When thinking about which asset classes will be affected by the AIFMD it is worth remembering that the directive has a very broad scope. 

It covers all alternative investment funds (AIF) that are managed or marketed in the EU and not already regulated under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. It is essential to bear in mind that the Directive(1) is focused on regulating the manager of the fund rather than the fund.

‘It is clear that a wide range of asset classes will be caught in the AIFMD net’

The AIFMD essentially lays down the rules for the authorization, ongoing operation and transparency of fund managers that manage and/or market AIF in the European Union. AIFs are “collective investment undertakings, including investment compartments thereof” which:

• raise capital from a number of investors
• invest that capital for the benefit of those investors in accordance with a defined investment policy.

An AIF may be either an open-ended or closed-ended fund and may take any legal form. It is not limited by reference to asset classes or investment strategies. However it is clear that a wide range of asset classes will be caught in its net.

Which asset types?

The definition does not limit AIFs in terms of the types of assets in which they invest. The term “alternative” is generally taken to mean, “alternative to a UCITS fund”, which tends to be retail mutual funds. AIFMD regulates alternative investment fund managers who market or manage funds in Europe targeted at professional investors. While it has been often been known colloquially as a “hedge fund directive”, it actually covers a wider range of other funds and thus a large spread of assets.

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The European Securities and Market Authority (ESMA) identified four macro asset groups, 25 asset types and 71 sub-asset classes ranging from cash to art for reporting purposes under the AIFMD(2). The macro asset types are: securities; derivatives; physical (real/tangible assets); and collective investment undertakings (CIU). This covers a wide range from traditional assets such as equities, equity-related assets and debt through private equity, real estate and on to non-traditional asset classes such as ships, forests, wine etc and any combination thereof.

The securities category contains a range of traditional asset classes that will be used by mainstream managers of funds available to the public and thus regulated by UCITS but which will also held within AIFs. These include:

• Cash
• Cash equivalents such as certificates of deposit and commercial papers
• Equities both listed and unlisted on stock exchanges and corporate bonds
• Sovereign bonds classified according to their maturity and the category of country issuing the bond.

The securities category also includes loans and more complex products such as structured and securitized products. These include:

• Asset-backed, residential mortgage-backed and commercial mortgages backed securities (ABS, RMBS and CMBS); and
• Collateralized debt and loan obligations (CDOs and CLOs).

The derivatives category includes commonly used products such as:

• Equity
• Fixed income commodity derivatives
• Foreign exchange derivatives
• Credit default swaps.
• Real/tangible assets including various property assets such as:
• Residential real estate
• Commercial real estate
• Physical commodities
• More esoteric assets such as art and collectables and transportation assets.

The final category of collective investment undertakings is broken down by whether the investment itself is or is not managed or operated by an:

• AIFM-Money Market Funds and cash management CIU
• AIFM-ETF
• AIFM-Other CIU

Which funds hold which assets?

Different types of funds are likely to hold various shares of asset classes depending on their strategy. ESMA carried out a mapping exercise in 2012 that identified six types of funds that were likely to be caught by the AIFMD regulatory net(3).

1. Non-UCITS funds such as hedge funds that invest in asset classes similar to those in which UCITS invest but which do not respect UCITS diversification or leverage requirements. These can include traditional assets such as equities, equity-related assets and debt.

2. Non-UCITS funds such as hedge funds that invest in financial instruments that are not eligible assets for UCITS. Eligible assets are broadly investments in transferable securities, investments in money market instruments, cash deposits and financial derivatives.

3. Private equity funds which invest predominantly in unlisted equities of existing or mature companies.

4. Venture capital funds which invest predominantly in unlisted equities of start-up or small firms.

5. Funds of real estate.

6. Funds that invest in a wide variety of assets including ships, art, wine, patents/rights, forestry, coins, precious metals, endowment policies, carbon instruments, life sciences (pharmaceuticals and biotechnology) and commodities.

‘AIFMD will capture any class of asset that is held in a fund that is captured by its definition of in-scope funds’

There are a number of key exemptions to the scope of the AIFMD. Specifically excluded from the definition of AIF are holding companies, joint ventures, securitization special purpose entities, pension funds, employee savings schemes, and family offices.

The bottom line is that AIFMD will capture any class of asset that is held in a fund that is captured by its definition of in-scope funds. AIF therefore contain a wide variety of financial instruments. Businesses need to ensure that they understand which activities will fall under the directive and which will not – whatever assets they hold.

Visit our AIFMD resource page for more articles and information.

[1] Directive 2011/61/EU. Official Journal of the European Union. 8 June 2011
[2] Guidelines on reporting obligations under Article 3 and Article 24 of the AIFMD. Consultation Paper. May 2013
[3] Key concepts of the Alternative Investment Fund Managers Directive and types of AIFM. Discussion paper. ESMA. February 2012

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