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Let us start by saying that if you are an investor then this legislation is fantastic for you. You now have access to the whole universe of assets classes via highly regulated, best practice transparent structures.

The EU Alternative Investment Fund Management Directive (AIFMD) reclassified the diverse fund world into a mere 2 categories:

1. Undertakings for Collective Investment in Transferable Securities (UCITS)

2. Everything else – now to be termed Alternative Investment Funds (AIFs)

UCITS are marketed to retail investors - thus are heavily legislated, restricted in their investment range and diversification, and have strict rules covering transparency, inducements, best execution, fair treatment of investors; all to protect retail investors. As a result UCITS has become the most trusted brand by fund investors worldwide.

AIFs enjoy a greater breadth of asset choice, everything a UCIT can invest into plus real assets – land, houses, forestry, works of art, physical commodities, private equity, pre IPO stocks, derivatives. Depending on jurisdiction they may invest in a single asset or gear 100 times, sell short and employ absolute return strategies - literally anything somebody may wish to invest into and as focussed as they may wish- providing capital and liquidity to the real economy. In short - a real alternative to traditional stocks, shares and bonds (often with little correlation to the main markets).

On the down side their structures often enjoyed little regulatory oversight, their charges could be opaque, conflicts of interest could be undisclosed. Their knowledgeable investors were expected to have the necessary skills, experience and resources to understand the underlying investments and be able to undertake the appropriate due diligence on the funds and their Managers as they were typically marketed to qualified, professional or institutional investors.

The EU has set in motion the building of a second trusted brand that will sit alongside and rival the UCITS brand for worldwide investor acceptability. The AIFMD has now legislated sound business practices and good corporate governance practices for alternative investment fund managers (AIFMs). This new legislation now protects professional and institutional investors almost to the same extent as retail investors.

The AIFMD has legislated the following critical investor-protection practices:

  • Acting in the best interests of the investors
  • Fair treatment of investors
  • Transparency
  • Conflicts of Interest disclosure monitoring and management
  • Sound remuneration practices
  • Risk and liquidity management
  • Compliance and Internal Audit.

What is the AIFMD?

It is the regulation of AIFs via the fund manager. Why indirect regulation? Well there was really no other way to regulate offshore AIFs that were being managed by EU managers and sold into the EU. Offshore AIFs were only subject to the laws of the offshore jurisdictions. In particular, the AIFMD affects the management and marketing of any AIFs that are managed from or marketed in Europe.

Advantages of AIFMD?

Investor protection. Soon all investors – retail, professional and institutional will become concerned with any fund or fund manager that is not able to afford them the protection that authorised AIFMs can. Fund selectors are not likely to risk the liability of selecting funds from non-authorised AIFMs. Authorised AIFMs are liable to answer to investors – deflecting fund selector liability to the AIFM.

Disadvantages of AIFMD?

In short: time and money. The legislation is heavy handed and onerous. Implementation by a fund manager includes amongst others:

  • extensive legal advice,
  • project planning,
  • organisational changes,
  • system and process reviews and amendments,
  • specialised skills,
  • the employment of extra qualified personnel and directors,
  • perhaps the establishment of an in-house Risk Management department if you did not have one (or its separation if it was a combined department)
  • establishment of AIFMD reporting systems and processes
  • additional capital…

Before we get into more of the AIFMD is, let’s first check if it applies to you.

Does AIFMD affect you directly?

If you manage or market Alternative Investment Funds (non-UCITS funds) – or intend to do so - you should check which category you fall into below to determine if the AIFMD applies to you.

In short - AIFMD applies to any non-UCITS fund managed from or marketed in the EU.

If you are an EU-based manager, you are caught within the AIFMD net (exceptions are listed in Articles 2 and 3 of the AIFMD. Examples are central banks and employee schemes.)
If you are a non-EU based manager you still need to comply with the AIFMD if you manage any EU registered Alternative Investment Funds or market ANY AIFs in the EU (outside of the restricted Private Placement Regime).

AIFMD does only NOT apply if you are a non-EU manager and you don’t manage any EU AIFs or market any AIF into the EU.

You may be even be affected by the AIFMD INDIRECTLY!

If you are a fund manager, an asset manager, an Investment Firm or provide any services to entities which are directly affected by the AIFMD – you are probably indirectly affected as well, as the AIFMD prescribes requirements and due diligence required of service providers to AIFMs. If you are a Director of an AIF – you should check if your AIF complies with the AIFMD as you are affected too!

Now that you have established if the AIFMD applies to you, let’s get into what the AIFMD actually requires.

Step-by-step guide to AIFMD requirements

Step 1

You need to establish if you fall under the lighter or full AIFMD regime using the criterion below. If you do not exceed the threshold, go to Step 2. If you exceed the thresholds go to Step 3.

Criterion for full/light AIFMD regime

An Alternative Investment Fund Manager which either directly or indirectly, through a company with which the AIFM is linked by common management or control, or by a substantive direct or indirect holding, manage portfolios of AIFs whose assets under management,


  1. including any assets acquired through use of leverage, in total do not exceed a threshold of EUR 100 million




  1. in total do not exceed a threshold of EUR 500 million when the portfolios of AIFs consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of 5 years following the date of initial investment in each AIF.


AIFMs under these thresholds fall under the light regime and shall not benefit from any of the rights (i.e. marketing) granted under the AIFMD unless they choose to opt in under the AIFMD. Where AIFMs opt in, the AIFMD shall become applicable in its entirety – i.e. the full AIFMD applies – go to Step 3.



You must do/have done the following by 22 July 2014:

1)      Register either as an external AIFM or a self-managed AIF with the competent authority of your home Member State; (note a self-managed AIF can only manage ONE AIF – itself)

2)      Identify your AIFM and the AIFs that you manage to the competent authorities of your home Member State at the time of registration;

3)      Provide information on the investment strategies of the AIFs that you manage to the competent authorities of your home Member State at the time of registration;

4)      Regularly provide the competent authorities of your home Member State with information on the main instruments in which you are trading and on the principal exposures and most important concentrations of the AIFs that you manage and;

5)      Notify the competent authorities of your home Member State in the event that you exceed the thresholds in the Criterion box in Step 1 and proceed to Step 3.

The above shall apply without prejudice to any stricter rules adopted by Member States with respect to AIFMs eligible for the lighter regime.

Note: You may upgrade your fund management company to a full AIFM or contract an external AIFM. It is then compulsory for the AIFM to subject your AIFs to the full AIFMD regime. This is called “opting-in” to the AIFMD because it is not a requirement but an option for you.

The benefit of opting in? Access to the rights granted to authorised AIFMs which must comply under the full regime –namely the worldwide brand acceptance and the marketing passport to EU investors. You can no longer market any AIFs to any EU investors without a fully authorised AIFM (except under jurisdiction-specific Private Placement Rules).


Fund selectors will become reluctant to take the liability risk or due diligence cost of investing into any AIF managed by a non-fully authorised AIFM.



You must do one of the following by 22 July 2014:

  • OPTION 1
    Become an Authorised self-managed AIFM or Authorised External AIFM with the competent authority of your home Member State. This means that you must comply with the entire AIFMD, the supplementing Commission Delegated Regulation 231/2013, the various ESMA guidelines and many more to follow. (Note a self-managed AIF can only manage ONE AIF – itself)
    There are extensive responsibilities laid upon AIFMs which fall under the full AIFMD regime. The AIFMD (71 pages, 71 Articles) and supplementing regulations (95 pages, 117 Articles) specify the requirements of an AIFM – ALL of which need to be enacted by the AIFM.




  • OPTION 2
    Outsource. Appoint an authorised External AIFM to provide a turnkey solution. (At this point in time Option 2 is probably the only way to meet the deadline if you have not started the AIFMD compliance processes.)


How to proceed


  1. The first step will be to establish your position via a call or email with a specialist external AIFM.
  2. They will undertake full due diligence to assess your needs based on the AIFMD requirements. They need to ensure that all the AIFMD requirements are in place and where there are deficiencies, remedy them and implement ongoing processes and procedures for you to become AIFMD compliant.
  3. A full operational memorandum will be drawn up clarifying information flows and responsibilities.
  4. You appoint the AIFM who would then delegate back to you either:
    • the risk or
    • the investment (portfolio) management
      and your fund is then deemed compliant.


Who will regulate your fund?

Your existing regulator will continue to regulate your fund and approve its Directors and ensure compliance with the fund laws of the jurisdiction of fund registration –

The external AIFM is responsible for any overriding EU regulation plus:

1)      Any reporting / answering to your funds regulator for any matters on which it is responsible in its capacity as AIFM and

2)      To its own regulator in its capacity as an authorised AIFM.

How long will it take for you to become compliant?

As soon as you appoint an authorised external AIFM, your fund will be compliant. It is the outsourced external AIFM’s responsibility to ensure that all relevant aspects of your fund are AIFMD compliant before it accepts the appointment. How long will depend on the amount of work required to get your fund compliant. It could take anything from a few weeks to a few months.

What might be involved?

Fund managers must be familiar with the full spectrum of AIFMD and how it will impact their business. This includes everything from depository requirements to remuneration rules, to leverage calculations and fund services delegation arrangements.

The extensive scope of this analysis may require the engagement of specialist consulting expertise to assist in analysing the business impact of AIFMD. Your outsourced AIFM can do this.

The analysis will involve assessing your fund against the AIFMD requirements as mentioned in Step 3. The list below is certainly not an exhaustive list, but the analysis could include some or all of the following (or more!):

  • Review of your fund offering document
  • Review of service providers – due diligence and to ensure contracts are in line with the AIFMD requirements e.g. your depositary
  • Implementation and/ review of transparency measures for your fund
  • Review of valuation procedures
  • Regular review of Conflicts of Interest procedures
  • Risk and liquidity management – the AIFM must implement effective risk management policies and procedures in order to identify, measure, manage and monitor on an ongoing basis all risks relevant to each AIF’s investment strategy to which each AIF is or may be exposed. The AIFM can supplement your management of these, or handle these in full. Defining risk limit systems for AIF, monitoring key risk measures, reporting on escalating risk limit breaches all qualify as a key aspect for providing sufficient substance at the level of the AIFM as required by AIFMD.
  • Investment management (which may be delegated back to you – such delegation will vary on a case by case basis). Note that the AIFMD specifies minimum requirements for entities that will be eligible to perform investment management. In particular such entities will have to be authorised or registered for the purpose of asset management and subject to supervision. Alternatively the delegation could be on an investment advisory basis (where the final investment decisions are made by the AIFM).
  • Compliance – The AIFM will need to ensure compliance of your funds with its regulator as well as with AIFMD regulation. There are also other laws and regulations such as EMIR and FATCA which must be complied with.

How will my operations be affected?

Potentially quite extensively, dependent upon your current practices and how you choose to comply. The appointment of an external AIFM should make the transformation less painful and more cost effective, as the regulatory burden and reporting is undertaken by a third party. This allows you to concentrate on investment management, asset growing and client acquisition.

However, whichever way you proceed your working practices will have to change and your processes and decisions will be subject to greater scrutiny, not only by your regulator but also by your service providers and auditors fulfilling their obligations under the directive.

What are the costs with becoming AIFMD compliant?

This really depends on the gap between your current arrangements and where you need to be. The key cost drivers are:

  • the AIFMD reporting requirements. Data administrators will have had to made system changes and had special programmes written to extract data in the prescribed format. Most administrators will charge a set-up cost which is their set-up cost spread amongst their clients and a regular fee depending on the reporting frequency and fund type (how often and how difficult it is to get the data). Cost structures vary between administrators. Third party providers are also offering solutions but this will be impossible without involving the administrator(s), as almost all the data required is contained within the administrator(s) systems. Most administrators are now offering AIFMD reporting as a service. If you use multiple administrators, you will have to consider how you will consolidate the reports into one integrated reporting batch for the regulator.
  • the introduction or revision of Compliance, Internal Audit and Risk Management functions. The costs associated with these are really difficult to quantify and will vary upon jurisdictions as well (due to the varying cost of skills in various jurisdictions). You will require full-time employees in your risk management department, as it must be a permanent in-house department and you may either hire employees to fulfil (or outsource) the Compliance and Internal Audit functions.


  • FATCA and EMIR. Don’t forget that your Compliance department will also have to ensure compliance with EMIR and FATCA – not directly related to AIFMD – but affects AIFs nonetheless. FATCA Responsible Officers have a big responsibility and must answer to the US Internal Revenue Services. Even if you outsource the FATCA Compliance function there will be a large cost involved. EMIR reporting requires data to be reported and reconciled using specialised systems. Funds trading in derivatives need to comply with EMIR and need an LEI number per fund. Companies obtaining the number for you will charge a service fee of a few hundred euros. And don’t forget the cost of the special systems! This can cost around €20,000 per annum for 3 users. And you must have staff learn how to use the software; and they must make time to load and reconcile the data.


  • Capital and own funds. An external AIFM needs €125,000 and a self-managed AIF needs €300,000. This excludes the additional own funds and insurance requirements.


  • Due diligence, Electronic data processing, Investment in Securitisation positions, Conflicts of Interest monitoring and management, Valuation requirements, policies and procedures. Require time and money. Depending on how advanced your processes, procedures and IT systems are – you may need to invest time and money to get these compliant with the AIFMD.

Let’s say all of the above can easily rise to €500,000. For a fund which is €100,000,000 – that is 0.5% - and we haven’t even covered everything! Depositaries may review their fees to incorporate their responsibilities as specified in the AIFMD and the Portfolio Managers will have to be regulated entities if they are delegates… Various reports have highlighted that if your fund is less than €500,000,000, it may well not be worth the time and effort to transform and to instead appoint an external AIFM.

Can I have more than one AIFM?

No. There can be only one responsible AIFM per AIF. The identification of this AIFM may not be so straight forward for the complex structure of many asset management groups. Nevertheless this must be done as numerous regulatory requirements stem from this. The AIFMD provides a criterion for establishing the AIFM. It is, however, possible to have an AIFM and various investment managers sub delegated to manage different sub funds or compartments.

Will I have to do anything?

Yes. The AIFMD will impact on your operations; an external outsourced AIFM will considerably lighten the workload and costs. However, whichever way you proceed the weight of this new legislation will be onerous. The upsides; the new brand created by the AIFMD will soon be sought after in the same way as the UCITS brand. The flip side to your extra cost is increased investor confidence. And don’t forget that all important EU distribution Passport.

Contact details

Mr Kevin Mudd


KMG Capital Markets Ltd

KMG is a fully licensed SuperManCo specialising in offering external AIFM outsourced solutions enabling fund managers to convert their fund structures into fully compliant AIFMD funds.

We can transform you regulatory burden into a competitive advantage.


(CySEC licence number AIFM 01/56/2013)

Tel: 357 25 817 488

Fax: 357 25 749 755

e-mail: This email address is being protected from spambots. You need JavaScript enabled to view it.


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