Master Feeder Structures in Cayman Islands or Luxembourg are a popular option for fund managers seeking to increase assets under management quickly and effectively, by attracting a broad range of investors in the most tax efficient method.
Cayman Master Feeder Structure:
A master fund structure which is designed to accumulate funds raised from US investors, US tax-exempt investors and non-US investors into one centralised vehicle - namely the Master Fund. The Master Fund is ultimately an 'AIF' as a standalone SPC, which the sub-funds would ultimately feed into; hence master 'feeder' fund.
Luxembourg Master Feeder Structure:
Luxembourg operates both UCITS and AIF master fund structures for European fund managers, often referred to as 'Entity Pooling' in Luxembourg. Fund managers seeking a regulated fund structure would opt for UCITS master feeder funds, as these funds would typically included various retail investments (either direct or through pension funds). Luxembourg also benefits from establishing 'AIFs' which are unregulated funds similar to Cayman, however have the benefit of being 'onshore'.
Benefits of a Master Feeder Fund Structure:
Simply put, economies. It is far more cost effective to create a master fund with critical mass as it becomes cost effective to manage and increases operational efficiencies rather than manage various smaller size funds. Also, master feeder fund structures allow fund managers to raise capital tax efficiently from investors globally.
|Advantages of a Master-Feeder Structure|
|Marketing, including investor preference||Feeder structures allow investors access to markets through recognised and often tax efficient vehicles and the benefit of reduced costs and improved efficiency. This is a key consideration in marketing a product in a jurisdiction with specific local investor needs and expectations.|
|Heritage & Track Record||Master-feeder structures, which are also referred to as “hubs", have a long history and are familiar to investors around the world, particularly in Cayman Islands and Luxembourg.|
|Product Offering & Innovation||Master-feeder structures can be designed with bespoke features to meet the needs of different types of investors. Distributors can thus promote their own brand by offering feeder vehicles that invest in masters run by larger fund managers with expertise and track record. This allows distributors to white-label the fund, without incurring the costs associated with creating the investment products.|
|Legal Segregation||Feeders are permitted to invest in assets other than the master fund and may hold certain allocations of assets in cash/derivatives for hedging purposes.|
|Efficiency & Cost Effectiveness||Pooling fund assets with similar investment strategies into master vehicles should result in economies of scale, cost efficiency and increased liquidity. This also allows consistency in overall fund strategy and returns as the master fund would be managed centrally, compared to a network of fund managers mirroring the fund strategy through smaller funds.|
Why a Master Feeder Fund:
The biggest advantage for US, Asian and European fund managers to is raised capital through a broad network of investors, who would otherwise be put off by investing into the fund as it may complicate the investors' tax position in the US (or non-US investors having to pay tax in the US).
Also, by creating a 'Master Fund', this eliminates performance discrepancies between smaller funds, as the assets would be pooled together and further by having one (or sometimes joint) investment manager(s) makes the processing more efficient and transparent for all parties concerned.
Ultimately, Master Feeder Funds are a flexible and traditional method for small/medium sized fund managers to gain critical mass quickly and effectively by attracting investors in a tax efficient method. Naturally, the bigger the fund, the more cost effective its management and performance fees; which then reciprocates back to the investors by way of return on capital.
If you are a US, Asian or European fund manager seeking to grow your assets under management, contact us and see how XCAP Global and our partners can assist with our fund hosting solutions for Master Feeder Fund structures.
|Entity / Activity||Description & Works Carried Out|
|Cayman Master Feeder Fund||Standalone Cayman Segregated Portfolio Company (SPC structure)|
|Cayman Sub Fund||Sub Fund established off the back off the Master Feeder Fund to cater for non-US investors|
|Delaware LLP entity||Established in Delaware, for US based investors only|
|Investment Manager & AIFM to Master Fund||TBC|
|Minimum AUM at launch||$20m USD|
|Standardised IM Fees||45-65bp of AUM (variable)|