Alternative Investment Funds (AIF)

Depending on the legal form, number of participants, and structure, the following types of AIF are distinguished:

AIF with Unlimited Number of Persons. They assume the possibility of attracting an unlimited number of investors, including retail investors. They are subject to more detailed regulation and thorough supervision by CySEC. Additional requirements are established for information disclosure, risk management, portfolio composition, etc. Advantages: high protection of investors’ interests, a wide base of potential contributors, which simplifies capital attraction.

AIF with Limited Number of Persons. The number of investors in the fund is limited by legislation (up to 50 or 75 people, depending on specific regulations). Less stringent requirements for public disclosure of information compared to funds for an unlimited number of persons. Typically aimed at professional and qualified investors with a deep understanding of risks. Advantages: lower costs for compliance and reporting, flexibility in choosing strategies and investment instruments.

Registered AIF, RAIF. Registration with CySEC without the need to obtain a full licence at the fund level, provided that management is carried out by a licensed AIFM manager. The creation procedure is usually faster and simpler, as CySEC conducts checks on the management company rather than the fund itself. Advantages: short time to market and fewer bureaucratic procedures, a wide range of assets, and flexibility in structure.

Umbrella funds. One fund can be divided into several sub-funds, each with its own investment policy and asset classes. Allows risks and reporting to be separated across different strategies within a single legal structure. Advantages: the ability to switch between different sub-funds within one umbrella AIF, diversification.

Self-Managed AIF. The fund can make decisions on asset management without involving an external AIFM manager if the volume of assets does not exceed the established threshold values (usually 100 million euros or 500 million euros under certain conditions). Advantages: greater autonomy in decision-making and reduced management fees, quick response to market changes.

To choose the appropriate format, it is important to consider the specifics of the business, the profile of investors, and the level of risks. At the same time, quality legal support and professional management are key factors for the success of any investment fund.

Before starting the registration procedure, it is important to clearly determine the type of fund. AIF is suitable for more flexible strategies, aimed at both professional and retail investors. UCITS is under strict EU regulation, primarily designed for retail investors, and implies strict restrictions on the composition of assets and diversification.

It is also necessary to determine the legal form. A limited liability company can act as a fund. Limited Partnership is particularly popular for private equity funds and venture projects. Another permissible form is a unit trust.

The next stage is the preparation of the business plan and internal documentation. In the investment strategy, it is necessary to determine which assets will be acquired, the risk profile, geographical coverage, and the planned investment horizon. In the business plan, it is necessary to assess the volume of capital to be raised, the expected profitability, the expense structure, conduct an analysis of the fund’s competitive advantages, and the anticipated circle of investors.

As for internal regulatory documentation, first of all, it is necessary to draft the Fund Rules, regulating operations, the calculation of net asset value (NAV), and the procedure for profit distribution. It is also necessary to develop mechanisms for client identification (KYC) and the prevention of the fund’s use for illegal activities.

Then it is necessary to register the legal entity with the Department of Registrar of Companies, prepare the Articles of Association and Memorandum of Association. The Articles of Association outline corporate rules: rights and obligations of participants, the board of directors, decision-making procedures, etc.

After that, it is necessary to submit an application to CySEC and attach the following documents:

For UCITS and most AIF, a licence is issued confirming the right to operate the fund. For RAIF, registration takes place, where the key person is considered to be the licensed manager.

To allocate capital, receive investments, and conduct transactions in financial markets, it is necessary to open a bank account. After this, it is necessary to proceed with organising the technical infrastructure (platforms for accounting and asset management, NAV calculation system, reporting channels for investors). And the final and main stage is attracting investors.

Funds are required to provide investors with accurate and up-to-date information about their activities, asset structure, risks, and expenses. The information must be presented in an accessible form (prospectuses, reports, brochures, personal accounts on the fund’s website, etc.) so that investors can adequately assess how the fund’s strategy aligns with their goals and level of risk tolerance.

Mailings, webinars, personal consultations, and responses to investor inquiries help maintain feedback and promptly respond to changes in market conditions and investor expectations. Special communication channels may be available for large or institutional clients (banks, insurance companies, pension funds).

Investors must have the opportunity to ask questions or file a complaint with the management company, and if necessary, contact the regulator or go to court.

Funds must disclose the following information to investors: the fund’s objective and strategy, fees and expenses (management fee, performance fee, depository, audit, etc.), risk reports, special notifications (change of management company, change of investment mandate, fund restructuring).

Investment funds are required to regularly provide CySEC with reports on their activities, including audited annual financial statements, quarterly/semi-annual financial results, and information on capital. In the event of significant changes (change of manager, change in shareholder composition, new investment policy), CySEC must be notified immediately.

CySEC can conduct both scheduled and unscheduled inspections to ensure the fund complies with all legal regulations, EU directives, and internal rules. Non-compliance may result in sanctions: fines, suspension, or revocation of the licence.

Regulation of Alternative Investment Funds (AIF) in Cyprus is not standing still. In light of updated European directives and local legislative initiatives, the Cyprus Securities and Exchange Commission (CySEC) continues to improve the regulatory framework.

The “AIFMD II” project provides clearer rules for new and existing categories of AIF, including funds engaged in lending (loan originating funds). Licensing requirements and minimum capital necessary for such specialised AIF are being clarified, as well as additional measures for risk management and borrower rights protection are being introduced.

CySEC introduces new requirements for the structure and frequency of reporting for AIFs and management companies (AIFM). The updated reporting forms are standardised with European standards, which should simplify interaction with regulators in other EU countries. The reports include expanded sections dedicated to the disclosure of the nature of assets, risk concentration, credit quality (in the case of credit funds), and hedging measures.

European regulators are implementing the provisions of the “Sustainable Finance Disclosure Regulation” (SFDR) and related standards, which impose obligations to disclose information about the social and environmental impact of investments. Management companies are advised to analyse and manage ESG risks (environmental, social, and governance) alongside traditional market and credit risks.