Master-Feeder Structure

What Is a Master-Feeder Structure?

A master-feeder structure is a gadget commonly utilized by hedge funds to pool taxable and tax-exempt capital brought from investors up in the United States and overseas into a master fund. Separate investment vehicles, also called feeders, are laid out for each group of investors.

Investors put capital into their separate feeder funds, which eventually invest assets into a centralized vehicle known as the master fund. The master fund is responsible for making all portfolio investments and leading all trading activity. Management and performance fees are paid at the feeder-fund level.

How the Master-Feeder Structure Works

The master-feeder structure starts with the investors, who deposit capital into the feeder fund. The feeder fund, containing all the limited partnership/shareholder capital, then, at that point, purchases "shares" of the master fund, similar as it would buy shares of any organization's stock. The primary difference, of course, is that a feeder fund — by buying into the master fund — receives the master fund's all's income credits, including interest, gains, tax changes, and dividends.

Albeit this two-layered structure can exist in different forms like "funds of funds" mutual funds the master-feeder structure is particularly common among hedge funds taking special care of both U.S. furthermore, offshore or overseas investors. The utilization of the master-feeder fund structure permits asset managers to benefit from a large capital pool while likewise having the option to fashion investment funds that take care of niche markets.

Organization of Master-Feeders

The average master-feeder structure includes one offshore master fund with one inland feeder and one offshore feeder. Feeder funds investing in a similar master fund have the option of decision and variation. As such, the feeders might vary in investor type, fee structures, investment essentials, net asset values, and different other operational properties.

Along these lines, the feeder funds don't need to stick to a specific master fund however can function legally as independent substances with the capacity to invest in different master funds.

For instance, on the off chance that feeder fund A's $100 contribution and feeder fund B's $200 contribution given the total investments to a master fund, then fund A would receive one-third of the master fund returns while fund B would receive two-thirds of the returns.

Advantages of the Master-Feeder Structure

One critical advantage of the master-feeder structure is the consolidation of different portfolios into one entity. Consolidation takes into account reductions of operation and trading costs. A larger portfolio has the benefit of economies of scale. Likewise, in light of its size, the portfolio has better options with regards to service and better terms offered by prime brokers and different institutions.

The primary drawback to the master-feeder structure is that funds held offshore are regularly subjected to a 30% withholding tax on U.S. dividends. There is another disadvantage innate in the structure, as it pools together a combination of investors that frequently have a wide range of qualities as well as investment needs.

Frequently, the fight to find a middle ground is uphill, while possibly not very much inconceivable, as investments and strategies that are suitable to one specific type of investor will be unacceptable, if not oppositional, to the requirements of an alternate type of investor.

Certifiable Example of Master-Feeder Structure

Connections between a master fund and its feeder funds can be complex, as a 2018 court case showed. At issue was the way redemptions by a feeder fund from a master fund are treated in a liquidation scenario.

The Ardon Maroon Asia Dragon Feeder Fund was a feeder fund to the Ardon Maroon Asia Master Fund. Similar individuals filled in as directors of two funds. Additionally, the two funds named a similar investment manager, administrator, and transfer agent.

In 2014, one of the feeder fund's investors presented a redemption notice. The feeder fund, which held no assets of its own, assumed the master fund would automatically fulfill the redemption request — something many refer to as a "back-to-back redemption." However, the two funds went into liquidation a couple of months after the fact. At the point when the original investor presented a proof of debt, seeking to collect their money, it was dismissed by the liquidators of the Ardon Maroon Asia master fund, on the basis that Asia Dragon had never formally presented a separate redemption request notice to it.

A claim resulted, recorded in the Cayman Islands, where the funds were based. In mid-2018, the Grand Court of the Cayman Islands ruled for the master fund. Albeit back-to-back redemptions are common industry rehearses, the court noticed that the constitutional reports of Ardon Maroon Asia required a written notice of redemption from its feeder funds.

So Asia Dragon had been delinquent in not separately telling its master fund even however similar individuals filled in as directors of two funds, and both named a similar investment manager, administrator, and transfer agent.

Features

• The master-feeder structure permits funds to benefit from economies of scale and favorable "go through" tax treatment.
• Hedge funds commonly use master-feeder structures to oblige both U.S. what's more, non-U.S. investors.
• In a master-feeder structure, investment funds are framed from investor capital; these feeder funds, thus, invest in a centralized master fund.