Master-Feeder Fund Structures: A Guide for Hedge Fund Managers

A master-feeder fund structure is one of the most widely used frameworks for hedge fund managers seeking to attract both U.S. and non-U.S. investors in a tax-efficient, operationally streamlined manner.

At its core, the master-feeder structure consists of two or more feeder funds—typically one onshore and one offshore—that invest capital into a single master fund, which executes the investment strategy. This setup consolidates portfolio management at the master level while maintaining flexibility in investor access and tax treatment.

How Master-Feeder Structures Work

In a master-feeder fund:

• Investors commit capital to either an onshore feeder fund (usually a U.S. limited partnership or LLC) or an offshore feeder fund (typically a Cayman Islands or BVI corporation).
• These feeder funds pool investor capital and invest it into a master fund, often an offshore entity structured to act as the central trading vehicle.
• The master fund then conducts all trading activity and investment management.
• Profits and losses from the master fund are allocated back to the feeder funds, which, in turn, pass the results to individual investors.

From the master fund’s perspective, each feeder fund is simply an investor—owning “shares” or partnership interests in the master.

Onshore & Offshore Feeder Funds

A standard master-feeder setup includes:

• Offshore Master Fund (typically in the Cayman Islands, BVI, or Bahamas)
• Offshore Feeder Fund for non-U.S. investors and U.S. tax-exempt entities
• Onshore Feeder Fund (usually a U.S. LP or LLC) for taxable U.S. investors

This structure allows fund managers to cater to diverse investor bases without duplicating trading activity or maintaining separate portfolios.

Tax Treatment and Regulatory Considerations

The master fund is typically organized as an offshore corporation, but may elect to be taxed as a partnership for U.S. tax purposes. This “check-the-box” election enables pass-through tax treatment, ensuring that profits and losses are properly allocated to the onshore feeder fund and, by extension, its investors.

Investment managers and general partners can be structured as offshore entities or U.S. entities, depending on regulatory strategy and tax planning needs.

Advantages of a Master-Feeder Fund Structure

Many fund managers choose the master-feeder setup for its flexibility, cost efficiency, and streamlined compliance. Key benefits include:

• Centralized trading reduces the need for duplicate portfolios and split tax lots
• Lower operational costs through consolidated fund administration and accounting
• Unified investment strategy across all investor types
• Increased buying power by pooling all investor assets in the master fund
• Tax efficiency for U.S. investors via flow-through treatment of capital gains and losses

Potential Drawbacks and Considerations

While master-feeder structures offer many advantages, fund managers should also weigh the following considerations:

• U.S. withholding tax: Offshore feeder funds may be subject to 30% withholding on U.S. source dividends
• Investor preference conflicts: Tax-sensitive strategies (e.g., long-term capital gains) may benefit U.S. investors but not offshore investors
• Asset class limitations: Certain investments (e.g., REITs or mutual funds) may suit one investor type but not the other
• Complex allocations: Managing multiple feeder funds with differing fee structures and tax treatments can increase accounting and reporting complexity

Mini-Master Fund Structures

As an alternative to the traditional master-feeder model, mini-master structures may be used by U.S.-based managers to reduce complexity. In this case:

• The onshore entity functions as both the investment manager and the master fund
• An offshore feeder fund invests directly into the onshore master
• Useful for newer managers or those with a majority U.S. investor base

Is a Master-Feeder Structure Right for You?

Deciding on a fund structure is a strategic decision based on your:

• Target investor types (U.S. taxable, tax-exempt, foreign)
• Fund strategy and asset classes
• Jurisdictional preferences
• Operational capacity and compliance needs

At SCG Fund Services, we help fund managers design and launch the optimal structure for their goals—whether that’s a classic master-feeder, mini-master, standalone fund, or segregated portfolio company (SPC).