What Is the Alternative Investment Fund Managers Directive (AIFMD)?
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 AIFMD sets standards for marketing around raising private capital, remuneration policies, risk monitoring, and reporting, as well as overall accountability.
The AIFMD is part of an increased push for investor protections that the EU undertook before the financial crisis, whereupon efforts were increased due to the systematic risks the crisis revealed.
- The Alternative Investment Fund Managers Directive is a regulatory framework that applies to EU-registered hedge funds, private equity funds, and real estate investment funds.
- The AIFMD was implemented to better regulate alternative investments that were left largely unchecked prior to the 2008-09 global financial crisis.
- The directive aims to protect investors as well as reduce some of the systemic risk that these types of funds can pose to the EU and its economy.
How the Alternative Investment Fund Managers Directive (AIFMD) Works
The global financial crisis was rooted in alternative investment vehicles like subprime mortgages. After the global financial crisis hit, the European Union made a move to regulate the alternative investment industry including hedge funds, real estate funds, private equity, and others—many of which remained largely unregulated on a grand, global scale. In fact, they were virtually unchecked in the EU.
Alternative investments like private equity and hedge funds were largely unregulated in the EU before the global financial crisis.
The Alternative Investment Fund Managers Directive was implemented in the EU in 2013. But rather than pass regulation on the funds themselves, the directive's aim is to regulate the fund managers. Any manager that operates a fund in the European Union is subject to AIFMD regulation, regardless of whether it is set up within or outside the union's borders. 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 MIFID was a regulation in Europe that aimed to boost transparency across the union's financial markets.
The AIFMD has two major objectives. 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 are only intended for professional investors, 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.
The second objective is to remove some of the systemic risks 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 European Union market. As the EU is still one of the wealthiest regions, 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.
Some of the requirements of the AIFMD include:
- business conduct including identifying conflicts of interest, fairness toward investors, full and complete disclosure, risk management, and remuneration
- minimum capital requirements including initial capital and total assets under management (AUM)
- marketing efforts directed solely at investors within the European Union
- how investments are safeguarded—through custodians and depositaries