Master-feeder
Encyclopedia
The master-feeder structure allows asset managers to capture the efficiencies of larger pools of assets (see economics of scale) although fashioning investment funds to separate market niches.
One or more investment vehicles pool their portfolio
within another vehicle – i.e. there are several smaller feeder fund
s and one master to which they contribute.
Sometimes, especially when the feeders are hedge funds, this is a way of complying with the distinct legal systems of distinct jurisdictions. In other words, there will be an onshore feeder and an offshore feeder to the same master portfolio.
This is also sometimes called the hub and spoke structure.
" or PFIC can prove to be a very expensive proposition. The offshore feeder fund will almost always meet the definition of a PFIC, but the master fund will not, so the transaction is set up so that the master fund is a partnership for U.S. tax purposes, which makes it an effective insulation between the US based investor and that PFIC feeder.
One or more investment vehicles pool their portfolio
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
within another vehicle – i.e. there are several smaller feeder fund
Feeder fund
A feeder fund is an investment fund which does almost all of its investments through a master fund via a master-feeder relationship.It is a situation similar to a fund of funds, except that the master fund performs all the investments....
s and one master to which they contribute.
Sometimes, especially when the feeders are hedge funds, this is a way of complying with the distinct legal systems of distinct jurisdictions. In other words, there will be an onshore feeder and an offshore feeder to the same master portfolio.
This is also sometimes called the hub and spoke structure.
Tax concerns
For a U.S. taxable investor, the ownership of shares in what is known as a "passive foreign investment companyPassive foreign investment company
For purposes of income tax in the U.S., U.S. persons owning shares of a passive foreign investment company may choose between current taxation on the income of the PFIC or deferral of such income subject to a deemed tax and interest regime...
" or PFIC can prove to be a very expensive proposition. The offshore feeder fund will almost always meet the definition of a PFIC, but the master fund will not, so the transaction is set up so that the master fund is a partnership for U.S. tax purposes, which makes it an effective insulation between the US based investor and that PFIC feeder.
External links
- http://www.greencompany.com/HedgeFunds/OffDocMasterFeeder.shtml
- http://www.sglawyers.com/hedgefundworld/forming-a-hedgefund/master-feeder.aspx