Aside from various fund types such as; Sector Funds, Emerging Market Funds, and Buy-outs; Private Equity funds also have a structure. The most common structure is a Master Feeder Structure.
Why a Master Feeder
A master feeder fund is used to pool taxable and tax-exempt capital raised by United States and overseas investors into a centralized vehicle known as a master fund; separate investment vehicles — feeders — are established for each group of investors.
In today’s global economy, hedge fund managers often manage money for both US and Non-US investors. Thus, managers seek a structure that can efficiently consolidate multiple portfolios and simplify reconciliation. Additionally, combining assets eases ability to obtain credit lines because most lenders are more comfortable providing credit to a large entity rather than two small entities. Combining funds also creates a pool of assets large enough to more effectively implement the fund manager’s investment strategy.
Economies of Scale
Common master feeder structures are made up of of three entities: one “master” company and two “feeders.” (See diagram). The feeders may be set up as limited partnerships for US investors, and an offshore corporation for Non-US investors. Investments of the feeder would be an ownership interest in the master.
Portfolio investments are made at the master company level, consolidating all trading activities into a single portfolio. This master company is generally organized as a limited liability company to preserve tax treatment for both US and Non-US investors.
There’s Always Room for More
Once a master feeder structure is in place, it is very easy to add additional feeders for new ventures. This adds flexibility and eliminates the need for more portfolio’s, additional credit lines, etc. Add-on feeders can also have an entirely different fee structures and agreements.
Master feeders allow for a number of possibilities with respect to creating hybrid structures making them highly appealing to Fund Managers.