A Feeder Fund is Mutual Fund that pools investment capital from various investors and then feeds (i.e invests) this capital pool into one or more Master Fund(s).
It is the Master-Fund that undertakes the investment activity on behalf of the investors.
In a Feeder-Master fund structure, the feeder fund is typically set up as a passively-managed fund.
What role do Feeder Funds play?
A Feeder fund is typically used as an investment vehicle to invest in international financial markets.
How feeder funds operate is better understood with the help of an example.
Let us assume there are three countries A, B & C.
Residents of country A and B find country C as an attractive investment destination.
To order to take advantage of this demand, a global Investment house sets up two Feeder Funds in Country A & B respectively, and a Master Fund in Country C.
The two Feeder funds collects investment capital from the residents of Country A & B and invests this capital into the Master Fund domiciled in company C.
It is the master fund that invests this capital into the financial markets in County C and allocates profits made from this investment activity to the feeder funds in proportion to the capital invested.
An advantage of this Feeder-Master structure is the cost savings it provides to the fund house.
Since the goal of the fund is to invest in country C, a Feeder Fund structure saves it from the cost of employing a dedicated research and investment in each of the countries A & B and can instead have a central team at Country C to undertake investing decisions.
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