Master – Feeder structure

A master-feeder fund is, most commonly,
a two-tiered investment structure in which
investors deposit capital in a “feeder” fund,
which in turn invests in a “master” fund
that is managed by the same investment

The master fund is the entity that
invests in the market as prescribed in the
partnership agreement.
The feeder fund is generally where the
capital investing begins: capital (cash
or securities) flows from investors into
feeders, and these in turn invest all or a
portion of that capital into the master fund.
The master fund then uses that infusion of
capital to invest in securities and thereby
generate profit and loss. This profit and
loss that the master fund generates is
then allocated to all of the master fund’s
constituent feeders. From the master
fund’s perspective, each feeder can be
viewed as an investor.
When you think of a feeder fund investing
in a master fund, think of it as a fund
buying any other security. For example, the
feeder fund (where all the limited partner/
shareholder1 capital resides) buys “shares”
of a master fund, similarly to the way it
buys shares of any stock.
One significant operational difference
between purchasing common stock and
purchasing shares of a master fund is
that when a fund buys a share of common
stock, it does not “peer into” the underlying
income attributes of that stock. Rather,
the total return of the stock comprises
only price appreciation and dividend
income distributions. By contrast, when
a fund buys a share of a master fund, it is
buying into an investment partnership, and
thus all the different income attributes
(such as dividends, interest, gains, and
tax adjustments) that the master fund
generates are passed through to the
feeder fund

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