Master-Feeder Fund

Some things exist only to become part of other things. Like 2x4s, for example. Sure, maybe some people out there buy 2x4s to just, like, have around, but for the most part, people buy 2x4s because they’re going to make something out of them. Treehouses, coffee tables, whatever.

Feeder funds are kind of the 2x4 of the investment world: they’re investment funds that exist solely to feed into much larger investment funds known as “master-feeder funds.”

It works like this:

We invest our money into a feeder fund. Our feeder fund can either go entirely into one master-feeder fund, along with a bunch of other feeder funds, or it can go into more than one master-feeder fund. We only pay the fees and commissions associated with our feeder fund; we don’t have to pay any extra for the master-feeder fund part. Anyway, it’s the master fund that does all the investing. When the master fund makes money, those profits then flow back down through the feeder funds and into the pockets of the investors.

This master-feeder structure is a crowd favorite amongst hedge fund managers everywhere. As one might expect, master-feeder funds can involve ginormous amounts of money, which means they can often benefit financially from doing things on a much larger scale than small, individual investment funds. For the most part, the master-feeder fund is an offshore fund, which allows it to collect from U.S. and non-U.S. feeder funds. Setting up the master fund as a partnership allows for greater tax flexibility, which can be great for us, as long as we keep in mind that dividends we receive from offshore operations can be taxed as high as 30%.