A system and method are disclosed for combining physically separate subnets of an Infiniband (IB) network into virtual subnets. In the virtual subnets, all of the end node in one subnet may be allowed to access all of the end nodes in another subnet, or the access may be limited to only a selected subset of another subnet. In addition to processing of globally-routed IB packets, the router also communicates (alone or in cooperation with another router) locally-routed IB packets traveling between a designated end nodes in different subnets. The routers may encapsulate the packets into raw datagrams for transport across intervening subnets. The described system and method may advantageously allow remote end nodes to act as a part of a given subnet, and may advantageously allow routers to provide both switch and routing functionality.