What Is the Alternative Investment Fund Managers Directive?
The Alternative Investment Fund Managers Directive (AIFMD) is a European Union (EU) regulation that applies to hedge funds, private equity funds, and real estate funds. The institutional funds that fall under the AIFMD were previously outside of EU financial regulations for disclosure and transparency, including the Markets in Financial Instruments Directive (MiFID). The AIFMD sets standards for marketing around raising private capital, remuneration policies, risk monitoring and reporting, and overall accountability. The AIFMD is part of an increased push for investor protections that the EU undertook just prior to the 2007-08 financial crisis, whereupon efforts were increased due to the systematic risks the crisis revealed.
The AIFMD has two major objectives built into it. First and foremost, the AIFMD seeks to protect investors by introducing stricter compliance around how and what information is disclosed. This includes conflicts of interest, liquidity profiles and an independent valuation of assets. The directive points out that alternative investment funds (AIF) are intended for professional investors only, although some member states can choose to make these funds available to retail investors as long as additional safeguards are applied at a national level.
AIFMD and Systemic Risk
The second objective of the AIFMD is to remove some of the systemic risk that these funds can pose to the EU economy. In order to do this, the AIFMD mandates that remuneration policies be structured in a way that does not encourage excessive risk taking, that financial leverage is reported to the European Systemic Risk Board (ERSB), and that the funds have robust risk management systems that take liquidity into account.
Compliance with AIFMD is required in order to get a ‘passport’ to sell financial services across the EU market. As the EU is still one of the wealthiest regions on earth, hedge funds and private equity funds are investing in compliance departments even as they complain about the burden and issue dire warnings of competition suffering as a result.