What Is a Master Fund?
A master fund is a collective pool of assets used in a master-feeder investment structure, which offers the benefit of reduced operating costs and trading expenses.
Master Fund Explained
A master fund is an investment fund used for transacting securities when a master-feeder structure is utilized. A master-feeder structure builds on the concept of managing portfolios from a collective investment pool. It allows a fund company managing numerous feeder funds with a similar objective to more comprehensively take advantage of transactional economies of scale.
Master-feeder arrangements can be used with many different pooled funds. The decision to use a master-feeder structure is made on a case-by-case basis as there are numerous advantages and often many factors involved.
Open-End Mutual Funds
An open-end mutual fund is managed as a collective investment pool offering multiple share classes structured for different types of investors. Collectively the assets are pooled into a single portfolio, and the differentiation by share class is managed by the fund’s accountants.
An open-end mutual fund may choose to add an additional layer to its collective investment by using a master-feeder structure. This can be efficient for a fund company if the investment company manages multiple open-end funds with similar objectives and holdings. In this case, a master-feeder structure would utilize a fund-of-funds approach where multiple open-end funds are feeder funds that comprehensively pool assets in a master fund.
With this type of fund-of-funds structure, the transactions are all made from the master fund. In the master fund, investment security transactions can be aggregated and therefore traded at a lower cost.
Other types of funds, outside of traditional open-end funds, may also choose to build a master-feeder structure. A master fund may be established with feeder funds when there is significant differentiation needed for different types of investors. For example, a fund with U.S. and offshore investors may utilize a master-feeder structure by offering two feeder funds that allow for differentiated investment from U.S. and offshore investors.
Regulation and Disclosure
Master-feeder structures can be utilized by all types of funds. If a master-feeder structure is utilized in a U.S. regulated fund, it will be disclosed in a fund’s prospectus, with the terms of the master-feeder structure provided in detail. Master-feeder funds can be a useful way to improve the cost efficiencies of a fund, however, the slightly more complicated structure can make them a higher risk investment in jurisdictions with minimal regulations.