A feeder is a fund in its own right.

A master-feeder structure is drawn as one portfolio with two or more wrappers above it. The master holds the assets. The feeders hold units in the master. Investors hold units in the feeders, each feeder built for a kind of investor the master cannot conveniently take directly: a feeder in a second centre for holders who need that domicile, a feeder for a tax-exempt class, a feeder that a bank sponsors for its private-banking book, a feeder for a sovereign that will not sit on a register with anyone else. The drawing makes the feeders look like accessories, and the word itself suggests plumbing. Every feeder is a collective investment vehicle under the law of the place it sits, with everything that implies, and a structure that forgets it discovers the feeder's rulebook at the first distribution, the first transfer or the first review.

This note sets out what a feeder carries, the order in which the consequences arrive, the distribution leg and why it breaks, the feeder's substance and what a look-through costs, the master's treatment of the feeder as a holder, the feeder's treatment of the master as an asset, the side-letter problem, a comparison of the common feeder types, a worked structure as a type, cases, what each party holds, the sequence, questions, terms and what to read.

What a feeder carries

A tier. The feeder is a fund in its own jurisdiction, at a tier that jurisdiction defines, with that tier's investor test, minimum subscription and holder cap. Those are not the master's. A feeder in one centre for investors from a Gulf state may sit at a tier whose test differs from the master's, and a holder who passes one may fail the other. A feeder in an onshore jurisdiction, which some registers require, sits under that jurisdiction's funds law with a regulator that may require authorisation rather than notification.

A register. The feeder's investors are on the feeder's register and nowhere else. The master's register shows one holder, the feeder. The master's manager knows the feeder's investors only through the feeder's own records, which it controls if it sponsors the feeder and does not if a bank or a platform does. Every duty that attaches to a register, classification, disclosure, reporting, the provenance file, the secondary-transfer rule, attaches to the feeder's register in the feeder's jurisdiction, performed by the feeder's manager.

A marketing perimeter. The feeder's units are marketed in the states its investors sit in, under each state's rules, and the rules are read for the feeder's domicile rather than the master's. A feeder formed in one centre to take investors from the Kingdom is a foreign fund in the Kingdom and goes through a distributor, a notification and a results statement like any other; a feeder for Kuwaiti institutions needs the permit; a feeder for Qatari investors is inside the count or goes through a bank.

A regulator. The feeder's own, who has never heard of the master, does not need to, and will examine the feeder on its own terms: its notification or authorisation, its substance, its governance, its reporting, the eligibility of its providers, and the classification of its holders.

A set of providers. An administrator for its own register, an auditor for its own accounts, a custodian for its one asset, and directors or a general partner who must decide in its own name.

The order of consequences

First, two investor tests. The feeder's tier must admit its own register, and the master's tier must admit the feeder as a single holder. Two classification records, two sets of documents, two disclosure files. And a feeder whose register includes a holder the master's tier would not have admitted directly is a question the master's manager has to have answered: the master's tier counts the feeder as one professional holder, and the feeder's tier admitted its own holders on its own test, and the two tests are not the same, so the master's manager is admitting, indirectly, persons it could not have admitted directly. Most regimes permit that, because the feeder is a fund and funds are professional clients. Some look through a feeder formed to circumvent the master's tier. The reading is done before the feeder exists.

Second, two placements. The feeder's raise is a placement in each state its investors sit in, with that state's intermediary and clock; the master's admission of the feeder is a subscription under the master's tier. A feeder formed quickly to catch a closing date has a placement calendar of its own that may not fit the date, and a feeder that admits its investors after the master's close has a register that was not in the master's first close at all.

Third, two constitutions drafted by two counsel in two centres, and the questions that have to be asked once per vehicle are asked once per structure instead. The valuation day, the distribution mechanics, the treatment of an in-kind receipt, the side-letter position, the currency of account, the transfer provisions, the key person clause, the term and its extensions. Each has to have the same answer in both constitutions, or an answer in the feeder's that can absorb the master's, and nobody is responsible for the comparison unless the structure paper names them.

Fourth, two sets of substance, two audits, two filing calendars, two annual confirmations, two sets of charges to providers, for as long as the structure lives.

The distribution leg

The distribution leg is where the structure fails most often, because the master's distribution provisions were drafted for a register of institutions and the feeder is an institution with a constitution of its own.

The master distributes in kind, and the feeder's constitution permits it to hold master units and nothing else. The feeder receives shares in a portfolio company, in a state where the feeder's jurisdiction is not a permitted holder, and cannot register them, cannot distribute them to its own investors, and cannot sell them without a placement.

The master pays a distribution in a currency the feeder's constitution does not name, on a date the feeder's own valuation cycle cannot absorb, so that the feeder's net asset value on its own valuation day does not reflect what it holds.

The master operates a gate or a suspension, and the feeder, which promised its own investors redemption on the master's terms, has a promise it cannot keep and a constitution that did not provide for the master's gate.

The master makes a capital call, and the feeder must call its own investors on a notice period its constitution sets, which is longer than the master's, so that the feeder defaults on the master's call while its own investors are within time.

Each of those is a provision in the feeder's constitution that mirrors or absorbs the master's, drafted by the same hand or compared by one.

The feeder's substance

A feeder with no directors resident where it sits, no administrator of its own and no decision ever taken in its own name is a vehicle a tax authority or a regulator can look through, and the feeder existed to prevent exactly that look-through for the investors inside it. A feeder formed in a centre for the treaty position of its investors needs a board that meets there, decides to subscribe to the master, decides to fund each call, decides to distribute each receipt, and minutes each decision with papers. A feeder whose minutes show an annual circular resolution approving accounts has a treaty position its investors' source states can deny, a substance requirement its own regulator can find unmet, and a residence its investors' home tax authorities can relocate.

The cost of substance at the feeder is the cost of a real company: resident directors who are not the master manager's staff, meetings, papers, minutes, an administrator, an office or a provider with people present. It is the same cost as any layer in a chain, and the same question is asked: what does the feeder answer that the master cannot. Where the answer is a holder who cannot sit on the master's register for a reason the feeder cures, the cost is justified. Where the answer is convenience, the feeder is a layer with no function.

The master reading the feeder as a holder

The master's manager admits the feeder as one holder and classifies it as such: a collective investment fund, deemed professional under the conduct rulebook. It then has to decide what it knows about the feeder's investors and what it relies on. The master's tier counts the feeder as one; its lender grades the feeder on what it can see of the participants, often nothing; its provenance file has to reach the persons behind the feeder to the extent the master's own rules require, which for a feeder the master manager does not sponsor means a reliance arrangement with the feeder's manager, documented. The master's side letters with the feeder are side letters with one holder, and the master's most-favoured-nation clause treats the feeder as one elector.

The master also reads the feeder's stability. A feeder sponsored by the master's own manager is a feeder whose dissolution the manager controls. A feeder sponsored by a bank is a feeder the bank can close when the product line ends, and the master needs the feeder covenant: notice, and a replacement nominee.

The feeder reading the master as an asset

The feeder holds one asset, units in the master, and its constitution has to describe that asset and what the feeder may do with it. It subscribes, funds calls, receives distributions, votes at the master's meetings, elects under side letters, and at the end receives the master's final distribution, which may be in kind. Each is a power the feeder's constitution grants its board or general partner, and each is a decision the feeder's board takes and minutes. The feeder's investment policy is "units in the master", and the feeder's own tier may require a policy statement, a risk disclosure and a valuation method for that asset, which is the master's net asset value on the master's day, adjusted for the feeder's own costs.

The side-letter problem

The master's side letters give the feeder, as one holder, rights: reporting, excuse, co-investment, a most-favoured-nation election. The feeder's investors negotiated, with the feeder's manager, for rights of their own, which the feeder can pass through only if its constitution has machinery to do so. A master-level co-investment right offered to the feeder is a right the feeder must allocate among its own investors under its own policy. A master-level excuse right is a right the feeder exercises on behalf of all its investors or none, and an investor whose own rules required the excuse finds the feeder has not exercised it. The pass-through is drafted into the feeder's constitution at formation, with the feeder's manager's discretion stated, or the feeder's investors hold rights the feeder cannot deliver.

By feeder type · by purpose	Why it exists	Tier and regulator	Characteristic failure
Second-centre feeder	Holders who need the other centre's domicile or court	The other centre's private tier and regulator	Two constitutions with different valuation days and distribution rules
Onshore feeder	Holders whose own state requires a domestic vehicle	The onshore funds law; authorisation rather than notification	Authorisation delay; the onshore regulator's view of the master
Bank-sponsored feeder	A private-banking book placed through one vehicle	The bank's chosen domicile; the bank's manager	Dissolution when the bank closes the product; participants arrive on the master
Tax-class feeder	Holders whose tax position differs from the others	A jurisdiction chosen for the position; substance tested	Look-through for want of substance; the position lost
Single-investor feeder	A sovereign or institution that will not share a register	Often the master's own centre	Treated as a circumvention of the cap where formed for that purpose

The valuation chain

A feeder's net asset value is struck from the master's, and the two are struck by two administrators on two calendars. The master strikes its value on its valuation day, on the valuer's number, after the waterfall; the feeder strikes its own on its day, from the master's number, less the feeder's own costs, in the feeder's currency of account at a rate on a date its constitution names. If the feeder's day precedes the master's, the feeder strikes a value on a master number that is a quarter old. If the feeder's currency differs, the feeder's holders carry a currency position the master's do not, and the feeder's constitution says whether it hedges and at whose cost. If the master adjusts a prior valuation, the feeder's prior valuation was wrong and its own transfers and equalisations in the period were priced on it.

The two constitutions therefore fix the feeder's valuation day after the master's by a stated number of days, name the rate and the date for conversion, and provide for the feeder to restate where the master restates. The administrators, where they are different firms, have a service-level arrangement for the delivery of the master's number to the feeder within the window. A feeder whose administrator learns the master's number from the master's investor report has a valuation that is always late.

The feeder's placement in three states

A feeder formed in one centre for Gulf investors is marketed into the Kingdom through a distributor with a notification fifteen days before the offer and a results statement within ten days of close; into Kuwait under a permit obtained by a licensed person, on the institutional route where the investors are professional clients by nature; and into Qatar within the count of one hundred or through a bank under the central bank's instructions, with an Arabic prospectus. The feeder's memorandum carries the centre's required statements and each state's; the feeder's manager keeps three placement records; the three clocks run from three complete applications. None of that is done for the master, whose only holder is the feeder, and all of it is done for the feeder, whose holders are the ones the regimes protect.

Winding up the feeder

A feeder ends when the master ends, or earlier if its sponsor closes it, and the ending is a distribution to the feeder's investors of what the feeder holds: cash, or master units, or whatever the master distributed in kind. A distribution of master units is a transfer of those units to the feeder's investors, which the master's constitution must permit, the master's tier must count, and the master's manager must classify, and which the master's lender must accept into or exclude from its borrowing base. The feeder's constitution provides for the order: the feeder's own costs and liabilities first, then the distribution, with a reserve for contingent liabilities and a period for claims. The master's constitution provides for the feeder's investors arriving on its register or holding through a nominee, under the covenant. A feeder wound up without either provision is a feeder whose investors hold nothing the master will register.

Where it surfaces

At the first call, when the feeder's notice period to its own investors is longer than the master's to the feeder.

At the first valuation, when the feeder's day precedes the master's and the feeder's number is stale.

At the first in-kind distribution, when the feeder's constitution does not contemplate the asset.

At the feeder's dissolution, when the participants arrive on the master's register unclassified and uncounted.

At the source state's inquiry, when the feeder's minutes show it was managed from the master manager's office.

In each case the feeder was treated as plumbing, and the plumbing had a rulebook.

The cost of a feeder over ten years

A feeder's formation cost is small and its running cost is not. Over a ten-year life a feeder carries ten audits, ten sets of accounts, ten annual confirmations where its regulator requires them, forty quarterly board meetings with resident directors, an administrator's annual charge, a custodian's, a registered office, and the legal cost of every amendment the master makes that the feeder must mirror. It carries, in addition, the cost of the placement in each state its investors sit in, which the master did not have to bear for those investors, and the cost of the substance that keeps its position. A structure paper sets the ten-year cost of each feeder beside the holder it admits, and a feeder whose ten-year cost exceeds the value of the holder it exists for is removed before it is formed. Managers are surprised by the comparison more often than not, because the feeder was priced at formation and the holder was valued at commitment.

Alternatives to a feeder

Some of what a feeder does can be done without one. A holder that needs a particular domicile for its own regulatory reasons can sometimes hold through a nominee in that domicile rather than a fund, where the nominee's jurisdiction treats the nominee as transparent and the master's counting rule treats it as one. A holder that needs a treaty position can sometimes obtain it through its own holding entity rather than through a feeder the manager sponsors. A holder that will not share a register can sometimes be given a separate class in the master with its own reporting, rather than a separate vehicle. Each alternative has its own reading, and none is a feeder, which is the point: the feeder is chosen when the alternatives fail, and the structure paper records why.

A structure, as a type

A master in one centre at the qualified investor tier, with two feeders: a feeder in the other centre for holders who need that domicile, and a bank-sponsored feeder for a private-banking book. The master's constitution and both feeders' are drafted from one schedule of questions with one answer each. The bank's feeder carries a covenant of a year's notice and a replacement nominee. The feeders' boards are resident and meet quarterly. Each feeder's placement runs under its own domicile in the states its investors sit in. The master's distribution provisions are read against each feeder's capacity to receive, and the master's side letters with the feeders are drafted with the pass-through in view.

The same structure built as plumbing: one counsel drafts the master; two others draft the feeders from their own precedents; the valuation days differ; the bank's feeder has no covenant; the second-centre feeder's board is the administrator's staff; the master's first in-kind distribution reaches a feeder that cannot hold it.

Four cases, as types

A master in one centre with a feeder in the other, formed for Gulf investors. The feeder's tier caps holders at a number below the master's, and the feeder's sponsor fills it at first close. The second close admits the next Gulf investors to the master directly, which its tier permits. The feeder's investors negotiated a most-favoured-nation clause with the feeder's manager, and the direct holders' terms, being better, now travel into the feeder, where the feeder's manager must honour them from a feeder that has no economics of its own to give.

A master that distributes a portfolio company's shares in kind at the end of its term. The feeder receives the shares. Its constitution permits it to hold master units only; the shares are in a company in a state where the feeder's jurisdiction is not a permitted holder; the registry will not record the feeder; the feeder holds a certificate it cannot register, cannot distribute and cannot sell without a placement in the state.

A feeder whose board consists of the master manager's staff and whose minutes record annual accounts and nothing else. The source state of the master's largest asset denies the treaty position the feeder claimed, on the footing that the feeder is managed from the master manager's office, and the feeder's investors, who paid for the feeder's jurisdiction, are taxed as if they held the master directly.

A structure whose two constitutions were drafted from one schedule, whose feeders have resident boards and a covenant, and whose distribution provisions were read against each feeder's capacity. The in-kind distribution at the end is made to the feeder in a form its constitution permits and its jurisdiction can register, and the feeder passes it to its investors under a provision written for that day.

What each party holds

The master's manager holds the admission of the feeder, the reliance arrangement for its participants, the feeder covenant and the schedule of questions with one answer.

The feeder's manager holds the feeder's tier, its register, its placement, its substance and its pass-through.

Counsel in each jurisdiction holds its own constitution and the comparison with the other.

The feeder's board holds the decisions in its own name and their minutes.

The lender holds its grading of the feeder, usually at nothing, and the covenant it wants.

Each regulator holds its own vehicle.

The sequence

1. Each intended feeder is justified: the holder it admits that the master cannot, and the cost.
2. The feeder's tier, regulator, placement perimeter and providers are identified as for any fund.
3. Both constitutions are drafted from one schedule of questions with one answer each.
4. The feeder covenant, the reliance arrangement and the pass-through are drafted into the documents.
5. The feeder's board and substance are staffed before its first decision.
6. The master's distribution, in-kind and gate provisions are read against each feeder's capacity.
7. The placements are run under each feeder's domicile in each investor state.

Questions a manager asks

Is a feeder one holder for the master's cap. Usually, because it is a fund; not where the master's counting rule looks through a feeder formed to circumvent the cap, and the rule is read before the feeder is relied on for that purpose.

Can the master's manager also manage the feeder. It can, under its permission in the feeder's jurisdiction or through a delegate there, and a manager who does controls both sides of the schedule, which is the easiest case.

Does a bank-sponsored feeder need anything the others do not. A covenant, because the bank will close it when the product line ends, and a reliance arrangement, because the bank holds the participants' provenance files.

What happens to the feeder's investors at an in-kind distribution. What the feeder's constitution says. Without a provision, they hold units in a feeder that holds an asset it cannot pass on.

Does the feeder need substance if it is only a pass-through. Yes, and more than most layers, because the feeder exists for a position, treaty, regulatory or domicile, that a look-through destroys.

Can the feeder be added later. It can, with its own formation, tier, placement and substance, and with an amendment to the master's documents if they did not contemplate it. Added at formation, it is designed; added later, it is retrofitted.

Terms used

Master: the vehicle that holds the portfolio.

Feeder: a separate fund whose only asset is units in the master.

Pass-through: the feeder's machinery for delivering master-level rights and distributions to its own investors.

Feeder covenant: the feeder's undertaking to give notice before dissolution and to replace itself with a nominee.

Reliance arrangement: the agreement under which the master's manager relies on the feeder's manager's provenance and classification work.

Look-through: a regulator's or tax authority's treatment of a vehicle as transparent for want of substance or purpose.

Schedule of questions: the list of matters that must have the same answer in the master's and the feeder's constitutions.

What to read

The funds rules of the feeder's jurisdiction for its tier and its substance requirements; the marketing regime of each investor state read for the feeder's domicile; both constitutions side by side against the schedule; the feeder's subscription agreement with the master for the covenant and the reliance. On this site, the master and feeder room under Structures, the marketing room under Jurisdictions, and the worked structure on an existing platform.