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Investment Structuring
Investment Structuring
- By Himani Srivastava
Investment Structure
The master-feeder structure is a technique for
structuring investment funds. It allows asset
managers to capture the efficiencies of larger
pools of assets although fashioning investment
funds to separate market niches.
One or more investment vehicles pool their portfolios
within another vehicle – several smaller feeder funds
contribute to one master fund.
Sometimes, especially when the feeders are
hedge funds, this is a way of complying with the
legal systems of distinct jurisdictions.
For example, an onshore feeder fund and an
offshore feeder fund contribute to the same master
portfolio.
This is also sometimes called a hub and spoke
structure.
Tax concerns
For a U.S. taxable investor, the ownership of
shares in what is known as a "
passive foreign investment company" or PFIC
can prove to be very tax-expensive. The
offshore feeder fund almost always meets the
definition of a PFIC.
An (onshore) master fund does not, so the
transaction is set up so that the master fund is a
partnership for U.S. tax purposes, which
effectively provides insulation between the US-
based investor and the PFIC feeder.
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