Understanding master-feeder accounting - Advent Software

1 Understanding master - feeder accounting A primer for fund managers 2 | Understanding master - feeder accounting Funds master - feeder fund structures and accounting requirements can be complex and confusing. This paper is designed to help fund managers decide whether this structure makes sense for them and their investors. This communication is provided by Advent Software , Inc. ( Advent ) for informational purposes only and should not be construed as or relied on in lieu of, and does not constitute, legal advice on any matter whatsoever discussed herein.

2 Advent shall have no liability in connection with this communication or any reliance thereon. | 3. What is a master - feeder Fund? Hungry to know more about A master - feeder fund is, most commonly, One significant operational difference master - feeder accounting ? This a two-tiered investment structure in which between purchasing common stock and should whet your appetite and investors deposit capital in a feeder fund, purchasing shares of a master fund is which in turn invests in a master fund that when a fund buys a share of common satisfy your cravings.

3 That is managed by the same investment stock, it does not peer into the underlying advisor. The master fund is the entity that income attributes of that stock. Rather, invests in the market as prescribed in the the total return of the stock comprises partnership agreement. only price appreciation and dividend income distributions. By contrast, when The feeder fund is generally where the a fund buys a share of a master fund, it is capital investing begins: capital (cash buying into an investment partnership, and or securities) flows from investors into thus all the different income attributes feeders, and these in turn invest all or a (such as dividends, interest, gains, and portion of that capital into the master fund.)

4 Tax adjustments) that the master fund The master fund then uses that infusion of generates are passed through to the capital to invest in securities and thereby feeder fund. generate profit and loss. This profit and loss that the master fund generates is The purpose of this document is to famil- then allocated to all of the master fund's iarize the reader with the characteristics of constituent feeders. From the master master - feeder funds, to explain setup and fund's perspective, each feeder can be processing considerations, and to provide viewed as an investor.

5 Basic information on advanced topics. This information should help readers determine When you think of a feeder fund investing whether to start a master - feeder fund, and in a master fund, think of it as a fund if so, to understand the most important buying any other security. For example, the features of such funds. feeder fund (where all the limited partner/. For purposes of this article, a limited partner is a US. 1 shareholder1 capital resides) buys shares . taxable limited partner, and a shareholder is a non-US of a master fund, similarly to the way it or tax-exempt investor.

6 Buys shares of IBM common stock. 4 | Understanding master - feeder accounting A typical master - feeder structure includes one master fund with one onshore feeder and one offshore feeder . | 5. master - feeder Structure master Fund 1% Mgmt. Fee 1% Mgmt. Fee US Domestic LLP Offshore LLC. (Onshore Fund) Investment Manager (Offshore Fund). 20% Perf. Fee Reallocation US Taxable General Partner Foreign or US. Partners Tax-Exempt Investors master - feeder Fund taxed as a US partnership, the feeder > A master - feeder structure eases the will receive pass-through treatment for administrative burden of maintaining Structures its share of the master fund's profit and multiple portfolios (pari passu).

7 Loss. The investment managers or general A typical master - feeder structure includes partners of offshore funds can be offshore > The master fund general partner's one master fund with one US ( onshore ) corporations owned substantially by the performance fee will be able to maintain feeder and one non-US ( offshore ) feeder . fund manager or the manager's US entity. the underlying tax attributes from The benefit of this organization is that it The business structure of a master - feeder onshore feeders.

8 Does not restrict the investee fund to just fund with onshore and offshore feeders is one type of investor (that is, tax-exempt shown above. > The fund's combined assets can be used versus US taxable). to obtain greater financing benefits (for example, greater leverage or lower feeder funds that invest in the same Advantages and interest rates on borrowed securities). master fund can differ from one another in their investor types, investment minimums, Disadvantages of master - Disadvantages of a master - feeder fee structures, net asset values, and other feeder Funds structure include: operational features.

9 In other words, a feeder fund is not tied to a particular In general, depending on the objectives > An offshore fund is generally subject to master fund, but rather functions as its of the fund and its target markets, the 30% withholding tax on US dividends. If own legal entity, a partnership in its own advantages of setting up a hedge fund with a fund tries to avoid such transactions, it right, that can invest in any number of a master - feeder structure can outweigh incurs increased costs that it otherwise master funds.

10 The converse is also true: a the disadvantages. would not experience. master fund can accept investments from any number of feeders. The advantages of a master - feeder > The different investment strategies structure include: available to a master - feeder do not offer A master fund is typically an offshore advantages to all investors at all times. corporation, but it can check the box > A master - feeder fund reduces trading For example, long-term capital gains and elect to be taxed as a partnership for costs because it has no need to split tax are beneficial for US limited partners, US tax purposes.