FEEDER FUND

One of several funds that feed into an umbrella fund called the master fund, which oversees all portfolio investments and trading activity. A feeder fund's structure is commonly used by hedge funds to pool investment capital. The master fund's profits are split on a pro-rata basis among the feeder funds in proportion to their investment. Management and performance fees are also paid at the feeder fund's level.

A feeder fund can obtain better trading and operating costs through the master-feeder structure because of economies of scale, rather than operating on its own. However, this structure would not be appropriate for a feeder fund that has unique investment characteristics and priorities, since these would be subsumed along with the other feeder funds in the master fund.