Our focus: Alternative Investment Funds (AIFs)
By creating the “fund for qualified investors” in 2005 Liechtenstein introduced a type of fund specially tailored to the needs of professional investors and allowing a large degree of freedom, thereby to a certain extent pre-empting the European Union’s AIFM Directive.
Since its inception, BENDURA FUND MANAGEMENT ALPHA AG has likewise specialised in alternative investments.
AIFs make it possible to create fully regulated structures that provide numerous advantages while facilitating the management of a broad range of different assets.
These might well include
- classic liquid securities, e.g. exchange-listed equities, bonds and derivatives
- precious metals
- private equity and private debt
- units of other funds (including hedge funds)
- limited partnership contributions in open-end and closed-end vehicles
- real estate (usually indirect investments in eligible holding companies)
- life assurance policies (e.g. US life settlements)
The basic rules is this: if the value of an asset can be determined in accordance with the relevant statutory provisions, that asset can be brought into an AIF.
Depending on how the AIF is constituted, it might also benefit from standardised access to investor capital within the EU. Moreover, in future AIFs can be expected to acquire the sort of “brand” identity that UCITS have had for quite a few years now.
Family office funds under the AIFMA:
Because of their high level of adaptability to changing liquidity and capital adequacy requirements, AIFs (like funds under the IUA) are suitable as vehicles for private asset allocation in favour of a single investor or a small number of investors, with the AIF serving as a sort of “asset-managing family office HQ”.
Particularly with larger asset portfolios it can be advantageous to keep a record of the entire financial situation at a glance based on a single, standardised data set and organised according to the investor’s own needs. Depending on the size of the asset portfolio this can, to a lesser or greater extent, reduce the amount of time, administration and co-ordination required. Regular, centralised reporting of the current status of the family portfolio facilitates a clear overview, more efficient control and uniform performance measurement. Most depositaries make it possible for the investor to find out the value of his fund units at any time via e-banking. The frequency with which an up-to-date net asset value (NAV) can – and should – sensibly be determined mainly depends on the type of assets held by the fund and the need for continuous subscriptions and redemptions.
Allocation of roles within an AIF
Fund manager / AIFM
The AIFM is the central fund manager, the beating heart of any AIF. The AIFM can carry out the portfolio management, risk management, administration, distribution and other functions itself or else delegate some of them to third parties.
One or more holders of units in the fund.
External portfolio manager
Takes the investment decisions as specified in the fund prospectus. The aim is to preserve and grow the fund’s assets. The portfolio manager is a qualified entity to which powers are delegated by the AIFM and is supervised by the AIFM.
A specialist entity which can give the asset manager administrative support, e.g. in the field of research.
Auditors / supervisor
These make sure that all transactions are always processed in conformity with the law and in the best interests of the investors or, where applicable, arrange for an independent spot check to be conducted ex post by a suitably qualified party.
Is responsible inter alia for issuing and redeeming fund units and keeping the fund’s assets in safe custody.
These make up the fund’s asset portfolio. The type and volume will depend on the fund’s investment guidelines.
Definition of “professional investor”
The following applies to investors who are professionals within the meaning of Directive 2004/39/EC (MiFID):
A professional investor is a client who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs. To be regarded as “professional” a client must fulfil the following criteria:
Categories of clients that are regarded as professional investors:
With regard to all investment services and financial instruments the following clients should be considered as professionals within the meaning of the Directive:
1. Entities which are required to be authorised or regulated in order to operate in the financial markets. The list below should be understood as including all authorised entities carrying out the characteristic activities of the entities mentioned:
- entities authorised by a member state under a directive,
- entities authorised or regulated by a member state without reference to a directive,
- entities authorised or regulated by a non-member state:
a) credit institutions;
b) investment firms;
c) other authorised or regulated financial institutions;
d) insurance companies;
e) collective investment undertakings and their management companies;
f) pension funds and their management companies;
g) commodity and commodity derivative dealers;
h) local investors;
i) other institutional investors.
2. Large undertakings meeting two of the following size requirements on a company basis:
- balance sheet total: EUR 20,000,000;
- net turnover: EUR 40,000,000;
- own funds: EUR 2,000,000.
3. National and regional governments, public bodies that manage public debt, central banks, international and supranational institutions such as the World Bank, the IMF, the ECB, the EIB and other similar international organisations.
4. Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions.
The entities mentioned above are considered to be professionals. They must, however, be allowed to request non-professional treatment and investment firms may agree to provide a higher level of protection. Where the client of an investment firm is an undertaking referred to above, the investment firm must inform it prior to any provision of services that, on the basis of the information available to the firm, the client is deemed to be a professional client and will be treated as such unless the firm and the client agree otherwise. The firm must also inform the client that the latter may request a variation of the terms of the agreement in order to secure a higher degree of protection.
It is the responsibility of the client considered to be a professional client to ask for a higher level of protection when it deems it is unable to properly assess or manage the risks involved.
This higher level of protection will be provided when a client who is considered to be a professional enters into a written agreement with the investment firm to the effect that it shall not be treated as a professional for the purposes of the applicable conduct of business regime. Such agreement should specify whether this applies to one or more particular services or transactions, or to one or more types of product or transaction.
5. Clients who may be treated as professionals on request pursuant to Directive 2004/39/EC (MiFID).