:max_bytes(150000):strip_icc()/Hubandspoke-764e6c529a3e41d2bc1ddf724732c8e3.jpg "Understanding Hub and Spoke Structure in Portfolio Management")
Key Takeaways
- A hub and spoke structure pools assets from several investment vehicles into one central vehicle for efficiency.
- This method helps reduce costs and streamline management in investment firms.
- Each investment vehicle remains independently managed while pooling assets collectively.
- The central vehicle, often called a master, allocates funds efficiently to improve performance.
- Hub and spoke structures are commonly seen in mutual funds, hedge funds, and other pooled investments.
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Defining the Hub and Spoke Structure
A hub and spoke structure is used by investment companies where several funds connect to a central fund that manages the main pool of assets. This setup lets the funds share investments while operating separately. By pooling assets together, the structure can help reduce costs, improve efficiency, and make investment management easier. In this article, we show how hub and spoke structures work and how investment companies use them to manage assets.
How the Hub and Spoke Structure Works
A hub and spoke provides benefits to managers of investment funds by offering numerous efficiencies from their pooled structure. With a hub and spoke structure, capital is channeled to the master fund where all transactions are made, helping to reduce transaction costs.
Enhancing Business Development with Hub and Spoke
Hub and spoke structures can also accommodate a full range of feeder funds, providing greater incentive for business development. A fund can be marketed in different ways and to different investors using a multitude of spokes. Each spoke can charge different fees and therefore appeal to a wider array of investors, all the while operating as one investment portfolio. These funds are able to keep fund operating costs relatively low in comparison to their competitors due to the hub and spoke structure.
In addition, hub and spoke structures commonly include both U.S. and offshore funds, creating the ability to market the fund globally. These structures are set up as partnerships to service global investors. As a partnership, they can work cooperatively while still allowing for individual feeder fund registration in the U.S. and abroad.
Accounting and Tax Advantages of Hub and Spoke Funds
Accounting and financial reporting can be complicated in a hub and spoke fund structure. With this type of fund, all transactions, fees, and expenses are accounted for and paid from the master fund. Despite the complicated accounting for inflows and outflows to and from the master fund, its partnership structure allows each feeder fund to be managed individually with its own rules and registrations.
This is particularly beneficial in the case of taxes. Offshore funds often require different taxes on dividends and capital gains. In a hub and spoke structure, U.S. investors in an onshore fund would be unaffected by any obligations of the offshore fund and vice versa. The hub and spoke structure keeps all fund reporting, fees, and expenses segregated while still allowing for the greater benefit of economies of scale.
Real-World Example: Hub and Spoke Fund
Several hub and spoke funds exist in the market. BlackRock is one fund manager broadly employing this fund structure in a variety of hub and spoke setups.
For example, they run the Master Treasury Strategies Institutional Portfolio, which is the hub, consisting of two spokes, the BlackRock Select Treasury Strategies Institutional Fund and the BlackRock Treasury Strategies Institutional Fund. Each of the feeder funds engages in a different investment strategy with a different portfolio manager.
