Fund Structure - GP/LP, Master-Feeder, and Vehicle Choice

By EC Assets Research Team, Fund Formation · Published 19 May 2026 · Updated 16 October 2026

Fund Structure: Fund structure determines the legal form, tax treatment, governance, and operational mechanics of an investment vehicle. For alternatives, the dominant structures are limited partnerships (GP/LP) and master-feeder arrangements across multiple jurisdictions.

What Fund Structure Means

Fund structure is the legal form, domicile, tax treatment and governance of an investment vehicle. It decides how money comes in and goes out, who bears which liabilities, how income is taxed, which regulations apply and what rights each party has. For alternative investments the dominant form is the limited partnership: a general partner manages the fund and bears its liabilities, usually through a company set up for the purpose, while limited partners provide capital with liability capped at their investment and no role in day-to-day management.

A separate investment manager, often a registered adviser, employs the team and runs the portfolio under a management agreement. In the US, private funds avoid registration as investment companies by relying on exemptions in sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940; in the EU, their managers are regulated under the Alternative Investment Fund Managers Directive.

How It Works

The limited partnership has three main advantages. It is usually transparent for tax, so income and gains are taxed once, in the hands of the partners, and keep their character. Limited partners have limited liability. And the partnership agreement can set fees, the distribution waterfall, information rights and governance flexibly.

Investors' tax positions differ, which is why hedge funds often use a master-feeder structure:

Each feeder owns a share of the master; returns flow back to each feeder's investors in proportion.

Private equity funds solve the same problem differently. Instead of a master-feeder, they often run parallel funds that invest side by side in each deal, plus alternative investment vehicles or blocker companies for particular holdings whose income would otherwise create tax problems for some investors.

Liquidity terms follow the assets. Open-ended funds take subscriptions and allow periodic redemptions, subject to lock-ups and gates. Closed-ended funds, the norm for private equity, private credit and real assets, take commitments, call capital over an investment period and have a fixed life, typically about ten years plus extensions.

Worked Example

A US tax-exempt foundation and a US taxable investor both invest in the same strategy, with fees of 1.5 percent and 20 percent. The master fund earns 12 percent in a year, including dividends from US shares equal to 1 percent of NAV.

The taxable investor, in the onshore partnership, receives 12 percent before fees: after the 1.5 percent management fee, 10.5 percent, and after the 20 percent performance fee, 8.4 percent, before its own taxes. The foundation invests through the offshore feeder, a corporation, so that leverage-related income does not become unrelated business taxable income. The feeder bears US withholding of 30 percent on its share of US dividends, 0.3 percent of NAV, so its return is 11.7 percent; after fees it is 8.16 percent.

The structure costs the foundation 0.24 percentage points in this example, the price of keeping its return free of unrelated business tax; the tax considerations entry sets out the wider rules.

When It Applies (and Limitations)

Complexity and cost. Multiple entities, domiciles and service providers raise legal, audit and administration costs, which are often charged to the fund.

Different investors, different outcomes. Feeders can produce different net returns for the same strategy, as the example shows, and side letters can give some investors better terms.

Regulatory change. Rules on marketing, reporting, beneficial ownership and economic substance in fund domiciles have tightened, adding requirements that structures must meet.

Domicile shapes access. Funds marketed to European investors are often domiciled in Luxembourg or Ireland to use the passport available under the directive, while the Cayman Islands remain common for global hedge funds; the choice affects regulation, cost and which investors can buy.

Alternatives exist. Separately managed accounts, funds of one, evergreen vehicles and listed or semi-liquid structures give investors more control or liquidity, with their own trade-offs.

Why It Matters for Institutional Investors

Choosing the right vehicle. Taxable, tax-exempt and non-US investors should each use the vehicle that fits their tax position.

Reading the documents. The limited partnership agreement sets the binding terms; the offering memorandum discloses the strategy, risks and conflicts; subscription documents contain the investor's representations. Where they conflict, the partnership agreement governs.

Governance rights. Key-person clauses, removal rights, advisory committees and most-favoured-nation rights determine what investors can do if things go wrong.

Side letters. Knowing which other investors have better terms, on fees, liquidity or information, helps judge whether an investor is treated fairly.

References

1. Investment Company Act of 1940, 15 U.S.C. § 80a-3(c)(1) and (c)(7). (1940). Definition of Investment Company: Exclusions for Private Funds. United States Code.
2. European Parliament and Council. (2011). Directive 2011/61/EU on Alternative Investment Fund Managers. Official Journal of the European Union.
3. Metrick, A., & Yasuda, A. (2010). The Economics of Private Equity Funds. Review of Financial Studies, 23(6), 2303-2341.
4. Internal Revenue Code, 26 U.S.C. §§ 511-514. (2025). Unrelated Business Taxable Income. United States Code.