The Audit Guide and ASC do not contain specific definitions for when a fund is a master-feeder or a fund of fund structure. However, ASC 946-210-45-7 does state that management of a fund should consider whether an investment in a single underlying fund is so significant to the fund of funds as to make the presentation of financial statements in a manner similar to master-feeder fund more appropriate. The following example illustrates this point.

Fund A is a non-registered open ended investment company which has been in existence for a number of years. Fund X is a newly created non-registered investment company whose sole purpose is to invest in Fund A. Fund X will not invest in any other direct investments apart from cash and thus the investment in Fund A will be its only investment.

Fund X has a lower minimum investment requirement for investors compared to Fund A. The investment manager for Fund A is not affiliated with Fund X or its investment manager. Fund X’s investment in Fund A currently represents one percent of Fund A’s total equity interests and such investment will be capped at a maximum of 25 percent of Fund A’s net equity. Fund A continues to accept direct investments from prospective investors without going through Fund X, so long as the investor meets Fund A's minimum investment and other qualification requirements. Per Fund X’s offering memorandum, an investor in the Fund will only receive correspondence or statements regarding their investment in Fund X (and not the underlying Fund A).

In this instance, Fund X is operating as a feeder fund. However, Fund A, by accepting direct investments and only expecting a minority of its capital to come from Fund X, is not operating as a master fund. Accordingly, there may be merit to both master-feeder and fund of fund presentations. Fund X should follow the presentation that it believes is most appropriate, given other attendant facts and circumstances. When assessing the appropriateness of the presentation, one should consider

all

the factors, including whether there are one or multiple top-tier (portfolio) funds, and whether the funds are under the same management.

If Fund X concludes that fund of funds is the more appropriate presentation, Fund X should provide additional footnote disclosures regarding its sole investment in Fund A sufficient to communicate to the reader all relevant information about the underlying investment. If Fund X follows the master-feeder structure, the master fund financials (i.e., Fund A’s financials) will normally be attached. Thus, under either scenario, the only significant difference between the master-feeder and the fund of funds presentation will be the income statement presentation. Refer to FS Assurance Quality Alert #2011-5: Practice Aid - Auditing Interests in Alternative Investments for more information.