AIFM retained vs delegated investment management: how to choose the right operating model

By Timothy Kelly, Client Relationship Director

The Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investment in Transferable Securities (UCITS) framework have reshaped Europe’s investment landscape. Together, they provide a harmonised regulatory framework for the management and marketing of alternative investment funds (AIFs) and UCITS.

Central tenets of both frameworks is the Alternative Investment Fund Manager (AIFM) or Management Company (ManCo). These entities are responsible for critical functions such as portfolio management, risk management, compliance and oversight.

For clarity, this article uses AIFM and ManCo interchangeably, as the appropriate structure depends on the asset class, investment strategy and target investor base.

This article explores when firms should consider a retained or delegated investment management approach, and the strategic, operational and regulatory factors influencing that decision.

What does an investment manager do?

An investment manager (or portfolio manager) – whether retained or delegated – is responsible for day-to-day investment decisions.

Typical responsibilities include:

• Selecting and managing assets in line with clearly defined mandates and guidelines
• Implementing and maintaining appropriate risk management frameworks
• Managing liquidity and cash flows across the fund structure
• Processing subscriptions, redemptions, capital calls and distributions as required
• Ensuring that all regulatory reporting obligations are completed accurately and on time

Only authorised and regulated entities can perform this role. These responsibilities are governed through formal agreements, including AIFM agreements and investment management agreements.

Retained vs delegated investment management

Comparison of models

Retained model

When an AIFM retains portfolio management, they:

• Maintain direct control over investment decisions
• Ensure alignment with the fund’s strategy, risk appetite and investor expectations
• Leverage their investment expertise, systems and relationships within the fund’s other delegates

This model allows the fund sponsor to focus on:

• Prioritising product development and fund structuring
• Capital raising and investor engagement
• Sourcing and originating investment opportunities

For certain asset classes, an investment advisor can be appointed to provide non-binding recommendations to the AIFM.

Delegated model

Delegating portfolio management can provide clear benefits:

• The fund gains access to specialised expertise that may not exist within the AIFM
• The structure allows the fund sponsor to leverage existing global investment platforms
• The model can improve operational efficiency by reducing duplication of functions

The model is particularly useful when:

• The investment strategy requires niche, sector-specific, or geographic expertise
• The sponsor already operates established investment teams managing similar assets

In this structure the AIFM retains responsibility for oversight, governance and risk monitoring.

Hybrid models

A hybrid approach allows responsibilities to be shared:

• The AIFM retains oversight, governance and key risk functions
• A delegate executes specific investment activities or manages certain asset classes

This approach can provide flexibility in aligning roles to expertise and allow sponsors to retain involvement without full regulatory burden.

Regulatory and compliance requirements

Whether the portfolio management responsibility is retained or delegated, there are significant regulatory and compliance considerations.

The AIFM or delegated Investment Manager must demonstrate that it has the substance, expertise, and infrastructure to manage portfolios effectively.

Regulators across the EU continue to increase scrutiny on AIFMs heir, particularly in relation to delegation models.

Regulators specifically monitor for “letter-box” entities – firms that lack real operational substance.

• To meet regulators expectations, the AIFM must;
• Have the appropriate substance (e.g., local presence, decision-making authority/evidence)
• Conduct initial and ongoing due diligence on all delegates
• Ensure that delegates have appropriate regulatory approvals and expertise
• Maintain clear oversight and governance frameworks

Infrastructure requirements

Acting as an investment manager requires robust infrastructure across people, process and technology. The appropriate core and additional infrastructure components will be driven by the asset class and strategy of the specific fund.

Core infrastructure components

Additional requirements include:

• The organisation must maintain fund accounting and valuation capabilities, either in-house or through third parties
• The organisation must implement strong cybersecurity measures to protect sensitive financial and investor data

Infrastructure can be delivered through a combination of:

• Fully in-house capabilities
• Outsourced service providers
• Hybrid operating models

Common operating models by asset

Whether the investment management role is retained or delegated can depend on the role of the fund, asset class, investment strategy, operational leverage/ capabilities, and fund sponsor themselves (i.e. business type and regulatory approvals).

In this section we consider different scenarios for both retained and delegated portfolio management roles.

Feeder funds and funds within global structures

• In feeder structures or global fund platforms, portfolio management is often retained by the AIFM, but the scope of that role is typically narrower than in standalone fund
• The AIFM takes on discretionary decision making role, operational and administrative burden of the cash, collateral, and day-to-day role of the “non-core” or auxiliary fund

Private equity and private credit funds

• Portfolio management responsibility is often delegated to the fund sponsor or an affiliate due to the hands-on nature of their strategies.
• The investment advisory model may be used where regulatory or operational considerations require it

Real estate and infrastructure funds

The type and regulatory status of the fund sponsor plays a key role in determining whether portfolio management is retained or delegated.

• Retained model – where developers or investors may not hold the regulatory permission to act as investment managers, portfolio management is typically retained by the AIFM, supported by and investment advisory arrangement. In these structures, a local asset or property manager is usually appointed to provide asset-level expertise and operational efficiency.
• Delegated model – where the fund sponsor has already invested in the necessary regulatory approvals, governance framework and operational infrastructure, portfolio management is commonly delegated to the sponsor, aligning investment and asset management activities with their business model

Fund of funds

The core value add for a fund of fund investment manager lies in manager due diligence, investment selection and portfolio construction, rather than direct asset management. Responsibilities include:

• Assessing underlying manager capability, capital allocation decisions across asset, sector, regional or thematic exposures and ongoing monitoring
• Negotiating commercial terms and maintaining relationships with underlying managers

These activities are typically retained by the fund sponsor under a delegated investment manager or investment advisory model.

Fund sponsors can concentrate on higher-value activities such as alpha generation, product development, and investor relations by leveraging an AIFM’s expertise. Operating within defined guidelines and service level agreements can reduce costs, and eases investor servicing and transaction processing burdens.

Highly active listed strategies

For highly active strategies which include large volumes, intra-day execution requirements, time or price sensitive execution, and/or a directed trade component, a delegated investment manager model is preferred.

Delays in decision-making, communication, or execution could negatively impact alpha generation.

Key takeaway: how to decide

There is no single optimal model. The decision should be based on a structured assessment of:

• The complexity and nature of the investment strategy
• The internal capabilities and infrastructure of the AIFM and sponsor
• The applicable regulatory requirements and expectations
• The expectations and sophistication of the investor base
• The need for operational efficiency and scalability

How we can help

We support fund managers, asset managers, and institutional investors in designing and operating fund structures across Europe.

Our AIFM platforms are established in Ireland, Luxembourg, France and the UK. We provide:

• Support across UCITS and AIF structures
• Guidance on retained, delegated, and hybrid models
• Regulatory, operational, and governance expertise

Get in touch to explore the right structure for your strategy and operating model.