A primary feed structure is a device commonly used by hedge funds to aggregate taxable and tax-exempt capital raised by investors in the U.S. and abroad as master funds. Separate investment vehicles, also known as feeders, are set up for each group of investors. A feeder fund is largely controlled by its general partner, which is typically a new entity formed and controlled by the investment manager. The general partner retains primary control over the power vehicle with minimal investor participation (except perhaps through an advisory committee and other limited voting rights or powers listed in the vehicle`s partnership agreement). There is no Feeder Fund Board of Directors or other independent oversight body for management (i.e. not the equivalent of a board of directors with independent directors appointed in corporations). Governance best practices that could be considered for application to hedge funds include: In a feeder fund agreement, all management fees and performance fees due are paid by investors at the feeder fund level. The letter amended Parts 12(d)(1)(A) and (B) of the 1940 Act, which previously limited the use of foreign feed funds in funds registered in the United States. The SEC has regulated the practice for several reasons.
First of all, it wanted to prevent master funds from exerting too much influence on an acquired fund. It also aimed to protect investors in the funds from multi-level fees and the possibility that fund structures would become so complex that they are difficult to understand. European institutional investors have begun to focus on improving the governance of the hedge funds in which they invest. In Europe, institutional investors typically access hedge funds through the purchase of shares of the fund company, in the same way that U.S. investors buy shares of mutual funds. Conversely, U.S. institutional investors typically invest in hedge funds by depositing capital as limited partners of a partnership vehicle. The main objective of the feeder fund master fund structure is to reduce trading costs and total cost of ownership.
The Master Fund effectively achieves economies of scale by having access to the large pool of investment capital provided by a number of feeder funds, allowing it to operate more profitably than would be possible for any of the feeder funds that invest themselves. To address these concerns and improve hedge fund governance, U.S. investors could consider one or more of the following reforms: The relationship between a master fund and its feeder funds can be complex, as a lawsuit in 2018 showed. This was how redemptions by a feeder fund from a master fund are treated in a liquidation scenario. Potential investors may request a copy of Lothbury Global Feeder`s LP offering document and sponsorship agreement. Please note that the existence of tax relief or treatment depends on the situation of the investors and the current conditions met by Global Feeder LP and LPT, as well as the information provided by the investors. The tax and regulatory treatment of Global Feeder LP is complex. Investors are advised to seek detailed advice. LIM is responsible for managing the portfolios and risks of LPT and Global Feeder LP, including responsibility for the marketing interests of Global Feeder LP.
A feeder fund is one of many sub-funds that invest all of their investment capital in a global fund of funds known as a master fund, where a single investment advisor manages all investments and trading in the portfolio. This two-tier investment structure of a feeder fund and a master fund is often used by hedge funds as a way to assemble a larger portfolio account by pooling investment capital. Even if the board of directors of a lead fund includes external directors who devote reasonable time and attention to the activities of the lead fund, the interests of U.S. investors are held through a feeder fund that is at least one step away from the main fund. As a result, U.S. investors have very little (if any) opportunity to provide independent oversight of the management of the Master Fund or to contribute to governance issues. In summary, options are available for institutional investors in the United States who want to improve governance and supervisory rights in the hedge funds in which they invest. Taking into account the structures used by European institutional investors for investments in hedge funds could provide guidance on this side of the Atlantic. Feeder funds that invest capital in a master fund function as separate legal entities from the master fund and can be invested in more than one master fund.
The different feeder funds invested in a master fund often differ significantly from each other in terms of expense fees or investment minimums, and generally do not have the same net asset value (NAV). Just as a feeder fund is free to invest in more than one master fund, a master fund is also free to accept investments from a range of feeder funds. In 2014, one of the investors in the feeder fund submitted a notice of redemption. The feeder fund, which did not own its own assets, assumed that the master fund would automatically respond to the redemption request – known as a “consecutive redemption”. However, both funds went into liquidation a few months later. When the original investor provided proof of debt to collect his money, it was rejected by the liquidators of the Ardon Maroon Asia Master Fund on the grounds that Asia Dragon had never formally submitted a separate notice of redemption request. A standard limited partnership agreement (“LPA”) model is an ongoing need in the private equity asset class given the cost, time and complexity of negotiating investment terms. General partners (“PMs”) have an interest in shortening the duration of warranty contracts, providing fundraising security and reducing their fundraising costs. Similarly, limited partners (“LPs”) want fair and transparent terms that explain rights and obligations while reducing their legal negotiation costs. The difference in hedge fund investment approaches used by European and US companies…