Tax Concerns
For a U.S. taxable investor, the ownership of shares in what is known as a "passive foreign investment company" or PFIC can prove to be a very expensive proposition. The offshore feeder fund will almost always meet the definition of a PFIC, but the master fund will not, so the transaction is set up so that the master fund is a partnership for U.S. tax purposes, which makes it an effective insulation between the US based investor and that PFIC feeder.
Read more about this topic: Master-feeder
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