Understanding Master-Feeder Accounting

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It appears that you've provided a detailed article about master-feeder funds and related topics. This article covers various aspects of master-feeder funds, including their structure, advantages, disadvantages, operational considerations, and advanced topics. Here's a summary of the key points in the article:

1. Master-Feeder Fund Structure:

  • A master-feeder fund is a two-tiered investment structure.
  • Investors deposit capital into a feeder fund, which then invests in a master fund managed by the same advisor.
  • The master fund invests in the market according to the partnership agreement.

2. Master-Feeder Fund Characteristics:

  • Feeder funds receive capital from investors and invest it in the master fund.
  • All income attributes generated by the master fund, such as dividends, interest, gains, and tax adjustments, pass through to the feeder funds.

3. Master-Feeder Fund Types:

  • A typical master-feeder structure includes one U.S. ("onshore") feeder and one non-U.S. ("offshore") feeder.
  • Feeder funds can differ in terms of investor types, fee structures, minimum investments, etc.

4. Advantages of Master-Feeder Structure:

  • Reduced trading costs as there's no need to split tax lots.
  • Streamlined administrative burden.
  • Greater financing benefits due to combined assets.

5. Disadvantages of Master-Feeder Structure:

  • Offshore funds may be subject to withholding tax on U.S. dividends.
  • Different investment strategies may not suit all investors.
  • Uneven allocations of profit and loss can be complex.

6. Differences from Fund of Funds:

  • Master-feeder funds provide more detailed income attributes information than fund of funds.
  • Fund of funds may not receive underlying details until year-end.

7. Capital Flows:

  • Capital contributions begin at the feeder fund and determine ownership percentages in both feeder and master funds.

8. Generation of Profit and Loss:

  • Both master and feeder funds handle profit and loss allocation, but feeder funds also carry their expenses.

9. Allocation of Profit and Loss:

  • Master funds allocate gains and losses based on economic and tax ownership percentages.
  • Tax allocations are necessary due to variations in cash flows between feeders.

10. Management Fees and Performance Fees: - Management and performance fees are typically charged at the feeder fund level. - Management fees can be negotiated individually within the feeder.

11. Hot Issue Allocation Methodologies: - Pro Rata, Pure Lookthrough, and Investment Lookthrough methods are used for hot issue profit and loss allocation.

12. Multiple Masters/Multiple Feeders: - Feeder funds can invest in multiple master funds, making profit and loss management more complex.

13. Direct Investments in the Master Fund by Non-Feeder Limited Partners: - Individual investors can directly invest in the master fund, subject to different fee structures.

14. Currency Hedges: - Currency hedges may be required for feeders based in different currencies than the master fund's base currency.

15. Side Pocket Classes: - Side pockets can disrupt the processing of master-feeder structures due to special handling requirements.

16. Performance Fees/Management Fees at the Master: - Some funds charge management fees and performance fees at the master fund level.

17. Performance Fees for Offshore Feeders: - Offshore funds charge performance fees differently, which may require equalization adjustments.

18. Bid/Ask NAV: - Some funds allow investors to purchase shares at the asked NAV and redeem them at the bid NAV, with specific allocation rules.

This comprehensive article provides insights into the intricacies of master-feeder funds and their operational aspects, making it a valuable resource for those interested in this investment structure.

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