The Cayman master-feeder fund, drawn out
A master-feeder is how many investment funds are built: investors put money into one of two 'feeder' funds, which both invest in one 'master' fund that does the trading. Here's why there are two feeders, what the master does, where the manager sits, and which company has to prove real activity in Cayman.
Investors are split by how they're taxed, not by investment strategy. Both feeders own the same portfolio through one trading fund.
- Capital in
- Each investor puts money into the feeder that suits how they're taxed; each feeder puts it into the master.
- Trading
- The master runs the whole strategy, so both feeders get the same performance, less their own costs.
- Fees out
- Management and performance fees go to the investment manager under the IMA, usually charged at feeder level.
- Reporting
- Audited accounts filed with CIMA (the Cayman regulator) every year, plus the fund's annual return and FATCA and CRS reporting (the international tax-information exchanges) through the administrator.
Why two feeders at all
The investment strategy doesn't need two funds. The investors do. US taxable investors want the income to pass straight through to them, with a K-1 tax form, which a Delaware partnership gives them. US tax-exempt investors, like pension funds and endowments, could face a US tax called UBTI if they held a fund that borrows directly, so they invest through a company that acts as a shield: the Cayman feeder. Non-US investors use the same Cayman feeder so they don't have to file US returns.
Both feeders then invest in one master fund, which does the trading. One portfolio, one broker, one track record, two tax wrappers.
Registration: which law applies
If investors can take their money out when they choose (an 'open-ended' fund), it's a mutual fund and registers with CIMA under the Mutual Funds Act (2025 Revision). If they can't (a 'closed-ended' fund, like private equity), it registers under the Private Funds Act. Getting this wrong breaks the rules from day one, because the filings, audits and deadlines differ.
Registering comes with ongoing duties: yearly accounts audited by a CIMA-approved local auditor, the fund's annual return, an anti-money-laundering compliance officer, a money-laundering reporting officer and deputy, and registered directors.
The manager, not the fund, has to prove real activity
This is the most misunderstood point in Cayman. Investment funds are outside Cayman's economic substance rules (the rules that make companies prove they really operate there). They just file a notification saying so.
The investment manager is different. If it runs funds from Cayman, it must pass the full test: the main money-making work done in Cayman, enough people, an office and spending there, and being run from there. A Cayman manager that's a nameplate, with decisions made elsewhere, is the risk. That's why many groups put the manager in Delaware, London, Dubai or Singapore instead, and keep Cayman just for the funds.
How long a launch really takes
The legal documents (the offering memorandum, the fund's articles, the management, administration and broker agreements, and the subscription forms) usually take six to ten weeks with a manager who replies quickly. CIMA registration follows once the directors are registered and the auditor is appointed. The slowest part is usually getting the bank and the broker to accept you, not the regulator.
- Assuming the fund's exemption from the substance rules also covers a Cayman investment manager. It doesn't.
- Registering a closed-ended fund under the Mutual Funds Act instead of the Private Funds Act.
- Setting up a master-feeder for a small group of similar investors, when one simple fund would have been cheaper and quicker.
- Hard-to-sell investments held at master level ('side pockets') not properly documented between the two feeders.
- Leaving FATCA and CRS tax reporting entirely to the administrator, with no director checking it.
- Starting the broker and bank applications after the documents are finished, rather than at the same time.
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