Answer ... The investment and borrowing restrictions of an alternative investment fund (AIF) are specified in the Classification of AIFs Directive. Restrictions may apply depending on whether the fund is targeted at retail or professional and well-informed investors.
Retail investors: An AIF targeted at retail investors may invest in one or more of the following eligible assets:
- transferable securities;
- money market instruments;
- units of collective investment undertakings;
- financial directive instruments;
- deposits with credit institutions;
- real estate and real estate-related assets;
- mortgage related securities;
- collateralised debt obligation securities, up to 30%;
- commodities, up to 20%; and
- foreign exchange, up to 20%.
General restrictions for AIFs addressed to retail investors include the following:
- The AIF cannot obtain shares carrying voting rights which enable it to exercise significant influence on the management of the issuing body. This rule does not apply to investments in other investment funds, private equity AIFs and real estate AIFs;
- The AIF cannot raise capital from investors by issuing debt securities; and
- The AIF cannot grant loans or act as a guarantor for third parties.
An AIF targeted at retail investors may borrow, if permitted to do so by its constitutional documents. However, such borrowings must not exceed 25% of the net assets of the AIF at any time.
Professional and well-informed investors: AIFs, AIFs with a limited number of persons (AIFLNPs) and registered AIFs (RAIFs) targeted at professional or well-informed investors are not restricted in any way regarding the eligible assets for their investments. However, such funds are subject to the following non-exhaustive restrictions:
- They cannot raise capital from investors by issuing debt securities (subject to derogation);
- They cannot grant loans or act as a guarantor on behalf of third parties, unless the granting of guarantees is permitted, subject to the provisions of the classification of the fund; and
- They cannot carry voting rights which enable them to exercise significant influence over the management of the issuing body. This rule does not apply to investments in other investment funds, private equity AIFs and real estate AIFs.
Regarding borrowing restrictions, AIFs, AIFLNPs and RAIFs targeted at professional or well-informed investors are not restricted unless otherwise defined in their constitutional documents or the offering memorandum.
A RAIF cannot be classified as a loan originating fund, fund of funds or money market fund.
Answer ... The Classification of AIFs Directive sets out requirements and restrictions on investments in cash, investments in other investment funds and investments in real estate of AIFs targeted at retail investors. Additionally, the directive imposes restrictions on the investment of the fund in other collective investment schemes.