European Union: AIFMD: How To Manage The Risks And Reap The Rewards

Under the European Union's Alternative Investment Fund Managers Directive, investment managers must quickly assess the risk profiles of their funds, understand the various types of risk exposures, and meet the reporting requirements that the directive demands. Here's what managers need to know to comply.

As investment managers begin adapting to the European Union's Alternative Investment Fund Managers Directive (AIFMD), they must quickly assess the risk profiles of their funds on an ongoing basis, understand the various types of risk exposures, and meet the reporting requirements that the directive demands.

AIFMD, which mandates that investment managers receive authorization and comply with regulatory reporting requirements in order to market funds in the EU, became fully operational across the European Union as of July 22, 2014. With its requirement for managers to implement and document a risk management function that is independent of portfolio management, the issue of risk is at the front and center of conversations around AIFMD compliance.

The directive outlines 16 wide-ranging managerial functions that an authorized alternative investment fund manager (AIFM) must perform, with duties ranging from supervision of delegates through to the monitoring of the investment policy and risk management.

The 16 functions have been listed in the AIF Rulebook as:

  1. decision-making
  2. supervision of delegates
  3. monitoring compliance
  4. monitoring of investment policies
  5. risk management
  6. financial control
  7. monitoring of capital
  8. internal audit
  9. complaints handling
  10. implementing accounting procedures
  11. liquidity management
  12. conflicts of interest
  13. operational risk management
  14. record-keeping
  15. remuneration, and
  16. AIFMD reporting obligations

Whilst AIFMs are allowed to delegate some of these functions, the responsibility of the delegated functions remains squarely with them. Importantly, AIFMs must demonstrate "substance," which effectively means they retain more functions than they delegate and in so doing, are not a so-called "letter-box entity."

In all instances, AIFMs must demonstrate that they have "sufficient resources and ... effective governance arrangements in place to ensure that statutory obligations can be met," according to the Central Bank of Ireland, which authorizes AIFMs.

Risk Management Impacts Other Managerial Functions

Unsurprisingly, AIFMD deals with the traditional investment risk management topics such as stress testing, effective exposure calculations and VaR, to name a few. However, the outputs from a risk management system can – and should – be used to feed other managerial functions, such as investment compliance and monitoring of the investment policy, as well as liquidity management.

Having all this information fed from a centralized risk system ensures consistency across the AIFM's reporting.

Independence is Key

One of the key requirements under AIFMD is the implementation of a solid risk management system that can identify, monitor and manage all material risks pertinent to the AIF's investment strategy. The function must be independent of the portfolio management process, and the policies and processes must be thoroughly documented.

Taking this approach further, many investment managers – particularly those that may not have the existing infrastructure – have seen the benefits in engaging specialist providers of risk calculations and oversight. As well as satisfying regulatory requirements, once the source data has been supplied by an independent party, the generation of risk analytics has proven to be a model embraced by investors, as it provides the ultimate degree of independence.

Liquidity Management

As a consequence of the financial crisis, AIFMs are required to establish appropriate liquidity management procedures and monitor liquidity risks, including performing regular stress tests. This requires analysis and identification of potential mismatches between the assets of the fund and its redemptions (i.e., liabilities), while also factoring in investor concentration. For non-listed securities, this can prove to be especially challenging.

What is needed here is a clear, transparent and meaningful method of understanding the scenarios under which a fund may not be able to meet its liquidity obligations.

Risk Parameters

AIFMD requires the calculation of various parameters, many of which may not be routinely produced by managers, including:

  • Regulatory AUM (RAUM)
  • Gross-Commitment-Leverage
  • Value-at-Risk
  • Liquidity Risk
  • Counterparty Risk
  • Borrowing and Exposure
  • Stress Testing

Ongoing Reporting and Customization

AIFMs must submit regular "Annex IV" filings to the relevant local financial regulator. This is the European equivalent of Form PF, and covers areas such as exposures, geographical profile, stress testing, and much more.

The frequency of reporting is driven by RAUM, while the amount of information to be supplied is determined by the holdings and investment strategy of the fund.

To account for the inevitable customization requirements, it's key that any risk reporting solution has the ability to reflect the uniqueness of each fund.

Cost and Technology

A common question surrounding regulatory reporting and compliance is the issue of costs. Concerns for AIFMs include the initial set up, and ongoing reporting to regulators (whether on a quarterly or half-yearly basis) and the time and processes it takes to generate the data that goes into the required reports.

Firms that can offer a comprehensive and cost-effective solution that ticks all the boxes for the full suite of reports will generally find themselves in the running when regulatory reporting proposals are weighed up.

Importantly, many have found synergies between the reports to be provided for the various types of regulatory reports as well as regular investor and investment compliance reports. The commonality of information provided in each can lead to savings, if done correctly.

All these factors are as important to service providers that wish to support AIFMs with outsourced reporting and risk management solutions as they are to the AIFMs. Regulators that authorize AIFMs are keen to emphasize that AIFMs should ensure that the resource persons or companies they engage have the required expertise, time and commitment to handle the complexities of their businesses and the compliance obligations under AIFMD.

Originally published in Tabb Forum on October 6th 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions