The Alternative Investment Fund Managers Directive (known as AIFMD), first instituted in the EU back in 2014, provides a regulatory framework for monitoring and supervising alternative investment fund managers (AIFMs).
The UK is no longer subject to EU regulations post-Brexit, which includes AIFMD. But the UK has implemented a domestic AIFMD regime that generally upholds the same set of rules—at least for now.
Of course, that regime is likely to change in the not-too-distant future. See our recent post about the upcoming changes we expect.
Using an FCA-regulated AIFM allows fund managers to outsource the set-up, oversight, and operation of alternative investment funds to a licensed firm with regulatory experience and infrastructure.
Read on for a brief history of AIFMD, and how AIFM solutions can make your compliance work easier.
What is AIFMD?
AIFMD regulates the management, administration, and marketing of alternative investment funds (AIFs). The focus is primarily on regulating the AIFM, rather than the fund itself.
The FCA defines AIFs as ‘collective investment undertakings’ not subject to UCITS, including hedge funds, private equity funds, retail investment funds, investment companies, and real estate funds, among others.
AIFMD has its roots in the 2008 financial crisis, when alternative investment funds were largely unregulated. Initial legislation in the EU was rolled out in 2014, and since then it has been used to set standards for marketing around raising private capital, remuneration, risk monitoring and reporting, and overall accountability.
The UK AIFMD includes the following requirements, among others:
- Fund manager authorisation or registration, depending on AUM thresholds
- Fair treatment of investors
- Regulatory capital
- Safekeeping of investments
- Delegation of controls
As with PRIIPs, the ultimate goal is to protect investors and reduce economic risk.
Why use an AIFM platform?
AIFM solutions are designed to help small and mid-sized firms navigate the AIFMD regime, assuming full compliance responsibility and risk. With instant access to a fully regulated AIFM, firms don’t need to invest the time and money required to set up their own.
For emerging or growing funds, the benefits of using an AIFM platform—rather than directly managing your own—are numerous:
- Attracting investors: The support of an AIFM lends your fund credibility. You and your potential investors can both rest easy knowing that regulatory risk is being managed appropriately, with effective oversight of portfolio management decisions
- Speed to market: Getting an AIFM regulated can take up to 12 months. By contrast, using an existing AIFM takes closer to 8 weeks, facilitating a much faster launch
- Potential cost savings: This isn’t true across the board, but using an AIFM solution can save you money since certain fixed overheads are spread across the entire platform
- Lower risk: The AIFM on record for the fund assumes responsibility for ongoing compliance and regulatory requirements, so you can focus on portfolio management and distribution
- Leverage expertise: Gain access to the AIFM’s wealth of knowledge. There’s a lot to learn with AIFMD, especially if you’re entering into the fund space for the first time. Using an AIFM allows you to lean on the accumulated knowledge of licensed firms that are very familiar with the launch process and other details
Of course, using an AIFM platform isn’t without a few drawbacks. What is gained in speed is lost in control; funds must abide by the AIFM’s rules and follow existing processes. But if you’re looking to decrease time to market and hire out your regulatory compliance tasks to an expert, using an AIFM is the surest route.
The only constant is change
The asset management sector is ever-evolving, and even small gains in efficiency can give you a competitive edge. AIFM solutions are one way to lend your fund instant credibility and stay focused on portfolio management, leaving the compliance responsibility (and risk) to experts in the field.
At IQ-EQ, we pride ourselves on being a one-stop-shop for our financial services clients. Contact us today to learn more about our service offerings and how we can give your firm an edge in the market.