What is a Master-Feeder Fund Structure?
A master-feeder fund structure is commonly used to accumulate funds raised from both U.S. taxable, U.S. tax-exempt and non-U.S. investors into one central vehicle - the master fund - in order to enhance the critical mass of tradable assets, improve the economies of scale under which the fund arrangements operate and enhance operational efficiencies, thereby reducing costs.
The structure generally involves the use of a master fund company (incorporated in a tax-neutral offshore jurisdiction such as the Cayman Islands or Bermuda) into which separate and distinct "hub" or feeder funds invest. U.S. taxable investors take advantage of investing in a U.S. limited partnership feeder fund, which through certain elections made at the time the structure is established, is tax effective for such U.S. taxable investors. Non-U.S. and U.S. tax-exempt investors subscribe via a separate offshore feeder company so as to avoid coming directly within the U.S. tax regulatory net applicable to U.S. taxable investors.
The tax impact of an investment in the fund for U.S. taxable investors and non-U.S. or U.S. tax-exempt investors, respectively, is minimised without the presence of one class of investor prejudicing the tax status of other classes of investor in the fund.
The feeder funds invest all of their assets in the master fund which, in turn, conducts all trading activity. Through their investments in the master fund, the feeder funds participate in the profits of the master fund on a pro-rata basis, in proportion to the amount invested in the master fund.
Management and performance fees are usually payable at the level of the feeder funds.
Why use a Master-Feeder Fund Structure
The principal advantage of utilising a master-feeder structure is that it allows U.S. taxable investors to invest in an offshore hedge fund in a tax efficient manner that does not compromise the tax position of other non-U.S. or U.S. tax-exempt investors. This enables a hedge fund manager to increase the critical mass of funds under management and thereby obtain and maintain credit lines and enhance the fund's ability to meet asset size-based investment qualifying tests.
For further information on setting up a Cayman master-feeder fund structure then please feel free to contact us for an initial discussion. We routinely manage the process of launching such funds, no matter the strategy and whether an opens-ended fund or a closed-ended private fund. We not only provide initial advice eon the optimal structure but also legal formation, registration, advice on suitable service providers mandated under the law, and can also provide ongoing support services such as independent director registered with CIMA, corporate services, registered office and compliance/regulatory services.