feeder fund is one of several sub-funds that put all of their investment capital into an overall umbrella fund, known as a master fund, for which a single investment advisor handles all portfolio investments and trading. This two-layered investment structure of a feeder fund and a master fund is commonly utilized by hedge funds for the purpose of collecting a larger portfolio account by pooling investment capital.
Profits from the master fund are then split, or distributed, proportionately to the feeder funds in light of the percentage of investment capital they have contributed to the master fund.
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 really accomplishes economies of scale through approaching the large pool of investment capital given by a number of feeder funds, which empowers it to operate less extravagantly than would be feasible for any of the feeder funds investing all alone.
The utilization of this two-layered fund structure can be extremely profitable when the feeder funds share common investment objectives and strategies yet are not fitting for a feeder fund with a unique investment strategy or aim since those unique characteristics would be lost in the combination with different funds inside a master fund.
Structure of Feeder Funds and Master Funds
The feeder funds that invest capital in a master fund operate as separate legal substances from the master fund and might be invested in more than one master fund. Different feeder funds invested in a master fund frequently contrast substantially from each other in terms of things, for example, expense fees or investment essentials and don't as a rule have indistinguishable net asset values (NAV). Similarly that a feeder fund is free to invest in more than one master fund, a master fund is in like manner free to acknowledge investments from a number of feeder funds.
As to feeder funds operating in the United States, it is common for the master fund to be laid out as an offshore entity. This frees up the master fund to acknowledge investment capital from both tax-exempt and U.S.- taxable investors. If, nonetheless, an offshore master fund chooses to be taxed as a partnership or limited liability company (LLC) for U.S. tax purposes, then, at that point, coastal feeder funds receive pass-through treatment of their share of the master fund's gains or losses, accordingly keeping away from double taxation.
New Rules on International Feeder Funds
In March 2017, the Securities and Exchange Commission (SEC) controlled to permit foreign-regulated companies (foreign feeder funds) to invest in open-end master funds (U.S. Master Fund), making it simpler for global managers to market their investment products in various foreign purviews utilizing a master fund.
The letter modified parts 12(d)(1)(A) and (B) of the 1940 Act, which recently limited the utilization of foreign feeder funds into U.S.- enrolled funds. The SEC regulated the practice in light of multiple factors. To begin with, it wanted to forestall master funds from applying too much influence over an acquired fund. It likewise aimed to shield investors in the funds from layered fees and the possibility of fund structures turning out to be perplexing to the point that they became challenging to comprehend.
Features
- A feeder fund is one of numerous more modest investment funds that pool investor money, which is then collected under a single centralized master fund.
- Consolidation of feeder funds into a master fund considers reductions of operation and trading costs, and a larger portfolio has the additional benefit of economies of scale.
- Hedge funds commonly use master-feeder structures, where fees created are supportive of evaluated and distributed to the feeder funds.
