HEDGE FUNDS
FUNDS TYPES & OFFERINGS: MASTER/FEEDER FUNDS

Master feeder arrangements reflect the decision of the investment manager to accumulate all funds into one central pot – the master fund – to enhance the critical mass of tradable assets or reduce the amount of transactions. Such factors are especially true in startup situations. Usually, a U.S.-based fund and a non U.S.-based fund are being combined.

Some tax background is needed to understand how this works. A non-U.S. entity that is engaged in investment activity (and is otherwise within the Internal Revenue Code definition) is called a "passive foreign investment company,” or PFIC. For the non-U.S. investor and the U.S. tax-exempt investor, this is of no concern. However, for the U.S. taxable investor, owning shares in a PFIC can be quite a problem for tax purposes. Therefore, if the manager desires to link the U.S. and the non-U.S. funds, it needs an intermediary. Otherwise, the U.S. investor would be deemed an investor in the non-U.S. fund (which would almost always be a PFIC). The intermediary is the master fund. It is established separate and apart from the two other funds, and it makes certain elections under the U.S. tax law – the "check the box" elections – so as to be treated as a partnership for U.S. tax purposes. This avoids the PFIC regime at this stage.

To preserve the offshore status for the offshore fund, the master fund also is located offshore. As with your offshore feeder fund, the day-to-day administration of your master fund must be done on-island.

See our International (Offshore) Funds web page for more information regarding offshore funds.

There is a lot of data for you to process to get your fund set up properly. We make that as easy as possible for you by sending you a “terms sheet” that defines most of the sections in our standard documents. These terms change from fund to fund. Using this method allows us to minimize your fees while still providing you with a customized and fully reviewed (both by us and by our attorney) set of documents. The terms sheet includes the following information:

A short description of the data requested;
A sample from a composite of hedge funds that we have helped our clients form;
A discussion of various alternatives that you can consider;
A place for you to define how you want your fund set up.

We review this data and consult with you regarding your choices. We will discuss any issue we identify, answer any questions you might have, and develop the first drafts of your documents. As we refine your choices and finalize certain information, we generate additional drafts for your review.

GreenTrader is not a law firm, we work on your hedge fund development (business, registration, tax and accounting) and utilize outside independent attorneys (as your liaison).

If you have any questions or would like to get started, please email hedgefunds@greencompany.com and/or call us.