Introduction
A feeder fund is a fund which pools investment capital and invests into a master fund. The master fund invests in the market, makes portfolio investments, and trading in securities. An investment advisor, in turn, handles all the investments.
Understanding Feeder Fund
The use of feeder fund-master fund structure helps in reducing overall trading costs and operating costs. The structure is advantageous, especially in the case of shared investment goals. The two-tier investment structure is generally used by hedge funds for assembling a larger portfolio account by pooling investment capital.
Factors to Consider
The feeder fund-master fund structure is used to put together a larger portfolio for investments.
All management fees and other fund fee is paid by investors at the feeder fund level.
Profits from the master fund are then distributed among the feeder funds in the percentage of their investment capital contributed to the master fund.
Any number of feeder funds can contribute to a master fund.
The two-tier structure helps in achieving economies of scale by having access to a large pool of investment funds. The master fund can operate less expensively as compared to the cost that would be involved in case the feeder funds operate individually.
The two-tier structure can be quite useful when the feeder funds and the master funds share common investment goals and strategies. However, the structure would not suit a feeder fund which has unique investment goals and strategy.
The feeder fund and the master fund operate as separate legal entities. For example, in the US, a master fund is established as an offshore entity, thus enabling it to accept investment from different investors. Also, a feeder fund may be invested in more than one master fund.
The way a feeder fund can invest in more than one master fund, a master fund can also accept investments from any number of feeder funds.
