Worldwide: Distributing Alternative Investment Funds In Europe

Last Updated: 25 February 2014
Article by Joseph Hardiman

The Alternative Investment Fund Managers Directive ("AIFMD") entered into force in the European Union in 2011, with member states required to implement it by July 2013. The Directive covers managers of alternative investment funds ("AIFs") who distribute or domicile their products within the European Union.

Does the Directive affect US managers?

If a US fund manager sets up a new EU domiciled AIF it must be compliant with the Directive immediately from launch. If you have a Cayman Islands fund currently distributed in Europe or are planning to distribute a Cayman Islands fund in Europe, it will likely be impacted from 2015 and may already be impacted. Managers of Cayman Islands funds can currently make use of the private placement and / or reverse solicitation regimes, but likely not for much longer.

Do I have any options other than to rely on private placements and reverse solicitation?

Yes. The AIFMD lets managers of AIFs make use of similar passporting privileges to UCITS within the EU.

If you want to make immediate use of the AIFMD's passporting provisions and not be compelled to rely on private placements and reverse solicitation, you can either use an EU management company (a "Manco", a company set up to meet regulatory substance requirements) or an EU domiciled self-managed AIF. In either case these can be authorized under the AIFMD to passport your fund:

Fund managers have the following options:

  • Establish a self-managed AIF
  • Set up your own EU Management Company
  • Use one of Carne's Management Companies in Ireland or Luxembourg

Carne's management companies can be used by fund managers for a speedy and effective launch, which allows you to meet the substance requirements laid down by the AIFMD without the costs of a bricks and mortar presence in the EU.

Our solution is particularly suitable for US managers seeking to distribute funds in Europe under the AIFMD passport who do not wish to open an office there. The Carne Manco also acts as a conduit to ensure, as required by the AIFMD, a functional and hierarchical independent risk function is established.

Regardless of which option a manager selects, Carne can assist with the launch using our fully documented risk management, oversight and ongoing monitoring services, all designed to meet the requirements of the Directive. We can also put in place the board-level reporting processes the AIF is required to have.

How long does it take to set up?

If a manager elects to use Carne's management company, it may be possible to have your fund approved within 24 hours of submitting the application to the regulator. Otherwise, if a manager selects the self-managed fund or proprietary management company options, timing will depend on a number of factors.

Why not use a UCITS fund in lieu of an alternative investment fund and thereby avoid being subject to the AIFMD?

Some funds are not eligible for UCITS-status. This includes funds investing in commodities, highly illiquid instruments, real estate funds, or investment strategies that concentrate heavily (e.g. more than 10% in one security). Additionally, regardless of the underlying portfolio, some managers will not want to deal with the complexities associated with running their portfolios in compliance with UCITS guidelines.

What else is required?

The Directive places a number of obligations on managers, which Carne will be able to assist with, including:

  • Reporting in compliance with the requirements of the regulator(s)
  • A suite of policy documentation which needs to be prepared in advance
  • Monitoring of delegated activities
  • The appointment of a depositary and other service providers
  • Hierarchical and functional separation of portfolio management and risk management activities
  • Capital requirements (and additional cover for risks arising from professional liability for funds making use of Carne's Manco)

Does the Directive carry with it additional restrictions?

There are obligations relating to risk and leverage monitoring and disclosure, as well as ongoing reporting to the regulatory authorities in respect of the AIFM and the funds under management. Carne can assist managers with meeting these requirements. We have an experienced in-house team of risk management professionals with extensive track records in capital markets, fund management, regulatory and treasury activities. We can put in place the required risk management framework, incorporating investment, liquidity and operational risks.

What about remuneration?

Authorised AIFMs will need to report how staff serving the AIF are paid and disclose a remuneration policy. However, this does not stretch to the entire investment management business, and US managers will not be required to disclose details of salary and bonus to European authorities. Information is aggregated and should cover staff whose role may have an impact on the risk profile of the fund.

Carne's management companies in Luxembourg and Ireland are also licensed to manage UCITS – hence, for managers who would like to use one single platform for their UCITS and AIFs, our Mancos can deliver a one-stop-shop solution.

Are there any additional requirements that I will need to meet before I can market my fund?

Once the Manco or self-managed AIF option has been selected and approved, there is a process for passporting and distribution to be followed. We can provide help and assistance with passporting and distribution of the AIF once it is authorised.

About Carne

Carne is one of the most respected brands by investors for the provision of governance and oversight services, a recognised provider of management company structures for US alternative fund managers. We provide management company solutions to UCITS funds and as of 2013 we have been supporting managers seeking assistance with the AIFMD.

We have a highly experienced team, including personnel on the ground in Ireland and Luxembourg, and client relationship managers in the US. We regularly work closely with service providers in Ireland, Luxembourg and the Cayman Islands in order to ensure the smooth operation of fund structures.

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.

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