Definition
A feeder fund is an investment vehicle that pools capital from investors and invests it into a master fund. Unlike a fund of funds which may distribute its investments across multiple funds, a feeder fund allocates essentially all its assets into a single master fund. This setup is common in hedge fund arrangements known as master-feeder structures.
Master-Feeder Structure
In a master-feeder structure, there are typically three entities:
- Master Fund: Responsible for managing the underlying portfolio and conducting all trading activities.
- Feeder Fund: Invests in the master fund. Typically, there are two feeder funds:
- One for U.S. investors.
- Another for non-U.S. investors.
The master fund usually operates as an offshore entity, structured as a limited-liability company to optimize tax treatments for both U.S. and non-U.S. investors. The structure consolidates trading, offering operational efficiencies and ensures performance consistency across feeder funds.
Examples
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Global Hedge Fund Feeder Funds: These funds allow investors from different jurisdictions to pool resources into a master fund that trades in international markets.
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Real Estate Investment Trust Feeder Fund: This type invests directly in a master fund that holds a diversified portfolio of real estate properties.
Frequently Asked Questions (FAQs)
Q1: Why are feeder funds used in hedge fund structures?
A: Feeder funds are used to streamline management and operations by consolidating investments into a single master fund, which allows for a more efficient trading process and consistent performance monitoring across investor groups.
Q2: What is the benefit of having separate feeder funds for U.S. and non-U.S. investors?
A: Separate feeder funds can accommodate diverse regulatory, tax, and legal requirements for different jurisdictions, ensuring compliance and tax efficiency.
Q3: Are there risks associated with investing in feeder funds?
A: Yes, risks can include poor master fund performance, management fees, lack of liquidity, and regulatory changes affecting taxation.
Q4: How does the performance of a feeder fund relate to the master fund?
A: The performance of each feeder fund mirrors the master fund, as the feeder invests solely into the master fund.
Q5: What kind of fees are typically associated with feeder funds?
A: Feeder funds typically include management and performance fees, similar to other hedge funds. Additional fees may arise for administrative services.
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Fund of Funds (FoF): An investment fund that holds a portfolio of other investment funds.
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Hedge Fund: A pooled investment fund that employs various strategies to earn active returns for its investors.
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Limited Liability Company (LLC): A flexible form of enterprise that blends elements of partnership and corporate structures.
Online References
Suggested Books for Further Studies
- Hedge Fund Market Wizards by Jack D. Schwager
- The Ultimate Guide to Hedge Funds by Frank T. Travers
- Hedge Funds: Structure, Strategies, and Performance by H. Kent Baker and Greg Filbeck
Fundamentals of Feeder Fund: Finance Basics Quiz
### What is a feeder fund?
- [ ] A fund that directly invests in a diversified portfolio of stocks and bonds.
- [x] A fund that pools investor capital to invest in a master fund.
- [ ] A fund that only invests in real estate projects.
- [ ] A mutual fund designed for retail investors.
> **Explanation:** A feeder fund collects investments from multiple investors and then invests the total into an overarching master fund.
### What is the main advantage of a master-feeder structure?
- [ ] Higher interest rates for investors.
- [ ] More flexible redemption terms.
- [x] Consolidated operations and consistent performance evaluation.
- [ ] Tax-free status.
> **Explanation:** Consolidating the operations into a master fund allows for efficient trading and consistent performance evaluation across feeder funds.
### Who typically invests in feeder funds?
- [ ] Only retail investors.
- [ ] Only institutional investors.
- [x] Both U.S. and non-U.S. investors.
- [ ] Only government entities.
> **Explanation:** Feeder funds are designed to accommodate both U.S. and non-U.S. investors, often via separate feeder entities.
### What is a fund of funds?
- [x] An investment fund holding a portfolio of other investment funds.
- [ ] A single-asset real estate investment trust.
- [ ] A governmental pension plan.
- [ ] A direct private equity investment fund.
> **Explanation:** A fund of funds diversifies its investments across multiple other investment funds.
### How does a master fund benefit from having feeder funds?
- [ ] It allows the master fund to avoid all regulatory oversights.
- [x] It consolidates investments for efficient management and compliance.
- [ ] It guarantees higher returns for all investors.
- [ ] It eliminates transaction fees.
> **Explanation:** Feeder funds help consolidate all investments, which streamlines management and ensures compliance with different jurisdictions.
### In what form is a typical offshore master fund organized?
- [ ] Sole proprietorship.
- [ ] S-corporation.
- [x] Limited-liability company (LLC).
- [ ] Publicly traded corporation.
> **Explanation:** Offshore master funds are typically organized as limited-liability companies (LLCs) to optimize tax treatments.
### What kind of investors are typically involved in hedge fund feeder funds?
- [ ] Exclusively retail investors.
- [ ] Restricted to governmental bodies.
- [x] Comparable levels of both institutional and high-net-worth individual investors.
- [ ] Only small-cap stock investors.
> **Explanation:** Hedge fund feeder funds often attract both institutional investors and high-net-worth individuals.
### What type of fund only invests as an ownership interest in the master fund?
- [ ] Sovereign wealth fund.
- [ ] Exchange-traded fund.
- [x] Feeder fund.
- [ ] Money market fund.
> **Explanation:** The investment strategy of a feeder fund is to place all of its capital into the master fund.
### Why would a master fund consolidate all trading activities into a single portfolio?
- [ ] To reduce the risk of a single investment.
- [ ] To increase the number of managed funds.
- [x] To provide operational efficiencies and consistency across investment strategies.
- [ ] To focus only on high-risk trading.
> **Explanation:** Consolidation of trading in a master fund allows for better operational efficiency and consistency across strategies.
### What is a key difference between a feeder fund and a fund of funds?
- [ ] Feeder funds invest directly in equities, while fund of funds invest in hedge funds.
- [ ] Feeder funds don't charge management fees, while fund of funds do.
- [x] Feeder funds invest all their assets in a master fund, while fund of funds invest in multiple funds.
- [ ] Feeder funds are regulated by SEC, while fund of funds are not.
> **Explanation:** A feeder fund allocates all of its assets into a master fund, whereas a fund of funds diversifies investments across various funds.
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