Master-Feeder Fund

A structure commonly used by hedge funds to pool investment capital raised by U.S. investors - both taxable and tax-exempt - and overseas investors into one central vehicle called the master fund, with separate investment vehicles or feeders created for each investor group. Investors invest in the feeder funds, which in turn invest their assets in the master fund. The master fund makes all the portfolio investments and conducts trading activity, while management and performance fees are payable at the feeder-funds level.

One master-feeder fund advantage is that its structure enables consolidation of multiple portfolios into one, which reduces trading and operation costs. It also has economies of scale and, by virtue of its size, can obtain better service and favorable terms from prime brokers and other institutions.

A major master-feeder fund disadvantage is that offshore funds are usually subject to withholding tax on U.S. dividends. As well, the structure combines investors with very different characteristics and investment priorities, and investments and strategies that are appropriate for one type of investor may not be appropriate for another type of investor.