At the Master Fund
Once the master has recorded the net capital flows it has to work with,
it then has a pooled trading account for which it can then generate all
P&L. All buys, sells, dividends, interest, etc. are initially accounted for
at this level. At an interval that reports need to be generated, it then
needs to “allocate” the P&L components back down to the feeder funds
that invested in it generally based on their relative capital (economic)
percentages.
At the Feeder Fund
Again, feeders are their own partnership (legal entity). They can decide
to invest in a master fund, as well as anything else allowed by the partnership
agreement. Thus there often times two sources of P&L for a
feeder—results from the master, and feeder-specific P&L. Feederspecific
P&L is what you’d expect it to be; P&L related only to things that
that feeder invests in (i.e. stocks, bonds, etc.), having nothing to do with
the P&L from other feeder(s) or P&L from the master fund. In addition,
the feeders carry certain expenses of their own such as management
and performance fees. Since each level of the master feeder structure
(i.e. corporation/partnership) is a legal entity, full books and records for
financial and tax reporting must be maintained for each.
The following activities typically occur solely at the feeder level:
- Cash—kept on hand for miscellaneous feeder-specific expenses and fees
- Capital contributions and redemptions of the investors
- Direct investments in securities and short positions
- Feeder level expenses including management fees and performance fees
- Other liabilities
- Organization costs
So, after the master P&L has been distributed to its respective feeders,
all the feeder-specific P&L is entered; then, finally, allocation down
to the investors can occur.