The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Delegation of investment management under the AIFMD

By Mark Browne, Partner, Mason Hayes & Curran


First published in Q1 2013 edition

The delegation model of fund management, whereby investment vehicles or their management companies appoint third party investment managers and advisers, many of whom are located outside Europe, has become increasingly common in the European context in recent years, in particular with respect to funds authorised as UCITS.

With respect to non-UCITS funds, the Alternative Fund Managers Directive (AIFMD) will be the key European legislation regulating such activity once it becomes operational from mid 2013.

The AIFMD notes in its preamble1 that, depending on their legal form, it should be possible for alternative investment funds falling under the directive (AIFs) to be either externally or internally managed and that AIFs that do not appoint an external alternative investment fund manager (AIFM) will themselves constitute the AIFM. AIFs structured as self-managed investment companies, for example, will typically fall into this category. As such the AIFMD supports the delegation model and in fact it does specifically provide for the right of AIFMs to delegate their functions, subject to applicable conditions2. However, the AIFMD was prepared as a principle-based framework document under the “Lamfalussy Process” and accordingly, following its adoption much of the fine detail, including with respect to the terms applicable to delegation, remained to be determined as "Level 2" measures.

The finalised text relating to Level 2 was contained in a regulation which was approved by the Commission on 19 December 2012 (the “Regulation”) and following this there is now greater clarity regarding how the delegation model will work in practice under the AIFMD.

Concerns had arisen, in light of draft text prepared for the Regulation by the European Commission, which disregarded advice received from the European Securities and Markets Authority (ESMA) in 2011 with respect to delegation, that the terms of the Regulation would prevent the continuation of delegation model. However the final version is not as restrictive as the proposed text in the earlier draft and accordingly, subject to compliance with the requirements detailed therein and discussed below, delegation arrangements may continue to be used.

The Regulation itself has now been sent to the European Parliament and Council for approval and, as it is not expected to be opposed, should be directly applicable in March or April 2013.

Overview of delegation under the AIFMD

The general concept of delegation, as provided for in the AIFMD3, is addressed and expanded upon in Section 8 of the Regulation4 under various headings, including general principles, reasons for the delegation, the nature of the delegate, potential conflicts of interest and the effective supervision of the delegate.

The relevant “General principles” include ensuring that the delegation structure does not allow for the circumvention of the AIFM’s responsibilities, obligations or liability (including in relation to its authorisation). Delegation arrangements must be documented in written agreements between the AIFM and the delegate and there are significant requirements relating to the specific contents of such agreements,5 including obligations to set out in the agreement:

  1. the respective rights and obligations of the parties, including rights of information, inspection, admittance and access for the AIFM and its instruction and monitoring rights with regard to the delegate in order to ensure effective supervision;
  2. terms requiring the delegate to properly supervise the performance of the delegated functions and adequately manage associated risks internally;
  3. instruction and termination rights, including a requirement that sub-delegation can take place only with the consent of the AIFM;
  4. a requirement on the delegate to disclose to the AIFM any development that may have a material impact on the delegate's ability to carry out the delegated functions effectively and in compliance with applicable laws and regulatory requirements;
  5. an obligation to protect any confidential information relating to the AIFM, the relevant AIF itself and the investors in that AIF; and
  6. a requirement to ensure that the delegate establishes, implements and maintains an appropriate contingency plan for disaster recovery and periodic testing of backup facilities. 

Existing contractual arrangements relating to delegation, i.e investment management agreements, will need to be reviewed and may need to be revised to ensure all of these requirements are addressed where the relevant fund structure falls under the terms of the AIFMD. In addition to specific requirements, such as those above, required to be included in the actual delegation contract itself, a series of on-going obligations are also imposed on the AIFM by the applicable general principles. In addition to potential references in contractual arrangements these requirements will ideally be addressed and documented separately in a procedures manual or business plan of the AIFM. Examples of these obligations include:6 

  1. establishing methods and procedures for reviewing on an on-going basis the services provided by delegates to ensure that they carry out the delegated functions effectively and in compliance with applicable law and regulatory requirements to an appropriate quality standard;
  2. setting out the appropriate action to be taken if it appears that the delegate cannot carry out the functions effectively or in compliance with applicable laws and regulatory requirements;
  3. ensuring that the AIFM has the necessary expertise and resources to supervise the delegated functions and in fact effectively supervises the delegated functions and manages the risks associated with the delegation; and
  4. instructing the delegate regarding implementation of the investment policy of the AIF and monitoring compliance on an on-going basis.

Many investment managers will already have some form of internal procedures and policy manuals which can be adapted to specifically address these requirements. Otherwise, and for self-managed corporate structures in particular, the form of “business plan” currently required for UCITS may constitute a useful basis upon which to base such documents.

Delegation of portfolio or risk management

At present, the decision to delegate investment functions is entirely one at the discretion of management. However, there will be a new requirement under the AIFMD to justify this decision upon “objective reasons”.7 Examples of reasons which would be acceptable for this purpose are included in the Regulation8 and these include: (a) cost savings; (b) expertise of the delegate in specific markets or investments; or (c) access of the delegate to global trading capabilities. It will be necessary for the AIFM to provide the competent authorities with a detailed description of the delegate and explanation of the objective reasons for any delegation with supporting evidence.

Delegates are required to have sufficient resources and to employ sufficient personnel with the skills, knowledge and expertise necessary (including appropriate training and previous experience) for the proper discharge of the tasks delegated. Personnel of the delegate are also required to be of sufficiently good repute and examples of the research to be undertaken to confirm such matters are detailed, for example specific attention is required to be paid to any previous convictions for dishonesty or fraud9. The requirements in this regard are broadly similar to those currently applicable under the “fitness and probity” regime of the Central Bank of Ireland (the “Central Bank“) and therefore this can essentially be regarded as applying concepts similar to those that apply to, for example, directors of Irish regulated funds, to delegates.

Where delegation of portfolio management or risk management is proposed the Regulation sets out the types of EU regulated entities to be deemed to be appropriately authorised for such purposes10. It also notes that non-EU entities authorised under the AIFMD or those authorised or registered for the purpose of asset management and effectively supervised by a competent authority in their home country would also qualify, subject to certain conditions11. Specifically, there must be a written agreement between the competent authorities of the home Member State of the AIFM (the “Competent Authority”) and the supervisory authorities of the delegate which allows the Competent Authority to:

  1. obtain on request information and documents necessary to carry out their supervisory tasks as provided for under the AIFMD;
  2. receive information from the supervisory authority in the third country for the purpose of investigating apparent breaches of the AIFMD and Regulation as soon as possible;
  3. obtain cooperation with regard to enforcement matters in accordance with applicable local law in cases of any such breaches; and
  4. carry out on-site inspections on the premises of the delegate.

The notion of entering into agreements which will have the effect, in accordance with the final point above, of permitting European supervisory authorities to carry out inspections on their premises outside Europe may pose concerns for some asset managers. However, the explanatory memorandum to the Regulation clearly specifies that the right to carry out on-sight inspections should include the ability to request the local third-country supervisory authority to carry out on-site inspections and also, where permission is obtained from the third-country supervisory authority, the ability of the Competent Authority to carry out the inspection themselves, or to accompany staff of the local supervisory authority to assist with an on-site inspection.

One of the stated aims of the AIFMD is to ensure more effective oversight of the alternative sector and the directive makes it clear that delegation should not be permitted where it prevents effective supervision. The Regulation clarifies that a delegation shall be deemed to prevent the effective supervision of the AIFM where:12

  1. any of the AIFM, its auditors or the Competent Authority do not have effective access to data related to the delegated functions and to the business premises of the delegate, or the Competent Authority is not able to exercise those rights of access; or
  2. the delegate does not cooperate with the Competent Authority in connection with the delegated functions.

Conflicts of interest

The AIFMD precludes delegation in circumstances where it conflicts with the interests of the AIFM or investors in the relevant AIF13 and the Regulation clarifies a range of factors to be considered in this regard14. In terms of meeting these requirements, the appointment of a strong independent board to the AIFM will assist, as will addressing these concerns in the conflicts section of the delegation agreement itself, in addition to including disclosures and representations in the offering document of the relevant AIF. 

It can be noted that the Corporate Governance Code for Collective Investment Schemes and Management Companies adopted by the Irish Funds Industry Association in consultation with the Central Bank, and which is now applicable to Irish funds, does require the appointment of at least one entirely independent board member so compliance may not necessitate substantial board restructuring.

There are exemptions to the general prohibition on delegation where this may lead to a potential conflict of interest included in the AIFMD itself15, for example where (a) the portfolio or risk management function may be considered to be functionally and hierarchically separated from other potentially conflicting tasks; and (b) where potential conflicts of interest are deemed properly identified, managed, monitored and disclosed to the investors of the AIF. The Regulation addresses these considerations further16 and provides examples of how these concerns might be addressed in practice. These are further examples of matters which could be documented in a business plan or policy and procedures manual (although in this case the documentation by the delegate, rather than only the AIFM, will also be relevant) and referenced or otherwise addressed in the delegation agreement to ensure compliance with the AIFMD.


As mentioned previously, it will be a requirement for any sub-delegation to be subject to the prior approval of the AIFM17. It can be noted that the Regulation clarifies that a general consent will not be acceptable and instead a specific approval will be needed from the relevant AIFM for any given sub-delegation by its delegate18. The AIFM in turn will be subject to a requirement to notify its competent authority and provide it with details of the delegate, the name of the competent authority where the sub-delegate is authorised or registered, the delegated functions, the AIFs affected by the sub-delegation, a copy of the written consent by the AIFM and the intended effective date of the sub-delegation19. The provision in the delegation agreement providing for sub-delegation should accordingly reflect this or provide that sub-delegation will only be permitted in accordance with applicable law.

Letter-box entities

One of the specific concerns of the AIFMD is to prevent the use of “letterbox” entities20. Such concerns have previously been addressed in relation to UCITS, where the “four eyes” principle now applies. It can be noted that the AIFMD itself specifies that measures would be adopted detailing when an entity would be deemed to constitute a letter-box entity for the purposes of the AIFMD and no longer be considered to be the manager of the relevant AIF.  Accordingly the Regulation21 sets out a series such relevant circumstances to be taken in to consideration. Key considerations in this regard include where:

  1. the AIFM no longer retains the necessary expertise and resources to supervise the delegated tasks effectively and manage the risks associated with the delegation;
  2. the AIFM loses its contractual rights to inquire, inspect, have access or give instructions to its delegates or the exercise of such rights becomes impossible in practice; and
  3. the AIFM delegates the performance of investment management functions to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself. A series of criteria are included in the Regulation to be used as a guide in this regard.

It can be noted that “investment management functions” are defined in the AIFMD to include both portfolio and risk management, so it is expected that the AIFM would retain one of these functions to ensure it meets this requirement and in fact the explanatory memorandum to the Regulation 2 specifically provides that when appointing a delegate the AIFM “has to perform at least functions relating to either risk or portfolio management”.

In practice, it would be anticipated that most AIFMs operating the delegation model would retain the risk management function to meet this requirement, especially in funds with a high level of trading. At the same time, the Regulation provides that determinations in this regard will be based on the structure as a whole, bearing in mind a range of factors including the types of assets held by the relevant AIF22.

The Commission intends to monitor the application of this Article in the light of market developments and shall review the situation after two years to see if it is necessary to further specify relevant conditions23. ESMA may also issue guidelines to ensure a consistent assessment of delegation structures across the European Union24.

Compliance with these requirements will entail (a) ensuring that the delegation agreement affords sufficient oversight powers to the AIFM and that the delegation only pertains to portfolio or risk management and not both; and (b) ensuring that the AIFM has the necessary expertise and resources to show substance and documenting this appropriately.


In summary, the existing delegation model should continue to be effective for non-UCITS, under AIFMD but compliance with the relevant requirements contained in the Regulation will entail amendment to existing contractual agreements and extensive additional documentation evidencing how the applicable requirements are being met.




[1] Point 20, Preamble to Directive 2011/61/EU
[2] Section 3, Article 20, of Directive 2011/61/EU
[3] Section 3, Article 20, of Directive 2011/61/EU
[4] Articles 75-82 of the Regulation
[5] Article 75 of the Regulation
[6] Article 75 (f) of the Regulation
[7] Article 20 (1) (a), Directive 2011/61/EU
[8] Article 76 (1) of the Regulation
[9] Article 77 (2) and (3) of the Regulation
[10] Article 78 (2) of the Regulation
[11] Article 78 (3) (b) of the Regulation
[12] Article 79 (a)-(c) of the Regulation
[13] Article 20 (2) (b), Directive 2011/61/EU
[14] Article 80 of the Regulation
[15] Article 20 (2) (b), Directive 2011/61/EU
[16] Article 80 (2) and (3) of the Regulation
[17] Article 20 (4), Directive 2011/61/EU
[18] Article 81 (1) of the Regulation
[19] Article 81 (2) of the Regulation
[20] Article 20 (3) ), Directive 2011/61/EU
[21] Article 82 (1) of the Regulation
[22] Article 82 (1) (d) of the Regulation
[23] Article 82 (2) of the Regulation
[24] Article 82 (3) of the Regulation




Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Partners
    7. Opportunities at AIMA
    8. AIMA’s 25th anniversary in 2015
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA Annual Reports
    2. AIMA Governance
    3. AIMA Logo
      1. Policy note
    4. AIMA Members' List
    5. AIMA Review of the Year
    6. Committees and Working Groups
    7. Weekly News
    8. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Private Placement Regime
        1. Canada
        2. Dubai
        3. Finland
        4. Germany
        5. Hong Kong
        6. Japan
        7. Saudi Arabia
        8. Sweden
        9. United Arab Emirates
      6. Systemically Important Financial Institutions ('SIFIs')
      7. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      8. Shadow Banking
      9. Volcker Rule
      10. Other
      11. Systemic Risk Reporting
      12. Dealing Commission
      13. Corporate Governance
      14. Securitisation
    2. Markets Regulation
      1. Algorithmic and High Frequency Trading
        1. EU Automated Trading
        2. US Automated Trading
      2. Benchmarks
      3. Capital Markets Union
      4. Derivatives/Clearing
        1. BCBS - IOSCO
        2. EMIR
        3. Dodd-Frank Act Title VII
        4. Hong Kong
        5. MiFID II / MiFIR - Derivatives
        6. Singapore
      5. Market Abuse
      6. MiFID II / MiFIR
      7. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      8. Recovery and Resolution
        1. EU
        2. CPSS-IOSCO
        3. Financial Stability Board
      9. REMIT
      10. Securities Settlement
      11. SFT reporting & transparency
      12. Short Selling
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FIN 48 and IAS 12
      5. Financial Transaction Tax (FTT)
      6. UK Investment Management Exemption (IME)
      7. UK Offshore Funds Regime
      8. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. Bank/Capital Regulation (including NSFR)
        4. BEPS
        5. CFTC Registration and Exemptions
        6. Corporate Governance
        7. Dealing Commission
        8. Derivatives
        9. FTT
        10. High Frequency Trading
        11. MiFID / MiFIR
        12. Other Hot Asset Management Topics
        13. Other Hot Markets Topics
        14. Other Hot Tax Topics
        15. Position Limits
        16. Trading
        17. UCITS
        18. UK Partnership Tax Review
        19. US State and Local Taxes
        20. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Glossary
    11. Cyber Security Resources
  8. Events
    1. AIMA Events
      1. AIMA Annual Conference
        1. 2015 Conference - Agenda
        2. 2015 Conference - Charity Dinner
        3. 2015 Conference - Videos
      2. AIMA's Global Policy and Regulatory Forum
        1. 2015 Forum - Review
        2. 2015 Forum - Photos
        3. 2015 Forum - Agenda
        4. 2015 Forum - Sponsors and Supporting Organisations
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contacts
    5. Press Materials
    6. Photos of Jack Inglis