how the master feeder structure works
the master feeder structure begins with the investors who deposit capital into the feeder fund the feeder fund containing all the limited partnership shareholder capital then purchases shares of the master fund much like it would buy shares of any company s stock the primary difference of course is that a feeder fund by buying into the master fund receives all of the master fund s income attributes including interest gains tax adjustments and dividends although this two tiered structure can exist in a variety of forms like funds of funds mutual funds the master feeder structure is especially common among hedge funds catering to both u s and offshore or overseas investors the use of the master feeder fund structure allows asset managers to benefit from a large capital pool while also being able to fashion investment funds that cater to niche markets composition of master feedersthe average master feeder structure involves one offshore master fund with one onshore feeder and one offshore feeder feeder funds investing in the same master fund have the option of choice and variation in other words the feeders may differ in investor type fee structures investment minimums net asset values and various other operational attributes 1in this way the feeder funds do not have to adhere to a specific master fund but can function legally as independent entities with the ability to invest in various master funds for example if feeder fund a s 100 contribution and feeder fund b s 200 contribution provided the total investments to a master fund then fund a would receive one third of the master fund returns while fund b would receive two thirds of the returns advantages of the master feeder structureone significant advantage of the master feeder structure is the consolidation of various portfolios into one entity consolidation allows for reductions of operation and trading costs a larger portfolio has the benefit of economies of scale also because of its size the portfolio has better options when it comes to service and more favorable terms offered by prime brokers and other institutions economies of scaletax advantaged partnership statusconvenient for both domestic and international investorsdividends subject to witholding tax if offshore difficulty of setting universal investment strategydisadvantages of the master feeder structurethe primary drawback to the master feeder structure is that funds held offshore are typically subjected to a 30 withholding tax on u s dividends 2 there is another disadvantage inherent in the structure as it pools together a combination of investors that often have a wide spectrum of characteristics as well as investment priorities often the battle to find a middle ground is uphill if not entirely impossible as investments and strategies that are suitable to one specific type of investor will be unsuited if not oppositional to the requirements of a different type of investor real world example of master feeder structurerelationships between a master fund and its feeder funds can be complex as a 2018 court case showed at issue was how redemptions by a feeder fund from a master fund are treated in a liquidation scenario the ardon maroon asia dragon feeder fund was a feeder fund to the ardon maroon asia master fund the same people served as directors of two funds also both funds appointed the same investment manager administrator and transfer agent in 2014 one of the feeder fund s investors submitted a redemption notice the feeder fund which held no assets of its own assumed the master fund would automatically satisfy the redemption request something called a back to back redemption however both funds went into liquidation a few months later when the original investor submitted a proof of debt seeking to collect their money it was rejected by the liquidators of the ardon maroon asia master fund on the basis that asia dragon had never officially submitted a separate redemption request notice to it a lawsuit ensued filed in the cayman islands where the funds were based in mid 2018 the grand court of the cayman islands decided in favor of the master fund although back to back redemptions are common industry practices the court noted that the constitutional documents of ardon maroon asia did require a written notice of redemption from its feeder funds so asia dragon had been remiss in not separately notifying its master fund even though the same people served as directors of two funds and both appointed the same investment manager administrator and transfer agent 