Master-feeder structures are a common fund formation strategy used by private investment funds to streamline operations while accommodating different types of investors. This structure is especially prevalent among hedge funds and increasingly used in private equity and credit funds with global investor bases.
What Is a Master-Feeder Structure?
A master-feeder structure consists of:
One master fund: The central investment vehicle that holds the portfolio and executes trades.
Two or more feeder funds: Separate entities that collect capital from investors and invest it into the master fund.
Typically, one feeder fund is formed for U.S. taxable investors (often a Delaware LP or LLC), and another for non-U.S. and U.S. tax-exempt investors (commonly a Cayman Islands exempted company). Both feeders invest into the master fund, which then manages the pooled capital.
Why Use a Master-Feeder Structure?
This structure is used to:
Achieve operational efficiency - All trading and portfolio management occurs at the master fund level, reducing duplication across entities and simplifying reporting and compliance.
Accommodate tax and regulatory differences - U.S. taxable investors and non-U.S./tax-exempt investors often require different legal and tax treatment. Separate feeders allow funds to tailor terms and structures to each group while maintaining a unified investment strategy.
Simplify investor onboarding - Investors can subscribe to the feeder that best suits their tax profile, while the fund sponsor manages a single investment pool.
Enable scale and cost savings - Consolidating assets in a master fund can reduce administrative costs, improve pricing on service providers, and streamline audits and tax filings.
When Is It Most Commonly Used?
Master-feeder structures are most often used when:
The fund expects a meaningful mix of U.S. taxable and non-U.S./tax-exempt investors.
The investment strategy involves frequent trading or complex instruments (e.g., hedge funds, credit strategies).
The sponsor wants to centralize portfolio management while offering tailored investor terms.
In private equity, master-feeder structures are less common but may be used in evergreen or open-ended vehicles, or when targeting a global LP base.
Final Thoughts
Master-feeder structures offer a flexible and efficient way to manage diverse investor bases under a unified investment strategy. While they introduce some complexity in legal and tax structuring, their operational benefits often outweigh the challenges, especially for funds with international reach. Sponsors considering this structure should work closely with fund counsel and tax advisors to ensure alignment with investor needs and regulatory requirements.