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. The role of a feeder fund is analogous to how money moves from one account to another in real life: money moves from lower balances into higher balances in an account hierarchy until it reaches its destination— usually a bank account or other form of liquid wealth accumulation. A feeder fund behaves similarly in an investment context: it contributes most (or all) of its assets into one master investment plan and then has additional investors add more capital through sub-schemes under it.For example, if one investor contributes $100,000 into an alternative investing scheme via a feeder scheme, she’ll also contribute $100,000 into that scheme’s primary asset allocation strategy via another sub-scheme controlled by her own firm or financial advisor. At this point, both sets of contributions will have been accepted by her firm and invested in her behalf by whoever manages her primary scheme’s assets under his control via his firm’s custodial arrangements with banks or other entities controlling these assets (such as pension funds).Feeder funds are designed to buy low and sell high, thereby generating a profit for the master fund. Sub-funds can be traditional or alternative investments, depending on how they’re structured and managed. Feeder funds can be based on mutual or hedge funds, but all must be under the control of the master fund’s manager.Feeder funds are designed to buy low and sell high, thereby generating a profit for the master money manager who controls the overarching umbrella investment plan known as a master fund. An alternative definition for “feeder” refers to any strategy used by an investor or group of investors who buy low and sell high when making investments in multiple asset classes so they can gain exposure across various markets without over leveraging their portfolio directly toward any single asset class they might be seeking growth in.
