The Master-Feeder structure is the gold standard for pooling US taxable capital, US tax-exempt capital, and non-US capital into a single trading vehicle to achieve economies of scale.
The Mechanics
Instead of running parallel funds that require identical trades across multiple portfolios, a single "Master Fund" (typically a Cayman Exempted Company checking the box as a partnership for US tax, or a Cayman LLC) executes all trading.
Capital is routed into the Master Fund via "Feeder Funds".
- US Feeder: Typically a Delaware LP or LLC. It accepts capital from US taxable investors (high net worth individuals, family offices).
- Offshore Feeder: Typically a Cayman Exempted Company. It accepts capital from US tax-exempt entities (pensions, endowments) to block Unrelated Business Taxable Income (UBTI), and non-US investors.
| Entity | Jurisdiction | Investor Profile | Tax Classification (US) |
|---|---|---|---|
| Master Fund | Cayman Islands | None (Feeder capital only) | Partnership |
| US Feeder | Delaware | US Taxable | Partnership |
| Offshore Feeder | Cayman Islands | US Tax-Exempt / Non-US | Corporation (UBTI Blocker) |
Cost Implications
While operationally efficient for trading, setting up a master-feeder incurs higher initial legal costs and ongoing regulatory fees compared to a standalone fund, as you are essentially creating three entities.
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