How must an AIFM manage risk, leverage and liquidity?

The risk management function must be separated functionally and hierarchically from the operating units, portfolio management included. CySEC oversees this in proportion to the business, and the AIFM must always be able to show that specific safeguards let risk management work independently. The exam material mentions only functional separation; the hierarchical element has been in the law since 2013. Under the Delegated Regulation, separation exists only if risk staff are not supervised by the heads of operating units or portfolio management, do not work in those units, are paid by risk objectives rather than those units' results, and, where a remuneration committee exists, it oversees the pay of senior risk officers. The function is permanent.

Risk systems must let the AIFM identify, measure, manage and monitor every risk relevant to each fund's strategy, without relying solely or mechanically on credit ratings, and the Delegated Regulation requires a review at least once a year, with changes where needed. Investing for a fund calls for due diligence that is appropriate, documented, kept up to date and consistent with the fund's strategy, objectives and risk profile; the risks of each position and their effect on the portfolio are tracked continuously, including through stress tests; and each fund's risk profile must fit its size, portfolio structure, strategies and objectives.

The AIFM itself fixes, for each fund, a maximum level of leverage and how far collateral or guarantees given under leverage arrangements may be reused. It weighs the fund's type and strategy, where the leverage comes from, links with other financial institutions that could create systemic risk, the need to limit exposure to any one counterparty, the degree of collateral behind the leverage, the ratio of assets to liabilities, and the size, nature and reach of its own activity. It must be able to show that each limit is reasonable and respected at all times. CySEC can impose its own limits where the stability and integrity of the financial system require it, but each fund's limit is set by the manager, not by CySEC, ESMA or the depositary.

For every fund except an unleveraged closed-ended one, the AIFM runs an appropriate liquidity management system and procedures that track liquidity risk and keep the liquidity of the investments in line with the fund's obligations, and it regularly stress-tests liquidity under normal and exceptional conditions. Strategy, liquidity profile and redemption policy must be consistent for each fund. No statutory deadline governs payment of redemptions and no minimum liquidity applies to each asset; both follow from the fund's own policy. Since 22 October 2019 an AIFM exposed to a securitisation that no longer meets the EU Securitisation Regulation must, where necessary, take corrective action in investors' best interests.

AIFMD II, Directive (EU) 2024/927, was due to be transposed and applied by 16 April 2026. When this note was reviewed, Cyprus had not done so: no transposing law had been published by 28 September 2026. CySEC said in December 2025 that bills to amend the AIFM Law were being promoted. Under the amended Directive, the manager of an open-ended AIF selects at least two suitable liquidity management tools out of seven (redemption gates, longer notice periods, redemption fees, swing pricing, dual pricing, anti-dilution levies, redemption in kind), may not pick only swing and dual pricing, and writes them into the fund rules; suspension and side pockets remain available separately. CySEC applies this through circulars: it urged managers to amend fund rules, adopted ESMA's guidelines on the tools in May 2026, and confirmed in August 2026 that the EU technical standards on the tools (Delegated Regulation (EU) 2026/465) have applied directly since 16 April 2026, with funds set up earlier given until 16 April 2027.