What is a Hub and Spoke Structure
A hub and spoke structure is an investment structure used by an investment company in which several investment vehicles, each remaining individually managed, pool their assets together, contributing to one central investment vehicle. This can also be called a master-feeder structure. All of the funds in the system typically have the same investment objective. The smaller investment vehicles are referred to as the "spokes." The central investment vehicle is referred to as the "hub" or the master fund.
BREAKING DOWN Hub and Spoke Structure
A hub and spoke structure can provide substantial benefits to managers of investment funds. These types of funds offer numerous efficiencies from their pooled structure. With a hub and spoke structure, capital is channeled to the master fund where all transactions are made, helping to reduce transaction costs.
Hub and spoke structures can also accommodate a full range of spoke or feeder funds providing greater incentive for business development. Hub and spoke structures also commonly include both U.S. and offshore funds. Hub and spoke structures are setup as a partnership to service global investors. As a partnership they can work cooperatively while still allowing for individual feeder fund registration in the U.S. and abroad.
Accounting and financial reporting can be complicated in a hub and spoke fund structure. With this type of fund, all transactions, fees and expenses are accounted for and paid from the master fund. Despite the complicated accounting for inflows and outflows to and from the master fund, its partnership structure allows each feeder fund to be managed individually with its own rules and registrations. This is particularly beneficial in the case of taxes. Offshore funds often require higher taxes on dividends and capital gains. In a hub and spoke structure, U.S. investors in an onshore fund would be unaffected by any obligations of the offshore fund and vice versa. This structuring keeps all fund reporting, fees and expenses segregated and controlled while still allowing for the greater benefit of economies of scale.
Hub and Spoke Funds
Numerous hub and spoke funds exist in the market. BlackRock is one fund manager broadly employing this fund structure. The investment company’s Master Trust LLC strategy uses a hub and spoke structure. In this example, the Master Trust LLC is the master fund. Its feeder funds include: BIF Treasury Fund and BBIF Treasury Fund. The funds are able to keep fund operating costs relatively low in comparison to their competitors due to the hub and spoke structure. Other examples of BlackRock hub and spoke funds can be found here: BlackRock Master Portfolios.