Liquidity management tools under AIFMD II: what managers need to know

By Fèmy Mouftaou, Head of Fund Strategy, Continental Europe, and Business Development, Benelux

Many alternative fund managers still view liquidity management tools as contingency measures to be used only in periods of market stress. Under AIFMD II, regulators increasingly expect them to form part of a fund’s ordinary liquidity governance.

Since April 2026, managers need to demonstrate not only that appropriate tools are in place, but that they’re operationally effective, tested and aligned with the fund’s redemption profile, asset liquidity and investor base.

The amended AIFMD II and the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive introduce enhanced rules on liquidity management tools (LMTs) for Luxembourg alternative investment fund managers (AIFMs) and management companies. The rules are set out in Article 16 and Annex V of AIFMD II, and Articles 18a and 84(2) and Annex IIA of UCITS, supplemented by Level 2 measures and ESMA guidance.

In practice, this shift is exposing the difference between funds that have documented LMTs and funds that can also evidence how those tools would work under pressure. This is where operational experience matters: the most resilient frameworks connect legal documentation, risk modelling, investor dealing terms, valuation processes and governance escalation routes into one coherent liquidity operating model.

Liquidity governance gaps we see in practice

Based on the work IQ-EQ does with asset managers, the most common weaknesses are rarely about the absence of an LMT. They’re usually found in the connection between policy, modelling and execution. For example, firms may have redemption gates or notice periods documented, but limited evidence that those tools have been calibrated against the fund’s asset liquidity, investor concentration or historical dealing patterns.

Other implementation challenges include unclear escalation routes when redemption pressure increases, stress tests that don’t reflect the way investors actually redeem, and documentation that treats liquidity as a compliance requirement rather than a live governance discipline.

These issues become more visible post AIFMD II because regulators expect a clear audit trail showing why a tool was selected, how it was tested and when it would be activated.

For managers striving to ensure AIFMD II compliance, the key question is: can the firm evidence that its LMT framework would protect investors fairly under both normal and stressed conditions? If the answer depends on manual judgement, inconsistent data or undocumented assumptions, the framework likely needs further work.

What is a liquidity management tool?

An LMT is a safeguard that helps funds meet redemption requests without forcing the sale of long-term or illiquid assets.

Its role is to:

• Protect investors from dilution and fire sale effects
• Ensure fair and proportionate treatment
• Preserve the fund’s long-term investment strategy
• Maintain orderly liquidity across market conditions

An LMT does not guarantee full redemption in all scenarios. It ensures that redemptions are processed where possible and deferred where necessary to protect the fund.

When do the rules apply?

The new AIFMD II rules came into effect on 16 April 2026. From this date:

• Open-ended funds must select and document at least two appropriate LMTs
• Managers must justify their choice of tools
• Regulators expect ongoing monitoring, governance and testing

This requires firms to embed LMTs into their operating model, not treat them as contingency measures.

What is the LMT efficiency test?

AIFMD II does not prescribe one single efficiency testing methodology. However, managers should be able to demonstrate that selected LMTs are appropriate, capable of achieving their intended purpose and proportionate to the fund’s liquidity profile.

In IQ-EQ’s risk work, the efficiency assessment is used to answer a practical question: does the LMT serve redemptions efficiently when liquidity is available, and defer only when necessary?

This assessment helps managers identify when and why deferrals occur, whether the tool protects remaining investors fairly and whether the fund can evidence consistent decision-making. It also supports regulatory reporting, board oversight and fund structuring decisions by turning liquidity risk from a theoretical policy requirement into a testable operating process.

How does liquidity stress-testing work?

Liquidity stress-testing is a core component of AIFMD II. It assesses how a fund behaves under different redemption scenarios.

The approach considers:

• Asset liquidation profile across liquidity buckets
• Investor redemption patterns under different scenarios
• The interaction between available liquidity and LMTs

IQ-EQ uses a proprietary modelling approach under controlled conditions to isolate the structural behaviour of the LMT. In client engagements, this type of modelling often reveals whether liquidity assumptions are too optimistic, whether redemption windows are aligned with asset liquidation timelines and whether the selected tools would operate as intended before stress becomes acute.

Testing assumptions include:

• No market shocks
• No haircut stress
• No behavioural feedback loops

Redemption patterns are applied externally, including:

• Flat scenarios to assess baseline capacity
• Wave-like scenarios to simulate prolonged redemption pressure

This approach gives managers a clearer view of how much liquidity the fund can safely provide, where pressure points emerge and what governance actions should be triggered as conditions change.

Key liquidity management tools

Managers must select tools that align with the fund’s strategy and liquidity profile. Common LMTs include:

• Hard lock-up periods to stabilise early-stage investment phases
• Defined redemption windows to provide predictability
• Redemption gates to limit outflows during periods of stress
• Extension of notice periods where asset liquidity requires more time
• Redemption fees, swing pricing, dual pricing and anti-dilution levies to protect investors from dilution
• Redemptions in kind for specific circumstances where cash redemption may not be the most appropriate route
• Suspension powers and side pockets for exceptional circumstances, where justified in the interests of investors

Each tool plays a specific role in balancing liquidity and asset preservation.

What our work with managers shows

Based on our experience, three outcomes consistently stand out.

1. LMTs tend to operate effectively under normal and moderate conditions when the fund’s dealing terms, asset liquidity profile and governance triggers have been properly aligned. In these cases, redemption requests can be processed smoothly when liquidity is available
2. Stress-testing is most valuable when it informs decision-making rather than simply producing a report. A strong framework shows not only how much liquidity is available, but when escalation is required and which actions the board, AIFM and risk function should consider
3. Under severe stress, constraints should become binding as intended. An effective framework allows deferrals, gates or other tools to protect remaining investors and avoid forced asset sales, while maintaining a clear record of why action was taken

The key takeaway is that efficiency is not only a quantitative output but also a governance test: can the manager explain, evidence and repeat the decisions made when liquidity becomes constrained?

What managers should do now

With AIFMD II now in effect, managers must test whether their framework is genuinely operational:

• Map each selected LMT to the fund’s redemption policy, asset liquidity profile and investor base
• Document why each tool is appropriate and what it is designed to achieve
• Test the framework using realistic redemption scenarios, including concentrated investor outflows
• Define governance triggers, escalation routes and decision-making responsibilities
• Review fund documentation, policies and operational procedures for consistency
• Ensure the board and risk function receive practical reporting that supports timely action

AIFMD II raises the bar on liquidity management, but it also gives managers an opportunity to strengthen resilience and investor confidence – to move beyond minimum compliance and build a framework that stands up to regulatory scrutiny and real market pressure.

How we can support

IQ-EQ’s licensed and regulated AIFM platforms support managers across the fund lifecycle by combining regulatory expertise, risk management, governance and operational delivery. Our teams help managers assess LMT suitability, strengthen liquidity stress testing, document governance frameworks and prepare for regulatory expectations under AIFMD II.

Visit our AIFM services page to learn how IQ-EQ can support fund structuring, liquidity governance and AIFMD II readiness.

About the author

Fèmy Mouftaou is Head of Fund Strategy, Central Europe and Business Development, Benelux at IQ-EQ. He has over 28 years’ experience in financial services, including senior roles with international fiduciary, fund administration and AIFM providers in Luxembourg, as well as a Big Four audit firm. Fèmy supports alternative fund managers with fund strategy, liquidity governance, stress testing and AIFMD-related requirements.