Risk management, leverage, valuation

Risk management, leverage, valuation

Risk management is to be separate from operations for AIFMD funds. There must be an independent valuation of assets.

Risk Management – AIFMD regulation

Risk management

The alternative investment fund manager (AIFM) must ensure that the activity of risk management is functionally and hierarchically separate from operations, including portfolio management, and is required to implement adequate risk management systems to identify, measure, manage and monitor all risks to which each alternative investment fund (AIF) is exposed. This includes the use of appropriate stress-testing procedures.

Leverage limits

The Alternative Investment Fund Managers Directive (AIFMD) does not place limits on the investments or the strategies that an AIF may employ. However, it requires the AIFM to set a maximum leverage limit for each AIF managed, which should be disclosed in the AIF offering documents. This maximum level should be set by taking into account the investment strategy, the sources of leverage, the need to limit the exposure to a single counterparty and the extent of collateral. The total amount of leverage employed by the AIF must be disclosed to investors on a regular basis.

The competent authorities may impose limits on the level of leverage that an AIFM is entitled to employ, based on concerns regarding systemic risk and disorderly markets.

Valuation of assets

The AIFM is required to ensure that appropriate and consistent procedures are in place for the proper and independent valuation of the assets of each AIF under management. An AIFM must ensure that the valuation function is performed either by itself or by an external valuer, but in both cases the AIFM remains liable for proper valuation.

Where the AIFM performs the valuation, it needs to ensure functional independence from the activity of portfolio management and that there are sufficient safeguards in place to manage any conflicts of interest, including with regard to the remuneration policy. In any case, the competent authorities of the home Member State of the AIFM may require the valuation procedures to be checked by an external valuer or an auditor.

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