What is Feeder Fund?

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A feeder fund is one of several sub-funds that put all of their investment capital into an overarching umbrella fund, known as a master fund, for which a single investment advisor handles all portfolio investments and trading. This two-tiered investment structure of a feeder fund and a master fund is commonly used by hedge funds as a means of assembling a larger portfolio account by pooling investment capital.Profits from the master fund are then split, or distributed, proportionately to the feeder funds based on the percentage of investment capital they have contributed to the master fund.

Definition

A feeder fund is a type of investment fund that invests all its capital into one of several sub-funds within a larger fund known as the master fund. A single investment advisor manages all portfolio investments and transactions. This two-tier investment structure, consisting of feeder funds and a master fund, is commonly used by hedge funds as a means to pool investment capital to create larger portfolio accounts. Profits are then distributed from the master fund based on the percentage of investment capital each feeder fund contributes to the master fund.

Origin

The concept of feeder funds originated in the hedge fund industry, designed to create larger and more diversified portfolios by pooling funds from multiple investors. This structure gained popularity in the late 20th century, particularly as hedge funds sought more efficient capital management methods.

Categories and Features

Feeder funds are typically categorized into two types: single feeder funds and multiple feeder funds. Single feeder funds invest all capital into one master fund, while multiple feeder funds allocate capital across several master funds. Key features include: 1. Capital Pooling: Aggregating funds from multiple investors to increase investment scale. 2. Professional Management: Managed by professional investment advisors. 3. Risk Diversification: Reducing risk through diversified investments.

Case Studies

Case Study 1: A hedge fund company established multiple feeder funds to pool funds from different investors into a large master fund. This approach allowed the company to make larger-scale investments in global markets and achieve higher returns. Case Study 2: Another investment firm used the feeder fund structure to attract small investors who might not meet the entry threshold for large hedge funds. Through feeder funds, these small investors could indirectly participate in large investment projects.

Common Issues

Investors using feeder funds may encounter issues such as: 1. Complex Fee Structures: Fees can be high due to the involvement of multiple funds. 2. Transparency Issues: Investors may find it difficult to understand the specific investment portfolio and strategies. 3. Risk Management: Despite the advantage of risk diversification, market volatility risks still need attention.

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