What Is an Alternative Investment Fund Manager?

An Alternative Investment Fund Manager (AIFM) is a regulated entity overseeing investment funds that operate outside traditional investments like stocks and bonds. The AIFM’s function involves the professional management of these specialized funds. This role is important for the alternative investments market, ensuring complex investment strategies are handled with a structured approach.

Defining the Alternative Investment Fund Manager

An Alternative Investment Fund Manager (AIFM) is a legal entity whose primary business is managing one or more Alternative Investment Funds (AIFs). The AIFM is responsible for portfolio management and risk management of these funds. To provide its services, an AIFM must be approved by a European regulator and authorized under the Alternative Investment Funds Directive (AIFMD).

An Alternative Investment Fund (AIF) is a collective investment undertaking that raises capital from professional investors to invest it according to a specified investment strategy. These funds differ from traditional investment options such as mutual funds or equities, often investing in non-traditional assets. Examples of AIFs include hedge funds, private equity funds, real estate funds, venture capital, private credit, and infrastructure funds.

The AIFM is the regulated legal entity responsible for the management of the AIF, while the AIF is the fund itself. This relationship emphasizes that the AIFM is the entity that oversees the operations, administration, and compliance of the alternative investment vehicle. An AIFM can be an external manager appointed by the AIF, or in some cases, the AIF itself if its legal form allows for internal management.

Core Responsibilities and Operational Activities

An AIFM undertakes various primary functions and day-to-day operational activities to manage an Alternative Investment Fund effectively. These responsibilities are central to the fund’s performance and compliance.

Portfolio Management

Portfolio management involves making investment decisions and executing strategies to achieve the fund’s objectives. This includes selecting investments and managing assets according to the fund’s defined strategy. The AIFM can either directly manage the portfolio or delegate this responsibility to an external investment manager, while still retaining overall oversight.

Risk Management

Risk management is a primary function, encompassing the identification, measurement, monitoring, and management of risks associated with the fund’s investments. This requires implementing robust systems and procedures to address various risks such as market, credit, liquidity, counterparty, and operational risks. Ensuring the fund has sufficient cash to meet its obligations, known as liquidity management, is also a responsibility.

Other Operational Activities

Further operational activities include the accurate and regular valuation of the fund’s assets, ensuring transparency for investors. The AIFM also handles marketing and investor relations, which involves offering the fund to investors and maintaining ongoing communication. Operational oversight covers managing service providers and internal operations, as well as ensuring compliance with all applicable laws and regulations.

The Regulatory Framework for AIFMs

The Alternative Investment Fund Managers Directive (AIFMD), a European Union (EU) regulatory framework implemented in 2013, governs AIFMs. The AIFMD was introduced to better regulate alternative investments, which were largely unchecked prior to the 2008-09 global financial crisis. Its main objectives include reinforcing investor protection, limiting systemic risk, and ensuring proper risk management by asset managers.

The AIFMD outlines common rules for the authorization, organization, and supervision of AIFMs. This includes requirements for AIFMs to be authorized and supervised by competent authorities in their home Member State. The directive imposes detailed organizational requirements, such as rules around internal governance, resources, and conduct of business.

Remuneration policies are also regulated, with rules governing how AIFM staff are paid to prevent excessive risk-taking. The AIFMD also sets conditions for delegating functions to third parties, ensuring that the AIFM retains ultimate responsibility and oversight. Transparency and reporting obligations are imposed, requiring AIFMs to report regularly to regulators and investors on their activities and the performance of the AIFs they manage.

Additionally, the AIFMD mandates specific depositary requirements for AIFs. A single depositary must be appointed for each AIF, responsible for functions such as cash flow monitoring, asset safekeeping, and oversight duties. These requirements collectively aim to provide a robust governance structure for alternative funds and enhance market transparency.

Scope of AIFM Regulation and Exemptions

The Alternative Investment Fund Managers Directive (AIFMD) applies to legal persons whose regular business involves managing one or more Alternative Investment Funds (AIFs). Not all managers of alternative funds are subject to the full scope of AIFMD authorization requirements. There are specific thresholds based on assets under management (AuM) that determine whether an entity needs full authorization or can qualify for a lighter registration regime.

An AIFM is exempt from full authorization if its AuM do not exceed €100 million, including assets acquired through leverage. A higher threshold of €500 million applies if the managed portfolios are unleveraged and investors have no redemption rights for at least five years following the initial investment. Managers falling below these thresholds are subject to registration and regular reporting requirements in their home Member State, rather than full authorization.

The AIFMD also addresses non-EU AIFMs marketing funds within the EU through National Private Placement Regimes (NPPRs). These regimes allow non-EU managers to market AIFs to professional investors in EU countries. Non-EU AIFMs must comply with specific disclosure and reporting obligations, and cooperation agreements between regulators must be in place.

Certain entities and undertakings are entirely outside the scope of the AIFMD. These exclusions include holding companies, joint ventures, securitization special purpose entities, pension funds, and employee participation schemes, provided they meet specific criteria and do not manage AIFs in addition to their primary function. These exemptions apply when the entity does not raise external capital or when its activities are ancillary to its main purpose.