# Bank Fees: Everything to Know About How Banks Make Money

## What Is a Feeder Fund?

A feeder fund is one of several sub-funds that put all of their investment capital into an overarching umbrella fund, known as a master fund, for which a single investment advisor handles all [portfolio investments](https://www.investopedia.com/terms/p/portfolio-investment.asp) and trading. This two-tiered investment structure of a feeder fund and a master fund is commonly used by [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp) as a means of assembling a larger portfolio account by pooling investment capital.

Profits from the master fund are then split, or distributed, proportionately to the feeder funds based on the percentage of investment capital they have contributed to the master fund.

### Key Takeaways

*   A feeder fund is one of many smaller investment funds that pool investor money, which is then aggregated under a single centralized master fund.
*   Consolidation of feeder funds into a master fund allows for reductions of operation and trading costs, and a larger portfolio has the added benefit of economies of scale.
*   Hedge funds commonly use master-feeder structures, where fees generated are pro-rated and distributed to the feeder funds.

## Understanding Feeder Funds

In a feeder fund arrangement, all management fees and any [performance fees](https://www.investopedia.com/terms/p/performance-fee.asp) due are paid by investors at the feeder fund level.

The primary purpose served by the feeder fund-master fund structure is the reduction of trading costs and overall [operating costs](https://www.investopedia.com/terms/o/operating-cost.asp). The master fund effectively achieves [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp) through having access to the large pool of investment capital provided by a number of feeder funds, which enables it to operate less expensively than would be possible for any of the feeder funds investing on their own.

The use of this two-tiered fund structure can be very advantageous when the feeder funds share common investment goals and strategies but are not appropriate for a feeder fund with a unique investment strategy or aim since those unique characteristics would be lost in the combination with other funds within a [master fund](https://www.investopedia.com/terms/m/masterfund.asp).

## Structure of Feeder Funds and Master Funds

The feeder funds that invest capital in a master fund operate as separate legal entities from the master fund and may be invested in more than one master fund. Various feeder funds invested in a master fund often differ substantially from one another in terms of things such as expense fees or investment minimums and do not usually have identical [net asset values](https://www.investopedia.com/terms/n/nav.asp) (NAV). In the same way that a feeder fund is free to invest in more than one master fund, a master fund is likewise free to accept investments from a number of feeder funds.

In regard to feeder funds operating in the United States, it is common for the master fund to be established as an offshore entity. This frees up the master fund to accept investment capital from both tax-exempt and U.S.-taxable investors. If, however, an offshore master fund elects to be taxed as a partnership or limited liability company (LLC) for U.S. tax purposes, then onshore feeder funds receive pass-through treatment of their share of the master fund's gains or losses, thus avoiding double taxation.

## New Rules on International Feeder Funds

In March 2017, the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC) ruled to allow foreign-regulated companies (foreign feeder funds) to invest in open-end master funds (U.S. Master Fund), making it easier for global managers to market their investment products in different foreign jurisdictions employing a master fund. 

The letter modified parts 12(d)(1)(A) and (B) of the 1940 Act, which previously limited the use of foreign feeder funds into U.S.-registered funds. The SEC regulated the practice for several reasons. First, it wanted to prevent master funds from exerting too much influence over an acquired fund. It also aimed to protect investors in the funds from layered fees and the possibility of fund structures becoming so complex that they became difficult to understand.