A master fund is a type of financial instrument which allows investors to invest in a wide range of products under the direction of a professional. Master funds can work in several different ways. In all cases, investors submit funds expecting a return on their investments, and the manager of the master fund takes a percentage of the returns in exchange for managing the funds. The risk of investing in a master fund varies, depending on what kind of fund it is and how well administered it is.
One of the classic ways to use a master fund is in a master-feeder arrangement. In this case, investors invest directly in feeder funds, with the funds from the feeders being pooled in the master fund. Using feeder funds allows investment firms to target particular clients and niches of the market, which can ensure greater interest in the fun and a greater flow of capital into the master fund.
Another arrangement is a fund of funds, in which the master fund is used to invest in other funds, rather than directly in investment projects. Setting up a fund of funds can distribute and thereby reduce risks for investors. Many municipalities also rely on investment in their discretionary funds, a form of master fund, to fund city projects and create a pool of capital which will be available when funds are needed.
Master funds can also take the form of hedge funds, a type of specialty fund which is high yield, but also high risk. These largely unregulated funds can be risky for investors who are not familiar with the market, especially if they are poorly or unscrupulously managed. Managers of hedge funds utilize a variety of techniques to maximize returns for their clients and sometimes these techniques can backfire. When they work, however, hedge funds can generate significant and very appealing returns for investors.
When selecting a master fund to invest in, investors should do their research, and consult financial advisors if they are uncertain about where their investments should be focused. Some important things to consider include the historical performance of the fund, the reputation of the company administering the fund, the types of investments the fund is involved with, and the amount of government regulation involved in the administration of the fund. More regulation can translate to more safety, but also lower returns, while less regulation can sometimes be more dangerous, and also allow funds to generate much higher returns.