What is a feeder fund?
A feeder fund is a smaller investment vehicle that pools investor capital and channels it into a central, overarching fund called a master fund. The master fund consolidates the capital from one or more feeder funds and executes all portfolio management and trading on behalf of those feeders. This master–feeder arrangement is common among hedge funds and other pooled-investment structures.
How it works
- Feeder funds collect investor capital and invest that capital into a master fund.
- The master fund manages a single, consolidated portfolio, handling trading and position management for the pooled assets.
- Profits (and losses) generated by the master fund are allocated back to each feeder fund proportionally, based on the feeder’s contribution.
- Management and performance fees are typically charged at the feeder-fund level before returns are passed back to investors.
Benefits
- Economies of scale: Combining capital into a larger master account reduces per-unit trading and operational costs.
- Operational efficiency: Centralized trading and portfolio management simplify execution and compliance.
- Flexibility for investors: Different feeder funds can serve different investor classes (for example, varying fee schedules, minimum investments, or regulatory domiciles) while accessing the same underlying strategy.
Structural and legal considerations
- Feeder funds and the master fund are separate legal entities. A feeder fund may invest in more than one master fund; likewise, a master fund can accept capital from multiple feeders.
- Feeder funds that back the same master fund can differ in net asset value (NAV), expense ratios, minimums, and investor eligibility.
- For U.S. investors, master funds are often established offshore to facilitate investment from both taxable and tax-exempt investors. If the offshore master elects partnership or LLC tax treatment in the U.S., onshore feeder funds can receive pass-through tax treatment of the master fund’s gains and losses, helping avoid double taxation.
Regulatory change affecting international feeders
In 2017 the SEC modified aspects of the Investment Company Act of 1940 to make it easier for foreign-regulated funds (foreign feeder funds) to invest in U.S.-registered open-end master funds. The changes relaxed prior limits on foreign feeder participation while addressing regulatory concerns such as:
- Preventing excessive influence of a master fund over an acquired fund.
- Protecting investors from layered or duplicative fees.
- Reducing complexity that could make fund structures difficult to understand.
When a master–feeder structure is appropriate
- Appropriate when multiple investor groups want access to the same investment strategy but need different terms (tax treatment, fee schedules, or regulatory domicile).
- Less suitable when a feeder has a unique investment objective or strategy that would be diluted if merged into a pooled master portfolio.
Key takeaways
- A feeder fund pools investor capital that is invested into a centralized master fund, which manages all trading and portfolio activities.
- The structure reduces trading and operating costs by achieving economies of scale and allows different investor classes to access the same strategy.
- Fees are typically charged at the feeder level; returns from the master are allocated proportionally to feeders.
- Legal, tax, and regulatory considerations—especially for international feeders and offshore masters—are important when deciding whether to use this structure.