Alternative Investment Fund Managers (AIFM) in LuxembourgUpdated on Tuesday 03rd May 2022
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The Alternative Investment Fund Manager (AIF) refers to the entity that is entitled to manage the assets and the investment schemes of alternative investment funds (AIFs). In Luxembourg, the AIFM Law entered into force on 15th of July 2013, as a transposition of the European Union’s Alternative Investment Fund Manager Directive (AIFMD).
The law on AIFM in Luxembourg applies to a wide range of funds that can be included in the AIFs category, such as hedge funds or real estate funds, but also to other types of investment vehicles, such as certain categories of collective investment funds. Local and foreign investors who want to open a fund in Luxembourg that falls under the AIFMD regulation can receive in-depth information on the registration process from our team of financial advisors.
What are the responsibilities of an AIFM in Luxembourg?
The AIFM in Luxembourg is represented by a person who has an in-depth knowledge of the financial sector, laws and regulations, and who is able to provide management services that will increase the value of an investment vehicle. The AIFM has multiple responsibilities and this is why the entity must be approved by the Financial Sector Supervisory Commission (CSSF), the entity which supervises all types of vehicles, including the SICAV in Luxembourg.
The main activities of an AIFM in Luxembourg refers to developing portfolio management services and risk management services. Besides these, the responsibilities of a manager can refer to marketing or administrative activities. Depending on the qualifications of the person, the AIFM can also be entitled to offer investment advice to his or her clients or safekeeping the assets of the fund.
It is also important to know that the AIFM in Luxembourg has to work under a legal entity; in the case in which the AIFM will hire additional staff, the respective employees must have a satisfactory level of skills and education. Businessmen interested in opening a Luxembourg fund must know that when they appoint an AIFM, the AIFM can outsource his or her activities to an entitled party, by sending a notification to the CSSF through which the AIFM will explain how this action will be in the best interest of the investors.
What is the AIFMD in Luxembourg?
The AIFMD in Luxembourg is the law that regulates the management of alternative investment funds that operate not only in this country, but also in other European Union (EU) states. It provides the legal framework applicable to the managers of such funds and it prescribes the levels of rules and restrictions applied to a certain type of AIF, based on the characteristics of the said fund.
The purpose of the law is to have a harmonized legal structure at a European level, as well as to offer better mechanisms for marketing one fund from a country to another (if both countries are EU member states). This means that the law implemented methods through which investors can invest from one country to another with fewer bureaucratic measures, while ensuring the necessary level of supervision and regulations.
With the implementation of the AIFMD in Luxembourg, managers of AIFs can market a fund registered in this country to another EU member state through a single type of authorization, which is know as a passport. The law also stipulates what types of funds are more regulated and which are less regulated, and here, we mention that the SICAR in Luxembourg is one of the funds that needs a more complex level of rules and restrictions.
At the opposite side, the RAIF in Luxembourg and the unregulated funds have a very low level of regulations, and these types of funds also benefit from a more flexible system with regards to the investments that they can conclude. Below, our team of financial advisors have prepared a short description on other purposes of the AIFMD in Luxembourg:
- through this law, all fund managers of AIFs are required to be authorized for this function;
- the scope of the law covers the manner in which managers have to report to the fund’s investors;
- it also regulates management procedures and the administration of the fund;
- the primary aspect covered by the law is the manager of AIFs, and only then the AIFs;
- the law is also applicable to the common fond, and the AIFM authorization must be done in the name of the fund.
AIFM in Luxembourg and AIFs – a growing industry
The AIF sector in Luxembourg is represented by a diversified market, as there are numerous types of funds created for the purpose of investing in different market sectors and having different investment strategies. Even so, the industry of AIFs has been flourishing in the last years and the demand of management companies operating as AIFM in Luxembourg has also increased.
Businessmen who want to open an investment fund in Luxembourg should take into consideration the following aspects if they want to invest in a fund that is regulated under the AIF laws (our team of financial specialists can offer an in-depth presentation on all the options investors have in this sense):
- in 2019, the assets under management held by management companies increased by 17% (this also takes into consideration the assets held by AIFM in Luxembourg);
- in 2019, CSSF approved 17 new management companies and all of them had an AIFM license;
- from all the entities allowed to operate as an AIFM in Luxembourg, 64% manage the assets of at least one Reserved Alternative Investment Fund (RAIF), one of the most popular AIFs that can be set up here;
- the number of RAIFs operating as real estate funds increased from 2018 to 2019 by 133%;
- most of the AIFs generally prefer to invest in a single industry – more exactly, 67% of them.
How does an AIFM in Luxembourg obtain a license?
As said earlier, the AIFM will need to obtain a license from the CSSF in order to carry management activities in this country. When applying for a license, the future AIFM in Luxembourg will have to complete a set of standard forms required by the institution and specific documents regarding the previous financial activity and financial education will also have to be added to the file.
Please be aware that some AIFMs will require obtain an authorization from the CSSF, while others will only need to register with the institution, and you can find out more information from our team of financial consultants. Once authorized or registered with the CSSF, the AIFM will have specific obligations towards this institution.
How are the passport requirements completed in Luxembourg?
As said above, the AIFMs can have passport rights, through which they can market a fund from one country to another at the level of the EU (the states of the European Economic Area are also included in the law for AIFMD in Luxembourg). This means through this method, a Luxembourg fund can be marketed to another EU/EEA state or vice versa.
In order to have passport rights, the AIFMs must first be authorized as AIFMs in their home country. This means that if a AIFM located in another EU/EEA state wants to provide management services for an AIF in Luxembourg, then this right will be provided as long as there are sufficient documents that can attest the authorization.
The procedure involves that the AIFMs will first have to address to the financial regulators in their home country, by sending an official notification with regards to their intention to exercise passport rights in Luxembourg, for the purpose of marketing a fund to investors located here.
After this step is completed, the next will be held at an institutional level, as the competent authority of the respective country will address to the CSSF, and send the necessary documents with regards to the passport of the AIFM. This procedure for AIFMD in Luxembourg is done following the rules of the Article 32.3.
According to the AIFMD law, the foreign AIFM will have the right to start the operations in Luxembourg only after the competent authority in the home country has send all the documents to the CSSF (starting from the day when the documents were received by the CSSF).
Please mind that the AIMFD in Luxembourg will approve the passport only as long as the funds are marketed to professional investors in this country. Provided that the investors are included in the category of retail investors, then other procedures have to be completed. For this, an authorization from the CSSF is necessary, which can be granted only if certain conditions are satisfied by the applicant.
In is also important to know that CSSF will charge a fee for marketing foreign AIFs in Luxembourg, which are registered in EEA states. The fee varies based on the structure of the fund (if you want to open an investment fund in Luxembourg you can choose from single compartment or multiple compartment funds and the same is available in other EEA states) and investors have to know that the fee will be imposed on a yearly basis; our team can offer updated information on the current fees charged by the institution.
The manager will need to provide information on the management structure of the company, any modifications brough to this structure or the any other changes (registered address, name of the AIFM in Luxembourg, shareholding, etc.). For more details on this subject, as well as for legal advice on how to open a Luxembourg fund, please contact our team of specialists.