Alternative Investments
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Know the numbers? Now learn the why.Read the Alternative Investment Funds (AIFs) study notes: short answers, key numbers and the law behind each rule.
- What is an AIF in Cyprus, what forms can it take, and how must it be organised?
- How much initial capital and how many assets must an AIF have, and by when?
- What may an AIF invest in, and how are transactions with related parties controlled?
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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?
- Exam material: a mutual company, an investment company or a limited partnership. Since 30 July 2018 (AIF Law 124(I)/2018): the first is correctly a common (mutual) fund, a contract-based fund with no legal personality.
- Which type of AIF can be internally managed?
- Exam material: an investment company. Since 30 July 2018 (AIF Law 124(I)/2018): also a limited partnership with legal personality, within the AIFM Law thresholds. A common (mutual) fund has no legal personality and always appoints 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?
- Exam material: €125,000 initial capital for internally managed AIFs only, and minimum assets of at least €500,000 for every AIF, free from any charge. Since 30 July 2018 (AIF Law, Article 14(1)): the €500,000 binds AIFs under the main regime and must be raised within 12 months of authorisation (CySEC may extend by up to 12 months); an AIF with a limited number of persons needs €250,000.
- 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?
- Exam material: at least once a year, with every AIF also valued on dealing dates and on the annual and half-yearly report dates. Since 30 July 2018 (AIF Law, Article 20): those extra dates bind internally managed AIFs, so at least twice a year; AIFs with an external AIFM value at least yearly and as often as their assets and dealing require.
- Who values assets in a transaction between an AIF and a related party?
- Exam material: an independent valuer nominated by the depositary, or by the external manager where the depositary is a party or no depositary is appointed. Since 30 July 2018 (AIF Law, Articles 22(4) and 26): the manager (or the fund, if self-managed) nominates where the counterparty is the depositary or a person connected with it; the no-depositary case comes from the repealed 2014 law, and every main-regime AIF must have a depositary.
AIFM scope
- What are the asset thresholds bringing an AIFM within the AIFM Law?
- Exam material: the law covers managers of AIFs above €100 million including leverage, or above €500 million if unleveraged with no redemption rights for five years. Since 5 July 2013 (AIFM Law, Article 4(2)): these are exemptions; the full law applies unless the AIFs hold at most those amounts, and a manager above €500 million is always in scope.
- What is the position of a sub-threshold AIFM?
- Exam material: outside the AIFM Law unless it applies for affiliation, meaning opting in. Since 5 July 2013 (AIFM Law, Article 4(3)–(5)): it still registers with CySEC and reports, and may opt in to take on the full regime and the passport; since 3 July 2020 a Cyprus sub-threshold manager needs a CySEC licence under Law 81(I)/2020, unless it is a CIF acting with CySEC approval.
- 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?
- Exam material: by additional own funds or professional indemnity insurance, and up to 50% of the capital may be a guarantee from a credit institution or insurer. Since 5 July 2013 (AIFM Law, Article 9(6)): the guarantee may cover up to 50% of the additional own funds (the 0.02% top-up) only, never the initial capital. Own funds are held in liquid, readily convertible assets, never speculative instruments.
AIFM authorisation
- What is the AIFM authorisation timeline?
- Exam material: CySEC decides within three months of a complete application (extendable by three months), and the AIFM may start once authorised but not before one month after submitting information on its services. Since 5 July 2013 (AIFM Law, Article 8(7)): the same periods; the month runs from supplying any missing information on delegation, fund rules, the depositary and investor disclosures.
- 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?
- Exam material: at least 40% deferred for a period suited to the AIF's life cycle, and up to 50% in AIF units or similar instruments. Since 5 July 2013 (AIFM Law, Article 14(2)): at least 40% deferred over at least three to five years (60% for particularly high amounts), and at least 50% in AIF units or equivalent instruments, unless AIFs make up less than half of what the AIFM manages.
- What governance rules protect the integrity of AIFM remuneration?
- Exam material: personal hedging that undermines the risk alignment of pay is prohibited, and a large AIFM has a remuneration committee of non-executive management-body members that prepares pay decisions. Since 5 July 2013 (AIFM Law, Article 14(2)(γ) and 14(4)): the committee is required for a significant AIFM; the management body adopts and reviews the policy, which is also subject to an independent annual review.
Risk & liquidity management
- How must the risk management function be organised and reviewed?
- Exam material: functionally segregated from the operating units, with risk systems reviewed at least annually and amended when required. Since 5 July 2013 (AIFM Law, Article 16(1); Delegated Regulation 231/2013, Article 42): separated functionally and hierarchically, including from portfolio management, so risk managers cannot be overruled by risk-takers.
- 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 from the liquidity management system and stress tests, although every AIF must keep its strategy, liquidity profile and redemption policy consistent. Other AIFs each need their own liquidity management system and procedures.
- Under what conditions must AIF liquidity stress tests be run?
- Exam material: under both normal and exceptional liquidity conditions. Since 16 April 2026 (EU rules, applied in Cyprus through CySEC circulars pending transposition): managers of open-ended AIFs must also select at least two liquidity management tools. Individual investments need not 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 CySEC before the delegation takes effect, and it must not become a letterbox entity. Sub-delegation needs the AIFM's prior express consent and advance notice to CySEC.
- Where may an EU AIFM market, and what applies to non-EU AIFMs and CySEC's retail rules?
- Exam material: CySEC's extra requirements for retail marketing may not be stricter than EU rules. Since 5 July 2013 (AIFM Law, Articles 38–39 and 66–67): they may be stricter than those for professional marketing but may not treat other Member States' AIFs more strictly, and they are reported to the European Commission and ESMA. An EU-authorised AIFM markets to professional investors in other EU and EEA states under the passport; a non-EU AIFM uses national private placement (conditions, notice to CySEC, a two-month wait), and retail marketing would need a CySEC permit.