Glossary · Fund / vehicle structure
Master-Feeder Structure
Also called: master feeder
A master-feeder structure is a fund arrangement in which two or more feeder funds, each designed for a different investor group, invest substantially all their assets in a single master fund that holds and trades the portfolio.
Investors with different tax and legal needs, typically US taxable investors on one side and non-US and US tax-exempt investors on the other, cannot always sit in the same vehicle. A master-feeder lets each group invest through a vehicle that suits it while the manager runs one combined portfolio in the master.
The classic hedge fund version
Onshore feeder: usually a Delaware limited partnership for US taxable investors. Under the US entity classification ("check-the-box") regulations, a domestic eligible entity with two or more members is a partnership unless it elects otherwise, and a partnership is not itself subject to US income tax: its partners are taxed on their shares.
Offshore feeder: usually a Cayman Islands exempted company for non-US investors and US tax-exempt investors. A foreign eligible entity whose members all have limited liability is a corporation by default, so US tax-exempt investors receive dividends from it, which are excluded from unrelated business taxable income (UBTI) unless the investor itself borrowed to buy the shares, instead of a share of the master's debt-financed income, which would be UBTI. Non-US investors likewise hold shares of a non-US corporation instead of being partners in the trading partnership themselves.
Master fund: usually a Cayman entity that elects to be treated as a partnership for US tax, so the onshore feeder keeps flow-through treatment: a foreign eligible entity whose members all have limited liability is a corporation by default but may elect partnership treatment. The master holds the portfolio, faces the prime brokers and executes trades.
Why it works for offshore investors
US tax law treats a non-US partner as engaged in a US trade or business if the partnership is, which would give it effectively connected income (ECI). Trading in stocks or securities for one's own account is, however, not a US trade or business (the trading safe harbour; dealers in stocks or securities are excluded). A master fund whose US activity is limited to such trading therefore does not, through that activity, give non-US investors in the offshore feeder ECI. The safe harbour covers trading; it does not by its terms cover originating loans or operating a business, so funds that do either are outside it and need different structuring.
Advantages
One portfolio means trades are allocated once, at the master, avoiding cross-trades or split executions between parallel accounts; scale improves financing terms; and administration, audit and risk management are run on one book. New feeders can be added for further investor groups (for example a feeder for a specific country or currency class) without changing the portfolio.
Costs and conflicts
Each feeder adds its own administration and governance costs. Feeders with different liquidity terms create pressure on the master when one feeder's investors redeem. Tax-driven decisions at the master can favour one feeder's investors over another's. Fees are usually charged at the feeder level, so performance must be compared at the share-class level.
Use outside hedge funds
In private equity and private credit, sponsors more often use parallel funds that invest alongside the main fund, and feeder funds that aggregate specific investor groups (for example a wealth-channel access fund) into the main fund as a single LP. For US registered funds, Investment Company Act section 12(d)(1)(E) lifts the section 12(d)(1) fund-of-funds limits where, among other conditions, the master's shares are the only investment security the feeder holds and the feeder passes votes through to its own investors or votes in proportion to the master's other holders. UCITS have their own master-feeder regime: under Article 58(1) of the UCITS Directive (2009/65/EC), a feeder UCITS is a UCITS approved to invest at least 85% of its assets in units of another UCITS, the master UCITS (in Luxembourg, Article 77(1) of the Law of 17 December 2010).
Not the same as
- Parallel Fund: Parallel funds invest directly alongside each other pro rata; feeders invest into a master that alone holds the assets.
- Fund of Funds (FoF): A fund of funds allocates across many managers; a feeder invests in one master run by the same manager.
- Blocker Corporation: A blocker is any corporation interposed to block UBTI or ECI; an offshore feeder often plays that role inside a master-feeder.
How it is classified
- Master-feeder: feeders invest substantially all assets in one master that holds the portfolio.
- Parallel: separate vehicles each hold their own pro rata share of each investment.
- Fund of funds: the top vehicle allocates to multiple unaffiliated or affiliated funds.
Common mistakes
- Assuming the master is always a corporation; it usually elects partnership treatment so the onshore feeder keeps flow-through status.
- Comparing feeder returns without adjusting for feeder-level fees, currency classes and expenses.
- Assuming the trading safe harbour, which covers trading in stocks or securities for the fund's own account, extends to strategies that originate loans.
Edge cases
- Some managers use a "mini master" with only an offshore feeder, so US tax-exempt investors invest via the offshore feeder and the master provides the partnership elections.
- Side pockets are often created at the master level and mirrored in each feeder's share classes.
Sources
- 26 U.S.C. 864 - Definitions and special rules (trade or business within the US; effectively connected income). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 864(b)(2)(A)(ii) — supports: Trading in stocks or securities for the taxpayer's own account is not a US trade or business; dealers excluded
- 26 U.S.C. 875 - Partnerships; beneficiaries of estates and trusts. U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 875(1) — supports: Foreign partner treated as engaged in a US trade or business if the partnership is
- 26 U.S.C. 512 - Unrelated business taxable income. U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 512(b)(1), (b)(4) — supports: Dividends excluded from UBTI; income from debt-financed property included under section 514
- 26 U.S.C. 514 - Unrelated debt-financed income. U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 514(a)(1) — supports: Debt-financed income included in UBTI in proportion to acquisition indebtedness
- Hedge Funds. U.S. Securities and Exchange Commission (Investor.gov), Accessed 2026-10-01. Status: current (checked 2026-10-01). Investor bulletin — supports: Hedge funds as private unregistered funds
- 26 CFR 301.7701-3 - Classification of certain business entities (entity classification elections). Internal Revenue Service / Treasury (CFR text via LII), Current CFR text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). 26 CFR 301.7701-3(a), (b)(1)(i), (b)(2)(i) — supports: Eligible entity classification election; domestic default partnership with two or more members; foreign default association (corporation) where all members have limited liability
- 15 U.S.C. 80a-12 - Functions and activities of investment companies (ICA s.12), incl. s.12(d)(1). U.S. Congress (US Code via LII), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 12(d)(1)(E)(i)-(iii) — supports: Fund-of-funds limits; exception where the depositor or principal underwriter is a registered broker-dealer, the acquired security is the only investment security held, and votes are passed through or cast in proportion
- Law of 17 December 2010 relating to undertakings for collective investment (UCI Law; SICAV) - CSSF consolidated text. Grand Duchy of Luxembourg; consolidation by CSSF, CSSF, Consolidated text updated 10 May 2026. Status: In force (as amended) (checked 2026-10-01). Chapter 9, Art. 77(1) — supports: A feeder UCITS invests at least 85% of its assets in units of another UCITS (the master UCITS)
- 26 U.S.C. 701 - Partners, not partnership, subject to tax. U.S. Congress (United States Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). Sec. 701 — supports: A partnership is not itself subject to income tax; partners are taxed in their separate capacities
- Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS). European Parliament and Council (Official Journal L 302, 17.11.2009, p. 32; text via Publications Office), OJ L 302, 17.11.2009; as amended (including by Directive (EU) 2024/927). Status: in force (checked 2026-10-02). Art. 58(1) — supports: A feeder UCITS is approved to invest at least 85% of its assets in units of another UCITS (the master UCITS)