What is the Alternative Investment Fund Managers Directive (AIFMD)?

Who Does AIFMD Apply to?

AIFMD applies to alternative investment fund managers (AIFMs) operating in the EU, and non-EU managers that market funds to EU investors. It applies to a wide range of alternative investment funds (AIFs), including hedge funds, private equity funds, infrastructure vehicles and real estate investment portfolios.

The scope of AIFMD covers:

• • • EU-based AIFMs managing EU or non-EU AIFs
    • Non-EU AIFMs marketing to EU investors

There are also lighter reporting obligations which AIFMs may be subject to if their portfolios fall within certain threshold requirements.

What Are the Main Requirements of the AIFMD?

The AIFMD mandates requirements for AIFMs to comply with to ensure that AIFs can be managed and sold on a cross-border basis. AIFMD introduced a set of operational, risk and governance requirements designed to enhance investor protection and improve financial stability. AIFMs must establish independent risk and liquidity management practices, maintain sufficient levels of capital and ensure that investor assets are safeguarded.

AIFMD also requires:

• • • The implementation of remuneration policies aligned with long-term risk management
    • Timely disclosures to investors on fund strategy, risk profiles and performance
    • Limitations on leverage to help control systemic exposure to risk

These requirements are designed to provide a consistent regulatory framework for alternative investment vehicles in the EU.

What Are the Main Reporting Obligations under AIFMD?

One of the core functions of the AIFMD is to provide regulators with greater insight into the activities and potential risk exposure within the alternative investment sector. AIFMs are required to regularly submit detailed reports to their national competent authorities (NCAs), which are then shared with the European Securities and Markets Authority (ESMA).

These reports give insight into:

• • • Portfolio composition, including asset classes and geographical exposure
    • Leverage levels and counterparty details
    • Risk metrics and outcomes of stress testing exercises

These reports are intended to identify potential risks to market stability and provide NCAs and ESMA with the data needed for regulatory oversight.

The AIFMD has created a unified regulatory framework for alternative investment fund managers in the EU focused on transparency, investor protection and mitigating systemic risk. Compliance with the AIFMD is not only important for regulatory compliance and avoiding penalties, but also serves as a great foundation for building trust within the wider regulated financial markets.