Master-Feeder Structure

A master-feeder structure is a fund architecture commonly used by hedge funds to pool capital from different types of investors—typically U.S. taxable investors and non-U.S. or tax-exempt investors—into a single central fund (the master) for investment purposes. Separate feeder funds collect investor capital and invest that capital into the master fund, which executes the portfolio strategy and trading.

Key takeaways

• Pools capital from domestic and international investors into one master fund to achieve economies of scale.
• Feeder funds can be customized (onshore vs offshore) to meet different tax, regulatory, or investor-preference requirements.
• Benefits include lower operational costs and flexible investor structures; drawbacks include potential withholding taxes on U.S. source income for offshore feeders and conflicts among investor priorities.

How it works

1. Investors place capital into a feeder fund appropriate for their tax or regulatory situation (e.g., onshore feeder for U.S. taxable investors, offshore feeder for non-U.S. investors).
2. Each feeder fund purchases interests in the master fund. The master fund holds all investments and returns are allocated back to feeders pro rata based on their ownership.
3. The master fund centralizes trading, custody, and portfolio management, while feeders handle investor-facing requirements (subscriptions, redemptions, reporting, and tax treatments).

Typical components

• Master fund: Central vehicle that owns the portfolio and carries out trading and investment decisions.
• Onshore feeder(s): Structured to accommodate domestic investors and U.S. tax rules.
• Offshore feeder(s): Structured for non-U.S. investors, tax-exempt U.S. investors, or those seeking certain regulatory/tax treatments.
• Service providers: A shared investment manager, administrator, custodian, and transfer agent are common across master and feeders.

Feeder funds remain legally distinct and can differ in fees, minimums, net asset values, and investor eligibility while still pooling assets into the same master.

Benefits

• Economies of scale: Consolidated trading and operations reduce costs per investor and improve negotiating leverage with brokers and counterparties.
• Operational efficiency: Centralized portfolio management simplifies execution and reporting at the master level.
• Flexibility: Feeder-level customization allows managers to serve diverse investor bases with different tax, regulatory, or commercial needs.

Drawbacks and risks

• Withholding taxes: Offshore feeders may face U.S. withholding taxes (commonly 30%) on U.S. source dividends and certain other income, reducing net returns for offshore investors.
• Divergent investor interests: Different investor types can have conflicting tax preferences, liquidity needs, or investment objectives, making it hard to adopt a single strategy that suits all.
• Operational and legal complexity: Precise compliance with subscription/redemption procedures and constitutional documents is essential; mistakes can lead to disputes or adverse outcomes in insolvency or liquidation scenarios.

Case study (redemption and liquidation)

A notable example involved feeder and master funds sharing directors and service providers. An investor submitted a redemption notice to the feeder, which held no assets itself and expected the master to satisfy the redemption via a “back-to-back” redemption. When both funds later entered liquidation, the feeder had not formally submitted a separate written redemption notice to the master as required by the master’s constitutional documents. The court sided with the master’s liquidators, rejecting the investor’s claim. The case highlights the importance of following formal notice and governance requirements even when management and service providers overlap across related funds.

Practical considerations for investors and managers

• Read constitutional documents carefully to understand redemption mechanics, notice requirements, and rights in liquidation.
• Assess tax implications of feeder selection—onshore vs offshore—especially for U.S.-source income.
• Ensure clear governance and operational protocols when the same parties serve multiple related entities to avoid conflicts and legal exposure.
• Evaluate whether the master-feeder pooling benefits (cost savings, centralized management) outweigh the added complexity for the intended investor base.

Conclusion

The master-feeder structure is an effective way for fund managers to combine assets from varied investor groups while providing tailored feeder-level solutions. It delivers scale and operational efficiency but introduces tax, governance, and coordination challenges that require careful structuring, transparent investor communications, and strict adherence to legal procedures.