In a feeder fund, capital is pooled and invested into a master fund. Master funds invest in the market, manage portfolios, and trade securities. An investment advisor handles all investments. A hedge fund usually assembles a large portfolio account by pooling investment capital using a two-tiered investment structure. Profits from the master fund are allocated proportionately to feeder funds based on their investment capital contributions.
A feeder-master fund structure is primarily used to reduce trading costs and operating expenses. With several feeder funds providing investment capital, the master fund can achieve economies of scale. As a result, it operates more efficiently than any of the feeder funds investing on their own.
If feeder funds have similar investment goals and strategies, two-tiered fund structures can be very advantageous. However, feeders with unique investment strategies and aims are inappropriate since they would lose their unique characteristics when combined with the master fund.
Let's understand how a feeder fund works with an example:
Consider a scenario where there are three countries: A, B, and C.
A and B residents find country C an attractive investment location.
A global investment house sets up two Feeder Funds in Countries A and B and a Master Fund in Country C to take advantage of this demand.
Feeder funds collect investment capital from residents of countries A & B and invest it in Company C's Master Fund.
The master fund invests this money in County C's financial markets and distributes profits from these investments proportionally to the investor.
It provides cost savings to the fund house because of its feeder-master structure. A Feeder structure saves the fund the cost of employing a dedicated research and investment team in each of countries A & B by instead relying on a central team in Country C to make investments.
Feeder and master funds are managed in a two-tiered manner. Feeder funds get money from direct investors and invest it in multiple master funds or one. Fees for fund management are based on the feeder. They're determined by the expense ratio of the master funds they invest in.
There is no requirement that feeder and master funds be located in the same geographic location. These funds can also be invested in US-based master funds. By investing in a feeder fund, one can reap numerous benefits by investing in international loans and stocks and removing the geographical barrier.
In the same way as the feeder fund, the master fund may invest money from a variety of sources. Feeder investors receive profits based on the weight of their investments. Master funds in which a feeder invests may not all have the same expense ratios or Net Asset Values.
A master-feeder structure has the following advantages:
A feeder fund is one of many sub-funds that invest entirely in a master fund. Every investor gets a share of the profits from the master fund based on how much they invested. These feeder-master fund structures are mainly used to reduce trading costs. Through several funds, the master fund can access a large pool of investment capital.
Feeder funds are mutual funds that do not earn money directly but invest in master funds to maximise their returns.
Investors invest in feeder funds, which in turn invest in a centralised vehicle known as a master fund. It is the master fund's responsibility to make all portfolio investments and conduct all trading activities.
Yes, they are good investments. They provide a number of benefits, such as Lower minimum entry requirements/affordable costs compared to larger funds.
Accredited investors, or those with a high income or net worth, invest in feeder-master funds.
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