Utilizing  Investment Expertise about Luxembourg Feeder Funds for Family Offices, Institutional, and Private Investors - Damalion - Independent consulting firm.

A master feeder fund functions as a special investment structure for pooling investment capital or subscriptions from multiple investors into a single vehicle referred to as the master fund. Often a limited partnership, a master feeder fund is used by hedge funds where participating investors invest in both onshore and offshore feeder funds. Master and feeder funds are typically managed by a single investment manager who directs and supervises all investments held in the Master portfolio.

In a master feeder fund structure, separate investment vehicles are created for each group of investors within the same umbrella. The profits gained by the master feeder fund is typically split on a pro-rated basis among its feeders in direct proportion to the total percentage of their respective investments.

A feeder is considered a separate legal entity from the master feeder fund but is considered a relevant entity for both lenders and funds when it comes to the context of lending relationships, such as in creating a subscription-based credit facility.

Investment Managers form feeders for the following reasons:

  • Feeders offer flexibility in relation to investor tax status
  • Employee Retirement Income Security Act (ERISA) funds
  • Minimum capital investments
  • Fee structures and administrative features that can be customized based on the specific needs of any investor

Feeder funds that invest in the same Master portfolio may choose to customize using variations that may differ in the following factors:

  • Investor Type

– Eligible investor

– Institution

– Qualified investor per country

  • Fee Structures

– Management fee

– Distribution fee

– Performance fee

  • Net Asset Values

  • Individualized operational attributes, including goals, gate, and many more

In essence, a feeder fund does not have to stick to only one specific Master feeder fund. A feeder is considered an independent entity that can invest in multiple Master feeder funds. Management and performance fees are typically paid at the feeder-fund level but may also be paid at the Master feeder fund level.

Advantages of Master Feeder Fund Structures

  • Efficient consolidation of various investment portfolio into a single one for regulatory purposes.
  • Reduce trading costs as trading fees in Master feeder fund structures are only a percentage of total transaction value.
  • By carrying out a single transaction for multiple portfolios, investment managers avoid paying multiple trading fees.
  • Creation of Master feeder funds establishes economies of scale that provide many benefits, including reduced operational and transactional costs.
  • Generates a diverse investor pool, allowing tax-exempt and foreign investors to invest in the master fund resulting in a larger pool of funds.

Significant opportunities exist for investment managers to access competitive capital markets in a legal and tax efficient manner, provided all appropriate structures are carried out with great precision. Adopting a Master feeder fund structure also affords investment managers to access different types of investors resulting in the greater flexibility and efficiency in the operations and management of Master and feeder funds. Master feeder funds are designed to maximize potential for asset growth, exceeding regulatory barriers to facilitate easy access to larger, more profitable global capital markets.

Damalion provides comprehensive consulting services for foreign legal entities, including private investors and family offices in choosing the right Master and feeder funds to grow their assets and further expand their portfolio. To determine whether a Master feeder fund structure is the right choice for your expansion, talk to a Damalion expert today.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.