Master Feeder Agreement
Management and performance fees are generally payable at the feeder fund level. Feeder funds are registered as separate legal entities and must therefore maintain their own accounting and accounting processes in addition to the master fund. It makes the accounting process very complex and laborious, as the profits and losses generated by the master fund must also be distributed fairly. A master-feeder structure is a device often used by hedge funds to pool taxable and tax-exempt capital raised by investors in the United States and abroad as master funds. For each group of investors, separate investment vehicles, also called Feeders, are set up. U.S. taxpayer investors choose to invest in the master fund because it is taxable as a partnership in order to prevent their investment for U.S. tax purposes from being considered an investment in a foreign passive investment company (PFIC). Under U.S. law, investors in IFPs are subject to a significantly heavier tax system and, as a result, investments structured in PCs are largely unattractive to taxable U.S.
investors. The Staff Letter is important because it removes the obstacles of the 1940 law to effectively offer a “master feeder” investment product in non-U.S. jurisdictions, with offshore feeder funds and a single master fund registered in the United States. However, there are a number of other barriers. For example, in some non-U.S. jurisdictions, there may be legal restrictions that may restrict certain types of non-U.S. feeder funds with respect to investments in other investment funds (including U.S. master funds).
It is important that the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, which generally allows the cross-border management and marketing of investment vehicles for individuals in Europe, also prohibits investing exclusively in shares of an investment company registered in the United States. This restriction effectively prohibits a UCITS from: Serving as a non-US feeder fund, an unfortunate result given the popularity of UCITS in Europe among retail investors.14 Although some pooled investment vehicles operating under the Alternative Investment Fund Managers Directive (AIFMD) may serve as non-US feeder funds, the AIFMD imposes certain restrictions that should be taken into account before relying on the Staff Letter. The average structure of master feeders includes a master offshore fund with a land feeder and an offshore feeder. Feeder funds that invest in the same master fund have the opportunity for choice and variation. In other words, feeders can differentiate themselves by investor type, pricing structures, minimum investments, net inventory values, and various other operational attributes. In this way, Feeder funds do not have to comply with a particular master fund, but can legally act as independent entities with the ability to invest in different master funds. A typical master-feeder fund structure is as follows: 1. See Dechert LLP, SEC No-Action Letter (8 March 2017). See also the letter from Brendan C.
Fox and Brenden P. Carroll, Dechert LLP, to Douglas J. Scheidt, Managing Partner and Senior Advisor, Division of Investment Management, SEC (Mar.