Master Fund (Investments) - Explained
What is a Master Fund?
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Table of ContentsWhat is a Master Fund?How is a Master Fund Used? How Master Fund WorksOpen-End Mutual FundsMaster Feeder AlternativesRegulation and DisclosureAcademic Research on Master Fund
What is a Master Fund?
Master fund refers to a fund from a pool of assets that is used to transact securities in a master-feeder investment structure. Master plan benefits its user through the reduced costs of operations as well as trade-related expenses.
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How is a Master Fund Used?
Investors in the United States and from overseas who wish to hedge funds and place it into a master fund by making use of master-feeder, where they pool both taxable and tax-exempt capital they raised. Each group of investors has its own established feeders. Note that it is through a master fund that an investor is able to make portfolio investments as well as implement his or her trade operations.
How Master Fund Works
The process of investing in master fund begins by an investor putting money into the feeder fund. From the feeder fund, the money goes to master fund where it is invested into the various markets. The profits and loss realized at the master fund are taken back to two feeder funds which then assign back the profit and loss to the investor.
Open-End Mutual Funds
The management of an open-end mutual fund is basically done in the form of a collective investment pool which offers multiple share classes designed for different types of investors. The assets are assembled together in one portfolio and then managed through the funds account in different classes of shares.
For investment companies that are capable of managing multiple open-end funds that have the same holdings as well as objectives, this type of fund can be quite efficient to them. Also, master-feeder related arrangements can be applied to a number of pooled funds that are different from each other. Note that investors may decide to use a master-feeder structure based on an individual case. This because there are a number of factors involved as well as a number of advantages which an investor will assess before he or she decides to make of it.
Master Feeder Alternatives
Note that master-feed structure can be built outside of traditional open-end funds hence establishing other types of funds. For a master fund to be established through feeder funds, there must be differentiation that is significant for different categories of investors. For instance, a fund offshore and United States investors can make use of the master-feeder structure. They can do this by putting on offer two toes of feeder funds that enables investment that is differentiated from both the United States and overseas investors.
Regulation and Disclosure
As said earlier, the utilization of a master-feeder structure can be done by all types of funds. The United States can utilize a master-feeder structure through its regulated fund. In this case, it has an obligation of disclosing this in a prospectus of a fund including the master-feeder structure detailed provisions.
The main benefit of a master-feeder is that it can be used to improve the funds cost efficiencies.
Master-feeder structure is a complex structure which makes it a risky venture especially in a jurisdiction where regulations to hedge the risks are minimal.
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