Master-Feeder Structure is a fund arrangement where multiple feeder funds (typically in different jurisdictions) channel capital into a single master fund, allowing diverse investor bases to invest through their preferred tax/regulatory domiciles.
What Is a Master-Feeder Structure?
A Master-Feeder Structure consists of a Master Fund (typically in Cayman Islands) that receives capital from multiple Feeder Funds established in different jurisdictions. Each Feeder Fund has its own share classes and investor base but invests substantially all capital into the Master Fund. This allows managers to serve investors with different tax requirements (U.S. taxable investors, U.S. tax-exempt institutions, European investors, etc.) through jurisdiction-specific feeders while maintaining a single investment portfolio in the Master Fund.
How Does Master-Feeder Structure Work?
Investors subscribe to their relevant Feeder Fund based on tax status and jurisdiction. Each Feeder Fund pools investor capital and invests it into the Master Fund. The Master Fund's portfolio manager executes all investment decisions. Net asset value is calculated at both feeder and master levels, with feeder NAV reflecting the master's performance plus any feeder-level fees or costs. Distributions from the Master Fund flow back through feeders to investors. The structure is common in hedge funds, private equity, and sophisticated investment vehicles.
Why Are Master-Feeder Structures Used?
Master-Feeder structures provide tax efficiency (different feeders optimize for different investor tax profiles), operational simplification (one portfolio instead of duplicated strategies), and flexibility (add new feeders for new investor segments without affecting existing investors or portfolio management).
Example: Master-Feeder in Practice
A hedge fund manager establishes: (1) Master Fund in Cayman Islands (the actual portfolio and investment vehicle); (2) U.S. Taxable Feeder in Delaware (for taxable U.S. investors); (3) U.S. Tax-Exempt Feeder in Delaware (for pensions and endowments); (4) European Feeder in Luxembourg (for European investors). All feeders invest substantially all capital in the Master Fund. U.S. taxable investors benefit from efficient tax treatment through the Delaware structure; U.S. tax-exempt investors avoid UBTI complications; European investors access the fund through an EU-regulated structure. The portfolio manager executes one consistent investment strategy across all capital pools.
When Should You Use Master-Feeder Structure?
Master-Feeder structures are valuable when:
You expect significant U.S. and non-U.S. investor participation
Tax-exempt investors (pensions, endowments) will represent material capital
You want operational simplicity (one portfolio) with tax-optimization for diverse investors
You're planning to scale to multiple geographic investor bases
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