How Risk Management Drives AIFs – Spotlight On Real Estate Funds

• Jurisdiction: Luxemburgo
• Date: 08 June 2017

The financial crisis of 2008 has highlighted the importance of thorough risk management processes, especially in the real estate sector. For too long, risk management of real estate funds has been purely a qualitative exercise, owing to lacking data and lacking methods. As risks have become more and more complex and interrelated, this approach has reached its boundaries... while the risks have not reached theirs.

Besides portfolio management, risk management is the core business function of alternative investment fund managers (AIFMs). In this respect one of the main objectives of an AIFM is to establish and maintain a permanent risk management function as a central component of a sound internal control system. Such a system must, among other duties, have effective risk management policies and procedures in order to identify, measure, manage and monitor, on an ongoing basis, all the risks relevant to each AIF investment strategy and that each AIF is or may be exposed to.

AIFMD rules

The AIFMD requires fund managers to "put in place such risk measurement arrangements, processes and techniques as are necessary to ensure that the risks of positions taken and their contribution to the overall risk profile are accurately measured on the basis of sound and reliable data" (Article 45, Commission Delegated Regulation (EU) No 231/2013).

The AIFMD sets out the following principles and requirements (among others) for an AIFMD-compliant risk management function:

identification and risk profiling a risk management policy with procedures that enable the AIFM to assess each of his/her AIFs' exposure to market, liquidity and counterparty risks, as well as to all other relevant risks, including operational risks, that may be material calculation of leverage and other risk measures accurate measurement, on the basis of sound and reliable data, of the risk of (single) positions taken and their contribution to the overall risk profile establishment and implementation of quantitative risk limits aligned to risk profile and strategy and covering, at least, market, credit, liquidity, counterparty and operational risks monitoring and controlling of the adequacy and effectiveness of the risk management policy and related arrangements, processes and techniques implementation and documentation, by the AIFM, of appropriate liquidity management systems that monitor and manage the AIF's liquidity obligations, taking into consideration both assets and liabilities...