Feeder Fund

A feeder fund is an investment vehicle similar to a fund of funds but typically invests all its assets into a master fund, which is responsible for managing the investments. This structure is common in hedge funds.
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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:

  1. Master Fund: Responsible for managing the underlying portfolio and conducting all trading activities.
  2. 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

  • Global Hedge Fund Feeder Funds: These funds allow investors from different jurisdictions to pool resources into a master fund that trades in international markets.

  • 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.

  • Fund of Funds (FoF): An investment fund that holds a portfolio of other investment funds.

  • Hedge Fund: A pooled investment fund that employs various strategies to earn active returns for its investors.

  • 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

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