Concept
A feeder fund is an intermediate investment vehicle that aggregates capital from multiple investors and enters a target fund (the master fund) as a single LP with a unified tranche. The investor legally owns a share in the feeder, while the feeder owns a share in the master fund. This is the classic master-feeder structure, long used by hedge funds and private equity funds.
The purpose of the structure is to remove the minimum ticket barrier. In a hypothetical example where the master fund's minimum commitment is $5 million, a feeder can aggregate fifty subscriptions of $100,000 and enter as a single investor with $5 million.
Where it's found
Master-feeder structures are used by private-markets access platforms (Moonfare, iCapital); by private banks that package a fund for their clients; and by organizers of club co-investments — a close but not identical mechanism that runs a syndicate through an SPV into a single deal.
Structure and participants
A feeder is usually a partnership (LP) or a tax-opaque company in a neutral jurisdiction: Luxembourg SCSp, Cayman, Delaware. It is managed by the organizer's management company or AIFM; the master fund remains a separate LP/GP partnership. The ownership chain: investor → feeder (an LP of the master fund) → master fund → portfolio assets.
| Parameter | Direct LP in fund | Through feeder |
|---|---|---|
| Minimum ticket | Set by the master fund's minimum commitment | Set by the feeder, typically lower |
| Relationship with GP | Direct | Indirect, aggregated |
| Voting rights / LPAC | Typically yes | Usually no |
| Fees | Fund only (2-and-20) | Fund + feeder fees |
| Reporting | Directly from GP | Through feeder organizer |
Master-feeder structure
The classic hedge-fund architecture solves a problem wider than the minimum ticket: pooling investors with incompatible tax regimes into a single portfolio. The structure comprises a Delaware LP as the onshore feeder for US taxable investors; a Cayman company as the offshore feeder for non-US investors and US tax-exempt investors (pension funds, endowments); and a master fund in the Cayman Islands, into which both feeders channel all the capital. Trading, positions, the prime broker and the track record are all at the master level — the feeders hold only its shares.
The structure comprises two feeders for different investor types, a shared master fund with the portfolio, and the manager.
Consolidation delivers scale: one prime broker and one set of ISDA documentation, netting of positions, a shared track record and a single audit instead of three. The manager runs the book once, and the differences between investor types stay at the feeder level.
The tax treatment differs by investor type. US taxable investors need partnership transparency: income passes through on a K-1 and is taxed at the investor level, whereas holding an offshore company would expose them to the PFIC regime. Tax-exempt investors choose a corporate feeder — a blocker: a partnership would pass through UBTI generated by leverage, whereas a corporation absorbs it at its own level. For non-US investors, shares of a foreign corporate feeder are not US-situs property for US estate tax purposes (26 USC 2104(a)).
Two tax mechanisms apply. The master, set up as a Cayman company, makes a check-the-box election and, for US tax purposes, becomes a partnership — profit flows transparently into the feeders. The safe harbour under §864(b)(2) IRC then lets the offshore master trade US securities for its own account without creating a US "trade or business." The Cayman Islands add the regulatory frame: a master with at least one regulated feeder itself registers with CIMA under the Mutual Funds Act.
European version: UCITS and AIFMD
In the EU, master-feeder is codified as a separate regulatory regime. A feeder UCITS must hold at least 85% of its assets in a single master UCITS (Article 58 of Directive 2009/65/EC); the remaining 15% is liquidity and hedging derivatives. AIFMD defines a feeder AIF through the same 85% threshold in a master AIF (or in several master AIFs with identical investment strategies). The typical wrappers are the Luxembourg SCSp/RAIF and the Irish ICAV.
Economics and fees
The investor bears a double load: the fund's own fees and carry plus the feeder's charge — a one-off setup and/or an annual management fee to the organizer. Capital calls follow the master fund's schedule, and the feeder passes them through to investors (see capital calls).
Where feeders differ
Feeders differ along several lines: the jurisdiction and whether the feeder is tax-transparent for the investor; the completeness of rights — voting, LPAC access and information rights, or only reporting; the total fee burden of fund plus feeder; the identity of the administrator and custodian and the consequences of the feeder's insolvency; and liquidity, since the secondary market for feeder shares is usually limited or non-existent.
A feeder fund opens access to funds closed by ticket size, at the cost of a second tier of fees and indirect LP rights.
Q/A
Ownership and rights
Do I own an interest in the master fund directly?
No. The investor owns an interest in the feeder, while the feeder itself is the legal LP in the master. Claims against the master, voting, reporting and distributions therefore run through the feeder’s documents and bodies; economic exposure to the strategy creates neither a direct GP contract nor title to master-fund assets.
Do I keep voting rights and LPAC access through a feeder?
Not automatically. Those rights belong to the feeder as LP and reach the end investor only if the subscription documents, LPA or a side letter expressly grants look-through, consultation or reporting. The same documents determine who votes, how GP notices are passed on and whether the organiser can vary or waive rights without investor consent.
Costs, tax and exit
Which charges sit on top of the master fund’s fees?
They commonly include a setup or placement fee, the organiser’s annual charge, administration, audit, bank or depositary costs and sometimes a separate performance fee. The comparison works only on an all-in basis for master and feeder, with calculation bases, offsets, accrual periods and exit costs; the same percentage on different bases produces a different result.
Will the feeder be tax-transparent for me?
Not necessarily. The answer depends on the feeder’s legal form, tax classification and elections, the type of income and the investor’s residence; one structure may be transparent for one investor and a blocker for another. The analysis covers the entire investor–feeder–master chain, not merely the master’s jurisdiction.
Can I exit the feeder before the master fund ends?
Usually not. Feeder liquidity is constrained by the master’s term and rules, while a transfer requires consents and may have no secondary buyer. The outcome turns on redemption and transfer restrictions, the capital-call schedule, default penalties, forced-sale powers and who bears the costs if an investor cannot meet the next call.