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AIF fundamentals
What defines an Alternative Investment Fund (AIF)?
A collective investment undertaking that raises funds from a number of investors and invests them per a defined policy for their benefit, and which does NOT hold a UCITS licence. The absence of a UCITS licence is the key distinction.
In what legal forms may an AIF be established in Cyprus?
As a mutual company (common fund), an investment company, or a limited partnership.
Which type of AIF can be internally managed?
Only an AIF set up as an investment company may manage itself internally. A mutual company or limited partnership must always appoint an external manager.
How does an AIF's investment scope differ from a UCITS?
UCITS are restricted to securities under Directive 2009/65/EC. AIFs may invest in both securities and non-securities — real estate, commodities, private equity, hedge-fund strategies — hence 'alternative'.
AIF capital
What initial capital and minimum assets must AIFs hold?
Initial capital of €125,000 applies only to internally managed AIFs. Every AIF, internal or external, must retain minimum assets of at least €500,000, free from any charge.
What may the minimum assets of an AIF consist of, and how are non-cash items valued?
Cash or assets aligned with the AIF's investment policy, free from any charge. Non-cash components must be independently valued at the time they are actually paid in.
How does the minimum-asset requirement apply to an umbrella AIF?
Each investment compartment must separately satisfy the minimum-asset requirement. Compartments cannot pool their compliance under the umbrella.
AIF governance & valuation
What is the minimum governing body of an internally managed AIF?
At least four natural persons, of whom at least two perform executive duties. In addition, at least two suitably experienced persons must actually conduct the management and operations.
How often must an AIF's NAV be calculated?
At least once a year as the floor, plus on every date units are marketed, redeemed or repurchased, and on the reference dates of the annual and half-yearly reports (so effectively at least twice yearly for reporting).
Who values assets in a transaction between an AIF and a related party?
An independent expert nominated by the depositary. If the depositary is itself a party (or none is appointed), the external manager nominates the expert instead.
AIFM scope
What are the asset thresholds bringing an AIFM within the AIFM Law?
Portfolios exceeding €100 million where leverage is used, or €500 million for unleveraged, closed-ended AIFs whose investors have no redemption rights in the first five years.
What is the position of a sub-threshold AIFM?
It falls outside the scope of the AIFM Law by default, but may voluntarily apply for affiliation — which then subjects it to the Law's regime and gives it passporting benefits.
How many AIFMs manage each AIF, and can an internally managed AIFM manage UCITS?
Each AIF has exactly one AIFM responsible for compliance. An internally managed AIFM cannot manage UCITS; an external AIFM may, if separately authorised under UCITS legislation.
AIFM core activities
What two activities must every AIFM perform, and can they be split?
Portfolio management and risk management — the two mandatory core activities. They are inseparable: an AIFM may not provide risk management without portfolio management, or vice versa.
What additional service may an external AIFM be authorised to provide?
Discretionary portfolio management (including for pension funds and occupational retirement institutions), plus non-core services such as investment advice and safekeeping/administration of units.
AIFM capital
What initial capital do internally and externally managed AIFMs need (portfolio < €250m)?
€300,000 for an internally managed AIFM and €125,000 for an externally managed AIFM. The higher figure reflects the AIF itself bearing the management risk.
What additional capital applies when an AIFM's portfolio exceeds €250 million?
0.02% of the excess over €250 million, capped at €10 million including the initial capital. Portfolios managed under delegation from another AIFM are excluded from the calculation.
How may an AIFM cover professional liability and hold its own funds?
By additional own funds or professional indemnity insurance. Up to 50% of required capital may be a bank/insurance guarantee. Own funds must be held in liquid, readily convertible assets — never speculative instruments.
AIFM authorisation
What is the AIFM authorisation timeline?
CySEC must decide within three months of a complete application (extendable by three months). An authorised AIFM may start managing no earlier than one month after submitting information on the services it will provide.
What must CySEC do when authorising an AIFM that is a subsidiary of a firm in another member state, and how does it report to ESMA?
It must consult the competent authorities of that member state before granting authorisation. CySEC reports authorisations granted or withdrawn to ESMA on a quarterly basis.
Conduct & conflicts
What general conduct standard applies to AIFMs?
To act honestly, fairly and with due skill, care and diligence — in the best interests of investors AND the integrity of the market. Investor interest does not justify market manipulation.
When may an AIFM give preferential treatment to certain investors?
Only where it is disclosed in the AIF's rules or instruments of incorporation, so all investors can see the terms before investing. Undisclosed side letters are prohibited.
What safeguards apply to self-investment and prime brokers?
An AIFM providing discretionary management may invest a client's portfolio into its own AIFs only with the client's prior general approval. Where a prime broker is used, the depositary must be informed of the contract for oversight of asset reuse.
Remuneration
What must AIFM remuneration policies promote, and to whom do they apply?
Sound and effective risk management, without encouraging excessive risk-taking inconsistent with the fund's risk profile. They target staff whose activities materially affect the risk profile of the AIFM or the AIFs managed.
Over what horizon is variable pay assessed, and when is guaranteed variable pay allowed?
Over a multi-year framework aligned with the AIFs' life cycle. Guaranteed variable remuneration is permitted only for new staff and only in their first year.
What deferral and instrument rules apply to AIFM variable remuneration?
At least 40% must be deferred over a period aligned with the AIF's life cycle; up to 50% may be paid in units/shares of the AIF (where AIF management is at least 50% of the portfolio).
What governance rules protect the integrity of AIFM remuneration?
Personal hedging that undermines the risk-alignment of pay is prohibited; a large AIFM's remuneration committee must consist of non-executive management-body members; and the policy is subject to an independent annual review.
Risk & liquidity management
How must the risk management function be organised and reviewed?
Functionally segregated from the operating (portfolio management) units, so risk managers cannot be overruled by risk-takers. Risk management systems must be reviewed at least annually and amended when required.
What is the AIFM's role regarding leverage?
The AIFM sets and monitors the maximum level of leverage for each AIF and the extent of any right to reuse collateral or grant guarantees, considering the AIF's type, strategy and counterparty concentration.
Which AIFs are exempt from the liquidity management system requirement, and how are systems structured?
Unleveraged closed-ended AIFs are exempt. Otherwise a separate liquidity management system and procedures must be maintained for each AIF, since liquidity profiles differ.
Under what conditions must AIF liquidity stress tests be run?
Under both normal and exceptional liquidity conditions. There is no requirement for individual AIF investments to meet any minimum liquidity standard — AIFs may hold illiquid assets.
Valuation function
May an AIFM value its own AIF's assets, and who bears ultimate responsibility?
Yes, provided valuation is functionally independent from portfolio management and conflicts are mitigated. Even where an external valuer is used, the AIFM retains ultimate responsibility for proper valuation and NAV publication.
What restrictions apply to an external valuer and to a depositary performing valuation?
An external valuer must be professionally registered/recognised and may NOT delegate its responsibility. A depositary may value assets only if its depositary and valuation functions are functionally and hierarchically separated and conflicts are managed.
Reporting & marketing
Within what period must an AIFM prepare the annual report for each EU AIF?
Within six months of the financial year end, provided to CySEC (and the AIF home-state authority where applicable) and available to investors on request.
What must the AIFM ensure when delegating functions, and who must be told of sub-delegation?
The delegate must be qualified, the AIFM must notify the competent authority before the delegation takes effect, and it must not become a letterbox entity. All delegation and sub-delegation arrangements, wherever the chain leads, must be disclosed to CySEC.
Where may an EU AIFM market, and what applies to non-EU AIFMs and CySEC's retail rules?
An EU-authorised AIFM may market to professional investors worldwide. A non-EU AIFM marketing in Cyprus needs CySEC authorisation. Any additional CySEC requirements for retail AIF marketing may not be stricter than EU rules and must be reported to the European Commission and ESMA.