A common type of hedge fund structure is called a “master feeder.” 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 advisor.
The master fund is the entity that invests in the market as proscribed
by the partnership agreement.
A typical master feeder setup has one master fund with one U.S. (or
onshore) feeder and one Non-U.S. (or offshore) feeder. The benefit of
this organization is that it doesn’t restrict the investing fund to just one
type of investor (that is, tax-exempt versus U.S. taxable).
Feeder funds under the same master can differ in their investor
types, investment minimums, fee structure, net asset values, and other
operational features. Said another way, feeder funds are not tied to a
particular master fund, but rather are their own legal entity. As such, they
are their own partnerships, and can invest in any number of master
funds. The reverse is also true; a master fund is not tied to a feeder, and
can accept investments from any number of feeders.
A master fund, being its own legal entity, is typically an offshore corporation.
An offshore corporation can “check the box” and elect to be
taxed as a partnership for U.S. tax purposes. By investing in an offshore
master feeder fund taxed as a U.S. partnership, the onshore feeder will
receive “pass-through” treatment for its share of the master fund’s P&L.
The investment managers or general partners of offshore funds can be
offshore corporations owned substantially by the fund manager or the
manager’s U.S. entity.