Definition:

A feeder fund is an investment fund that invests primarily in another fund, known as the master fund or seed fund. Feeder funds are often used to gain access to the strategies and performance of the master fund.

Types of Feeder Funds:

• Direct feeder funds: Invest directly in the master fund.
• Indirect feeder funds: Invest in a feeder fund that invests in the master fund.
• Multiple feeder funds: Invest in multiple feeder funds, each targeting a different master fund.

Advantages:

• Access to master fund strategies: Feeder funds provide access to the strategies and performance of the master fund.
• Lower costs: Feeder funds can typically offer lower costs than direct investment in the master fund.
• Diversification: Feeder funds can diversify investments across multiple master funds.
• Access to leverage: Feeder funds can provide leverage, which can amplify returns.

Disadvantages:

• Limited liquidity: Feeder funds may have limited liquidity compared to direct investments in the master fund.
• Manager selection: Feeder funds rely on the manager of the master fund to be successful.
• Performance risk: The performance of a feeder fund is largely dependent on the performance of the master fund.
• Fees: Feeder funds typically charge fees, which can eat into returns.

Examples:

• A feeder fund might invest in a master fund that specializes in value investing.
• An indirect feeder fund might invest in a feeder fund that invests in a hedge fund.

Key Considerations:

• Feeder funds can be a valuable tool for investors seeking access to master fund strategies.
• It is important to consider the costs, liquidity, and performance risk associated with feeder funds.
• Investors should carefully consider their investment goals and risk tolerance before investing in a feeder fund.