How do master-feeder UCITS structures work?

A feeder is a UCITS, or a compartment of one, authorised to put at least 85% of its assets into units of another UCITS or compartment, called the master. This departs from the normal spreading rules, which is acceptable because the master is itself a diversified UCITS. The feeder may keep up to 15% in ancillary liquid assets and in derivatives used only for hedging, and a feeder VCIC may also own movable or immovable property essential to its business. For its global exposure to derivatives, the feeder adds its own hedging exposure to either the master's actual exposure or the maximum the master's rules allow, in proportion to its holding.

A master is a UCITS or compartment with at least one feeder among its investors. It cannot itself be a feeder, and it may not own units in a feeder. The exam material describes the feeder's 85% as going into other UCITS or other funds. Since 2012, Article 73 of the Law has required it to go into a single master UCITS.

Every UCITS normally has to raise its capital from the public. A master with at least two feeders is released from that condition, so it can decide whether to take money from other investors or to serve only its feeders. The exam material, like the Cyprus text of the Law, calls this a choice to raise money from other investors as well. The Directive makes clear that the choice runs both ways, and Cyprus has applied that rule since 2012. A master with a single feeder gets no such release: like any UCITS, it must still raise capital from the public. A master that raises no public capital in another Member State, and has only feeders there, does not file a marketing notification for that state.

A Cyprus feeder needs CySEC's prior approval before investing in a given master beyond the 20% that may normally be held in one fund, and CySEC decides within 15 working days of a complete application. Master and feeder then sign an agreement, free on request to unitholders of both; where one management company runs both funds, internal conduct-of-business rules can take its place. Until the agreement or rules are effective, the feeder may not put more than 20% of its assets into the master. If the two funds use different depositaries, or different auditors, each pair must sign an information-sharing agreement before the feeder invests at all.

The funds coordinate when they calculate and publish NAV, so that nobody can exploit price gaps between them through market timing or arbitrage. If the master suspends redemptions, the feeder may suspend for the same period. If the master is liquidated, merged or divided, the feeder is wound up too, unless CySEC approves a new master or conversion into an ordinary UCITS. After a merger or division, CySEC may also let the feeder stay with the master or with a fund that results from it. A master is liquidated no sooner than 3 months after informing its unitholders and CySEC of the binding decision.

The feeder must monitor the master's activity effectively. It may rely on documents and information from the master, or from the master's manager, depositary or auditor, unless it has grounds to doubt them. Any distribution fee, commission or other monetary benefit that the feeder, its management company or anyone acting for them receives in connection with the master is paid into the feeder's assets.

A Cyprus master tells CySEC immediately who each feeder is, and where a feeder is established in another Member State, CySEC immediately informs that feeder's home authority. The master may not charge the feeder subscription or redemption fees when the feeder buys or disposes of master units, and it must supply in good time all the information the feeder needs.