Alternative Investment Funds (AIFs)

European fund regulation distinguishes between two harmonised types of funds, namely UCITS (Undertakings for Collective Investment in Transferable Securities) and AIF. According to the EU UCITS Directive (UCITSD), UCITS are defined as securities funds which are generally open to retail investors. On the other hand, the European AIFM Directive basically defines all funds outside the scope of the UCITSD as AIFs.

This means that all funds which invest in something other than securities can then only be AIFs. Nevertheless, there are also securities funds which do not meet the criteria for UCITS and are therefore AIFs as well. The reason is that, while all UCITS are securities funds, not all securities funds are UCITSs: If a securities fund is structured in such a way that it does not need to comply with the legal UCITS criteria regarding investment limits, minimum diversification or counterparty risks, the AIF rules apply to it.

The management of an AIF by the "Alternative Investment Fund Manager" (AIFM) comprises four main tasks:

  • Portfolio management,
  • risk management,
  • fund administration, and
  • marketing.

Portfolio management

Portfolio management implements the investment strategy of the respective fund in accordance with the law and the investment guidelines in the fund's constitutive documents. In addition to the investment decisions, this includes investment research as well as liquidity management.

Risk management

Risk management is functionally and hierarchically separated from the operational departments. This leads to stricter and more constant monitoring. Risk management performs stress tests under normal and exceptional conditions with regard to liquidity and market fluctuations in accordance with Art. 39 and 40 AIFMG. This is to ensure that fund stability is also tested under exceptional market conditions and that the liquidity of the assets and the obligations of the AIF, in particular to redeem units, are compatible with each other. In addition, all risks will be addressed at the fund or company level and managed by means of controls in such a way that the risk will either be reduced or consciously accepted above a certain size (on the basis of various dimensions). In addition, an appropriate, documented and regularly updated due diligence process is carried out for the AIF when the portfolio manager makes investments on behalf of the AIF. In addition, Art. 39 AIFMG ensures that the risk structure of the AIF corresponds to its size, the composition of its assets, its investment strategy, the investment objectives and the information contained in the constituive documents, the prospectus and the marketing documents.

Fund administration

Fund administration comprises legal services as well as fund accounting and accounting services, client enquiries, valuation and pricing of units of AIF, including tax returns, compliance monitoring, keeping an investor register, distribution of profits, issue and redemption of units, contract settlements, including dispatch of certificates, and keeping records.


The distributor of AIF in Liechtenstein must be licensed by the FMA (Art. 69 AIFMG). The distributor is responsible for seeking and retaining suitable investors for the AIF within the framework of legislation and constituive documents. The law defines distribution pursuant to Art. 4 para. 23 AIFMG as the following: The direct or indirect offering or placement of AIF units to investors or to investors resident or domiciled within the EEA at the initiative or on behalf of the AIFM.


Only a depositary domiciled in Liechtenstein can assume the custody of assets with a domestic AIF (Art. 57 AIFMG). The depositary acts independently (Art. 59 AIFMG). The depositary may not delegate its duties pursuant to Art. 59 AIFMG to third parties, with the exception of duties pursuant to Art. 59 para. 1 lit. a and b. Subdepositories and prime brokers are permitted under certain conditions. Characteristics of the depositary function are the management of issues and redemptions or transfers of fund units, the safe custody of fund units and fund assets, the guarantee of due diligence, control with regard to compliance with the investment guidelines of the fund’s constitutive documents, examination of the constituive documents/prospectuses, plausibility checking of the NAVs and others.


An auditor must be appointed for each alternative investment fund in accordance with Art. 109 AIFMG. The auditor checks that the admission requirements are met, that the provisions of the law and the constituive documents are complied with in the conduct of business and that the AIF’s annual reports are in accordance with Art. 110 AIFMG. In addition, the auditor must be independent of the AIF to be audited, the AIFM, and the depositary (AIFMG Art. 109).

Financial market supervision

The Financial Market Authority monitors the implementation of the Act and the associated ordinances. Pursuant to Art. 156 AIFMG, the Financial Market Authority is responsible for granting, amending and withdrawing authorisations and authorisations, approving constituive documents and model documents, reviewing auditors’ reports, appointing experts and deciding on their remuneration, and cooperating with the competent authorities of other EEA member states to facilitate supervision.

Alternative investment funds (AIF)

Alternative investment funds are funds which are not undertakings for collective investment in transferable securities (UCITS) and which collect capital from a number of investors in order to invest it for the benefit of these investors in accordance with a defined investment strategy (Art. 4 AIFMG). The basic idea of the EU AIFM Directive is manager regulation. The EU legislator has essentially refrained from direct product regulation. The legal basis is the AIFM Act or the AIFM Ordinance. AIFs are, for example, hedge funds, private equity funds, real estate funds and others. A fully licensed AIFM (Alternative Investment Fund Manager) has a great deal of leeway in the design of AIFs (alternative investment funds). An AIF can take up all types of assets and very high leverage financing. In principle, alternative investment funds are aimed at professional investors due to the higher risk of loss (Directive 2004/39/EC MiFID), but non-professional investors may also be admitted under certain conditions. Specific features of the AIFM regulation are, for example, that the risk management is hierarchically and functionally separated from the operational departments. This leads to stricter and more constant monitoring according to the specific risk profile of the fund. All fund providers are required to carry out regular stress tests in order to identify liquidity risks at an early stage. If leveraged financing is used, increased transparency requirements apply, in particular through regular reporting to the Financial Market Authority. In addition, there are regulations on remuneration policy, which must be in line with the corresponding risk profile. In addition, organisational and administrative precautions must be introduced for conflicts of interest in order to monitor and avoid conflicts of interest. According to Art. 21 AIFMV, the legal minimum assets for an AIF are 1.25 million euros or the equivalent in another currency and must be attained within one year of authorisation or admission. Depending on the type, the minimum economic capital is approximately 10 million euros.

Professional investor

Any investor who is regarded as a professional client within the meaning of Annex II to Directive 2004/39/EC or who, upon request, is to be treated as a professional client.


Professional client is a client who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risk that it incurs. In order to be considered a professional client, the client must comply with the following criteria:

I. Categories of clients who are considered to be professionals

The following should all be regarded as professionals in all investment services and activities and financial instruments for the purposes of the Directive:

1. Entities which are required to be authorised or regulated to operate in the financial markets. The list below should be understood as including all authorised entities carry 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, and 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 schemes and management companies of such schemes

(f) pension funds and management companies of such funds

(g) commodity and commodity derivatives traders

(h) locals

(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 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 customer that he can 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.

II. Clients who may be treated as professionals on request

II.1 Identification criteria

Clients other than those mentioned in section I, including public sector bodies and private individual investors, may also be allowed to waive some of the protections afforded by the conduct of business rules.

Investment firms should therefore be allowed to treat any of the above clients as professionals provided the relevant criteria and procedure mentioned below are fulfilled. These clients should not, however, be presumed to possess market knowledge and experience comparable to that of the categories listed in section I.

Any such waiver of the protection afforded by the standard conduct of business regime shall be considered valid only if an adequate assessment of the expertise, experience and knowledge of the client, undertaken by the investment firm, gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved.

The fitness test applied to managers and directors of entities licensed under Directives in the financial field could be regarded as an example of the assessment of expertise and knowledge. In the case of small entities, the person subject to the above assessment should be the person authorised to carry out transactions on behalf of the entity.

In the course of the above assessment, as a minimum, two of the following criteria should be satisfied:

– The client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters.

– The size of the client’s financial instrument portfolio, defined as including cash deposits and financial instruments exceeds EUR 500 500.

– The client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.

II.2 Procedure

The clients defined above may waive the benefit of the detailed rules of conduct only where the following procedure is followed:

– They must state in writing to the investment firm that they wish to be treated as a professional client, either generally or in respect of a particular investment service or transactions, or type of transaction or product.

– The investment firm must give them a clear written warning of the protections and investor compensation rights they may lose.

– Clients must confirm in writing, in a document separate from the contract, that they are aware of the consequences of the loss of this level of protection.

Before deciding to accept any request for waiver, investment firms must be required to take all reasonable steps to ensure that the client requesting to be treated as a professional client meets the relevant requirements stated in Section II. 1 above.

However, if clients have already been categorised as professionals under parameters and procedures similar to those above, it is not intended that their relationships with investment firms should be affected by any new rules adopted pursuant to this Annex.

Firms must implement appropriate written internal policies and procedures to categorise clients. Professional clients are responsible for keeping the firm informed about any change, which could affect their current categorisation. Should the investment firm become aware however that the client no longer fulfils the initial conditions, which made him eligible for a professional treatment, the investment firm must take appropriate action.