Take a look into the incredible and complex workings behind some of the most powerful funds.
You hear stories all the time about how some secretive hedge fund manager set up a complex web of controlled funds to cheat taxes and hide profits. But usually, the story stops there.
The world of inter-woven corporate fund structures gets complicated fast, but when you take a second to unpeel the layers, it becomes much more simple, and a lot more interesting.
So, let’s break down how one of these structures work and see why they’re used so much.
A master-feeder structure is a common arrangement used by hedge funds to pool together assets from multiple investors while addressing their diverse legal, tax, and regulatory requirements. It consists of two main entities: the master fund and the feeder funds. Here’s what you need to know:
- Master Fund: The master fund is the central entity that makes investment decisions and holds the assets. It is typically organized in a tax-neutral jurisdiction like the Cayman Islands, British Virgin Islands, or Bermuda.
- Feeder Funds: Feeder funds are separate investment vehicles that pool investor capital and feed it into the master fund. These feeder funds are created to cater to different types of investors based on their jurisdiction, tax status, and investment preferences. The most common types of feeder funds are:
- Domestic Feeder Funds: This fund is designed for investors who are residents or domiciled in the same country as the hedge fund manager. This feeder fund is typically structured as a limited partnership (LP) or limited liability company (LLC).
- Offshore Feeder Funds: This fund is tailored for non-resident investors or tax-exempt U.S. investors such as pension funds, endowments, and charities. It is usually organized in a tax-neutral offshore jurisdiction.
All About The Taxes
Now that you know how the structure works, let’s see why it’s so useful: