Alternative Investment Funds: An Industry Overview with a Deep Dive into Banking Solutions [whitepaper]

A Comprehensive Guide for Finance and Payment Professionals

Alternative investment funds (AIFs) have become a significant component of the global financial ecosystem, with continued growth across various sectors and strategies. How do these specialized investment vehicles manage the complex regulatory and compliance requirements that vary across jurisdictions? What barriers do fund managers encounter when attempting to establish reliable banking relationships? With traditional financial institutions often hesitant to service smaller funds in certain sectors or geographies due to perceived risk and compliance burdens, where can these funds turn for financial services? Find out the answers to these questions here.Download the full whitepaper (pdf) via the link below — no email required:

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Introduction to Alternative Investment Funds (AIFs) and Market Overview
Alternative Investment Fund Fees and Revenues
Regulation
Industry Challenges and Risks
Recomendations for Selecting a Banking Partner for an Alternative Fund

Introduction to Alternative Investment Funds (AIFs) and Market Overview

Alternative investment funds (AIFs) come in many forms, employ a variety of strategies, and invest in a dizzying array of assets. This combination may be daunting to newcomers, but according to Joel Coleman, founder of alternative fund manager Hay Mews Capital, this diversity is the sector’s main asset for investors. “AIFs offer access to a wide variety of asset classes – from property and infrastructure to private equity and debt – as well as a broad range of investing strategies. They’re incredibly varied, meaning you have the flexibility to choose a fund that’s aligned with your financial circumstances, goals, and approach to risk and values,” Coleman said in May 2024. But first, what are investment funds? Their core role is to pool capital from multiple investors in a portfolio of assets. And it's a big business. According to data from the European Central Bank, at the end of 2024, the total assets of investment funds in the 20-member Eurozone stood at €19.73trn, with equities (€695.8bn), with equities (€746.1.8bn) and debt securities dominating (€5.bn) the asset mix.

These funds can be divided into two types; firstly, undertakings for collective investment in transferable securities (UCITS) funds, which are marketed to retail investors and had total assets of €13.1 trillion at the end of 2023, according to the European Fund and Asset Manager Association’s (EFAMA) Fact Book (2024).The second type are AIFs, which are collective investment funds. These funds are not marketed towards the general public but they still have a small (less than 15% of net asset value, or NAV) amount of retail investor participation. ESMA data shows the 35,361 AIFs registered in the EU held around 36% of the trading bloc’s fund industry NAV at the end of 2022.According to the EFAMA Fact Book the AIF sector was roughly one third the size of its retail focussed peer with net asset values of about €7.5trn.Despite variety being one of the main attractions of AIF investment, it is possible to draw out some market trends.

Market Trends and GrowthAIFs have seen steady growth over the last decade; total NAV for the sector stood at €5.14trn in 2015, and a slight decline in 2022 it recovered well in 2023.The EU AIF sector may have taken a slight backward step in 2022 with net outflows of €60bn but it returned to muted health in 2023 and recorded net inflows of €54bn, which EFAMA attributed to Danish and Dutch pension funds reacting to regulatory changes.“The combination of net inflows and market appreciation resulted in a rebound of asset growth in 2023 following the 2022 decline. As AIFs have a lower exposure to equity than UCITS, their 2023 market appreciation was also somewhat lower, 7% compared to 10% for UCITS,” EFAMA said.

Distribution of AIF TypesAIFs can be split into five basic investment types. At the end of 2023, ‘other’ AIFs - a catch-all category which includes LDI, private debt,and commodity funds - dominated the sector with a 38% share. Next were multi-asset AIFs (25%), followed by real estate (13%), bond AIFs (12%) and equity AIFs (11%) (EFAMA, 2024).Despite the average NAV of AIFs standing at €200m, the sector is dominated by a few mega funds (with a NAV over €1bn). In 2022, AIFs with a NAV larger than €1bn accounted for less than 4% of all AIFs but for 51% of the NAV, according to ESMA.

Geographical Distribution of AIFsThe story of a small number of large funds dominating AIF NAV is also true in respect to fund location. “The AIF industry is concentrated in a few countries, with the top five accounting for 90% of the NAV. In 2022, Germany remained the country with the largest AIF industry in the EEA30 (32%), followed by Luxembourg (24%), France (14%, stable) and the Netherlands (10%),” ESMA said.Germany also leads the list of biggest owners of AIF assets, according to EFAMA, which said at the end of 2023 Germany held just over 20% of total European AIF assets, ahead of the UK (13.7%) and France (11.3%).There is a greater diversity depending on the underlying investment strategy of the AFM. Funds of funds (FoF) tend to be domiciled in jurisdictions with a large fund management industry. This means that countries like Germany, Ireland, France, and Luxembourg, dominate the FoF segment and collectively account for 78% of that segment’s NAV. Hedge fund AIFs are mostly found in Ireland and Luxembourg, with the two countries holding a combined 74% of the sector’s NAV.Luxembourg is also a leading domicile for PE funds, along with France it accounts for 72% of this fund segment's domicile. The outliers are real estate funds and ‘other’ AIFs, which are more evenly distributed. Two of the main centers for registered AIFMs are Luxembourg and Malta. According to data from Luxembourg's regulator, The Commission de Surveillance du Secteur Financier, in its sector survey (2023), the principality is home to a large number of smaller-sized AIFs, with 63% of its 9019 AIFMs recording a NAV of less than €100m.

Who are the investors in AIFs?It’s difficult to find precise data on the investor mix of AIFs but the EFAMA Fact book says that institutional investors are the single most important group for fund managers, both in the UCITs and alternatives sector. Insurers and pension funds held around €4.4bn of UCITs and AIF investments at the end of 2023, according to EFAMA, or roughly 32.3% of the total. Households with €3.6trn, or 25.9%, were the next largest group.

Alternative Investment Fund Fees and Revenues

Typically, fund managers make profits by charging a fee for managing the assets; these vary by manager and the underlying asset class, but they are typically higher than for more general funds given the more bespoke nature of alternative investing. Hedge fund managers are well known for a ‘2+20’ approach to fees. This breaks down into a 2% of AUM charge to pay expenses such as salaries and a 20% performance fee allocated to pay the fund's key executives and portfolio managers.Fees are typically higher for Fund of Funds AIFs. They charge more as they typically invest in an underlying basket of hedge funds and then charge an additional management fee over the top. In contrast, data from ESMA shows that the average fee for UCITs exchange-traded equity funds, which are generally the cheapest way to access stock markets, was 0.4% in 2023. AIFs are intended to bring portfolio diversity and, therefore, reduce the volatility of an investor's overall returns compared with investing entirely in stocks and bonds, in addition to aiming for higher returns than mainstream investment funds. Typically, actively managed stock market or fixed-income funds target a return that is a certain percentage ahead of the underlying benchmark, such as the EURO STOXX 50 or the Bloomberg Global Aggregate Index. Alternative funds often take an ‘absolute return’ approach, which seeks to make returns for investors irrespective of the underlying market performance. One such vehicle is the Cantor Fitzgerald Alternative Investment Fund. “It is a process-driven absolute return fund. The fund may hold cash from time to time in order to protect capital. The fund does not reference a benchmark; instead, it targets a return in excess of 7% per annum for the investor, notwithstanding how equity markets perform,” the fund said on its website.

Regulation

The European Union introduced the Alternative Investment Fund Managers Directive (AIFMD) in July 2013 to create a harmonised regulatory framework for alternative funds distributed within the trading bloc. AIFMD was a reaction to the 2008 Financial Crisis and the perception that lightly regulated alternative investment funds had fueled the crisis. Its successor directive AIFMD II was passed by the European Parliament in March 2024 and will come into effect on 16 April 2026.The directive applies to all fund managers operating in the EU, irrespective of where their underlying assets are located.Scope and Application of AIFMDContrary to the UCITS directive, which covers investment vehicles aimed at retail customers and provides prescriptive rules over the products they sell, AIFMD is focused on the fund management companies themselves. This reflects the far greater diversity in the AIF sector relative to UCITs and is intended to avoid the bureaucratic burden of creating a common set of product-specific rules for each AIF category.Flexibility and LeverageUnder AIFMD, alternative fund managers also have greater room to use leverage, and they can invest in a broader range of asset types, including underlyings such as commodities, mortgage-backed securities, and infrastructure.PassportingThe directive also enables what is known in EU financial jargon as ‘passporting.’ In theory, this allows for funds in one member state to be marketed and sold in another without any further regulatory hurdles, but leading law firm CMS said in a recent report that the reality is more complex. “The EU Commission promoted passporting rights as one of the key benefits for hedge funds, private equity, real estate, and other alternative investment fund managers authorised under AIFMD. However, we are now experiencing impediments to the passporting rights as certain domestic regulators are imposing ‘border controls’, and fund managers need to pay fees and comply with various other requirements in order to market their funds cross border,” said CMS. Reporting RequirementsAIFs are required to file reports to the regulator in the country they are domiciled annually, covering details such as pay, assets, as well as filing a full set of accounts. Funds with an AUM which is below the threshold are not required to report to regulators, but they still need to register with authorities. In EU parlance, the above threshold funds are referred to as ‘Authorised AIFMs,’ whereas those below this level of AUM are known as ‘Registered AIFMs.’AIFMD II: Upcoming ChangesThe EU’s approach to regulating AIFMs is being overhauled with AIFMD II entering into application in the first quarter of 2026.According to French Bank Société Generale, the latest iteration of AIFM is ‘an evolution more than a revolution.’ While the EU regulation contains Brexit-inspired provisions over the derogation of investment authority, it also includes rules on more general regulatory concerns such as liquidity risk management and loan exposures.“Among the key elements, the amending directive modernizes the framework for liquidity management tools, clarifies the EU framework for funds that provide loans to companies, and introduces enhanced rules for delegation by portfolio managers to third parties. It does not alter the requirement that the depositary must be located in the country in which the fund is domiciled, even though it grants exemptions to certain States,” Société Generale said. One such state is Malta, according to local law firm Mamo TCV. In its April 2024 analysis of AIFMD II, it said the latest version of the regulatory framework could give a give a fillip to the island state’s Malta’s alternative investment industry as locally domiciled AIFMs can now choose a banking provider (depositary) from another EU state. “Compliance with these new requirements could boost investor confidence, attracting more institutional and professional investors to Maltese AIFs managed by Maltese AIFMs whilst being able to choose an EU depositary outside of Malta,” Mamo TCV said. Depositary RequirementsUnder AMFID II, authorised AIFMs are required by the EU to appoint an entity to manage its cash flows - an independent depositary in regulatory jargon - for each investment fund it manages.The depositary can be an EU credit institution, or investment firm, or institutions entitled to act as a UCITS depositary, and these depositaries must be established in the home member state of the AIF. Meaning a Luxembourg-based fund manager must use the services of a local firm to manage its cash. Authorised firms in Malta may now have greater flexibility over EU depository regulations, but Neil Ambikar, CFO and Co-founder of Finnish electronic money institution Narvi, said that registered outfits in the majority of EU member states will face a challenge in obtaining a fundamental business requirement – banking services. “The problem a lot of registered alternative fund managers, whose NAV is below the €100m regulatory threshold, face is that banks don't really want to work with them because the compliance work for smaller funds is just as complicated as for larger alternative fund managers. It might take several months for a bank to onboard these companies, and the amount of compliance involved in maintaining these accounts makes them unprofitable,” Ambikar said. Narvi Payments can work with registered alternative fund managers; as a Finnish electronic money institution, it is not technically a bank, and it is able to provide depositary services for AFMs with an NAV of just a few million euros.

EU AIF Regulatory Timeline 2025 Preparing to meet the requirements of AIFMD II which comes into force in 12 months is set to be the headline regulatory challenge for EU AIFs in 2025 but it’s far from the only one. Digital assets like bitcoin and private debt have been two of the headline stories from the financial services sector over the last decade and half and this year EU policy makers are looking to coral both sectors with strong rule sets. AMLA goes live In July 2025 the EU’s brand new Anti Money Laundering Authority (AMLA) goes live, tasked with enforcing the current AML rule and drawing up a new set.Scrutiny over AIFs KYC procedures and AML procedures is set to increase.DORA (The Digital Operational Resilience Act)All financial services firms, including AIFs, had to implement the Digital Operational Resilience Act (DORA) on 17 January 2025 . Dora is the EU’s response to the increasing reliance on information and communication technologies (ICT) but financial firms, as well as a growing web of interconnectedness between them and their service providers. In a world of rising cyber risks expect Dora to be strengthened again in the future. Markets in Crypto-Assets (MICA)The EU doubled down on digital regulation in 2025 - on 30 December 2024 it brought in the Markets in Crypto-Assets (MICA) directive. As with DORA, MICA applies to the whole financial services ecosystem, and represents a significant overhaul of KYC and AML rules for all crypto asset investors, AIFs included. EU AI ACTChatGPT only emerged in 2022 but in a sign of the blistering pace of change that AI has brought, the EU has already drawn up a set of rules for managing digital technology - the AI ACT. Research from ESMA shows that more than half of fund managers already use, or are thinking about using AI, in their work meaning this legislation should be of great interest to the sector. T+1 settlementThe US made the switch to T+1 settlement in 2024 and in February the EU Commision announced that the EU, in line with Switzerland and the UK, European markets would move to T+1 in October 2027. According to the industry capital market association AFME, the move from a settlement two day settlement cycle (T+2) to a single day (T+1), reduces the available post-trade processing time by approximately 83%, from 12 hours to 2 hours. The solution to the compressed settlement time is increased automation and longer working hours for back office staff which will disproportionately affect AIFs which are run by small numbers of staff. The list of asset classes affected by the move to T+1 one includes a large number which AIFs are heavily exposed to such as: listed equities, fixed income, ETFs, ABS - including CLOs and structured products, warrants, and money market instruments. ESMA consultation on open-ended loan originating AIFs As part of the revised Alternative Investment Fund Managers Directive (AIFMD II), the European securities regulator is consulting on open-ended loan originating AIFs, with results expected in March. The move is part of increasing regulatory scrutiny of the private debt sector which has grown in the post-Financial Crisis period to have assets under management globally of $1.6trn.

Industry Challenges and Risks

Given the nature of AIF business the core challenge is market risk – that the fund manager experiences losses due to factors that affect the overall performance of the financial markets.Market Risk and Its Impact on AIFsFor funds which adopt the ‘2 and 20’ approach to charges, a fall in the value of the underlying investment will reduce the amount of management fees they receive. Major falls in asset values could threaten the viability of the fund, and the recent move by the EU to overhaul the AIFMD framework was partly driven by fears that misuse of leverage by fund managers could threaten financial stability - a key post-GFC concern for global regulators. The global rise in interest rates during 2022 was cited in the ESMA’s latest AIFMD risk assessment, which focussed on the potential risks posed by real estate funds. The European securities regulator found that while there was a limited exposure at an individual fund level, they posed a potential systemic risk in countries where they own a large chunk of the overall property market. “This is the case in Ireland where the Central Bank of Ireland (CBI) imposed leverage limits for those funds,” the ESMA report said. The largest chunk of the AIF market - others - is also of interest to regulators in particular liability-driven investment (LDI) funds, which gain leveraged exposures to the UK government bond market, which experienced severe short-term volatility following the disastrous mini budget by the UK short-lived Prime Minister Liz Truss. “Following the severe stress experienced by LDI funds in September 2022, authorities in Luxembourg and Ireland communicated on the suitable levels of resilience those funds should maintain,” the ESMA report said. Banking Issues and Solutions for Registered Alternative Fund ManagersUnlike traditional lenders, which often require new accounts to be opened at a physical address, a process which Ambikar said is often paper-based and can take several months, Narvi offers a totally digital onboarding process over a much condensed time frame.Narvi is also able to offer banking service to another type of fund manager which can find banking challenging – securitisation funds. These are special-purpose entities that sit outside of AIFMD. Malta has adjusted its financial legal framework so that an AIF can only be constituted as a collective investment scheme.“[This] leads to a situation whereby under Maltese law, a securitisation vehicle cannot be an AIF (since it is not a collective investment scheme) and thus falls outside the licensable remit of the AIFMD. The above has allowed fund managers to structure certain parts of their business and services in a more flexible manner,” said Dutch compliance specialists TMF Group.The greater flexibility offered by the Maltese framework provides options for securitisation vehicles domiciled on the island, but the process of finding a traditional banking services provider in other jurisdictions can be complicated, said Ambikar.“These entities face similar issues with banks as registered alternative investment funds. Because they sit outside the AIFMD regulatory framework, it provides a compliance headache for traditional banks, but Narvi is able to serve them. The same is true of private alternative investment funds - such as ones which are providing services to friends or family. The rough rule of thumb is if you are not marketing the fund then it doesn’t need to be regulated. Which in turn leads to issues over obtaining banking services,” said Ambikar. Benefits of Narvi’s Digital Onboarding and Compliance SolutionsNarvi Payments offers 10-minute digital onboarding, which means clients, when approved by the compliance department, have remarkably fast access to a bank account. This account can also have three or four admin users and as many IBANs as required so that all investment funds can be managed separately. “Each of the IBANs will generate its own bank statement; they are completely segregated, and it's effectively the same as having multiple bank accounts. Narvi also provides users with API so clients can automate the bank account into their platform,” said Ambikar. Narvi is headquartered in Euro Zone member Finland, which allows for effortless money transfer throughout the single market and all accounts are able to receive funds in dollars and pounds, as well as offering the ability to make payments in 60 different currencies. Each account also comes with its own relationship manager, which Ambikar said enables compliance issues to be resolved smoothly. “Narvi has really strong AML and compliance teams with a lot of experience at large traditional and neo banks. What is different is that Narvi provides a private banking level of service that enables us to give a view on a compliance issue in a few hours via a tailor-made and customised approach,” Ambikar said.

Narvi's Comprehensive Banking SolutionsNarvi, a Finland-regulated Electronic Money Institution (EMI), offers a range of banking solutions tailored to the needs of alternative investment funds. Our digital onboarding process ensures quick and efficient access to banking services, including the ability to generate multiple IBANs for separate investment funds. Here are some key features of our business banking solution:

Global Payments with Zero Hassle: Send and receive SEPA and SWIFT payments in 100+ countries in a variety of currencies with a dedicated Finnish euro IBAN without delays.
Simple, Fast Onboarding: Apply for an account online in under 10 minutes. Paperwork reduced to a minimum.
Secure and Personalized Support: Enjoy robust security (2FA, multi-user access) and support from real people, not bots.
Integrated Financial Services: Integrate our API from day one for seamless financial operations.
Transparent, No Hidden Fees: Full regulatory compliance under Finnish law and a clear fee list.

AIF representatives are invited to explore Narvi’s banking solutions and book a demo via the link below:

The Way Forward for AIFs in 2025

The Alternative Investment Fund (AIF) sector continues to evolve rapidly, presenting both opportunities and challenges for fund managers and financial professionals. The industry may have seen a return to net inflows but it is navigating an increasingly complex regulatory landscape, particularly with respect to digital assets. The establishment of the EU’s bespoke AML watchdog also heralds increasing scrutiny of AIFs transactions given their private ownership structure and investment strategies. As the industry navigates complex regulatory landscapes, volatile market conditions, and increasing operational demands, the choice of banking partner becomes increasingly critical.Actionable Recommendations when Selecting a Banking Partner for AIFsFor CEOs and CFOs:

Consult Legal and Accounting Departments:
- Action: Consult your legal or accounting department to ensure that the potential business banking service is suitable for your AIF given the evolving regulatory landscape.
- Benefit: This ensures that the banking service aligns with your regulatory and operational needs, avoiding potential compliance issues, fines and regulatory censures.
Conduct Thorough Due Diligence:
- Action: Conduct thorough due diligence on potential banking providers to assess their financial stability, regulatory compliance, and service reliability.
- Benefit: This ensures that you choose a banking provider that is reliable and meets your operational and compliance needs.
Assess Compliance Obligations:

Action: Evaluate the latest EU AML and KYC regulations and assure yourself the banking partner meets these
Benefit: Ensures that you are meeting all the compliance regulations which can being fines and actions from authorities

Assess Integration Capabilities:
- Action: Evaluate the integration capabilities of potential banking providers to ensure they can seamlessly integrate with your existing financial systems and processes.
- Benefit: This improves operational efficiency and reduces the risk of disruptions in financial operations.

For Business Development and Chief Investment Officers:

Diversify Banking Relationships:
- Action: Consider diversifying your banking relationships to include both traditional banks and neobanks to mitigate risks and enhance flexibility.
- Benefit: This provides a safety net and allows you to leverage the strengths of different banking providers.
Asses Crypto Exposures

Action: Evaluate your AIFs current crypto exposures and what regulatory issues this could bring.
Benefit: Ensures your operation is up to date with the latest crypto regulation.

3. Align Banking Services with Investment Strategies:

Action: Ensure that your banking providers support your chosen investment strategy and provide the services across the asset classes you invest in.
Benefit: This ensures that your investment strategies are optimized and that you are taking full advantage of the banking services available to you.

Engage with Regulatory Bodies:
- Action: Engage with regulatory bodies and industry associations to stay informed about upcoming regulatory changes and industry trends in AML and crypto.
- Benefit: This helps in proactively addressing regulatory challenges and staying ahead of industry developments in a volatile environment.

For Operations and Compliance Officers:

Implement Robust Compliance Frameworks:
- Action: Implement robust compliance frameworks to ensure adherence to evolving regulatory requirements and over digital assets, and KYC and AML.
- Benefit: This helps in avoiding regulatory penalties and maintaining the trust of investors, stakeholders, and regulators.
Monitor Regulatory Changes:
- Action: Continuously monitor EU and global regulatory changes and updates to ensure that your banking providers and internal processes remain compliant.
- Benefit: This ensures that you are always in compliance with the latest regulatory requirements from global and regional bodies.
Enhance Data Security Measures:
- Action: Enhance data security measures by implementing advanced security protocols, conducting regular security audits, and choosing a business banking service that has robust security features developed.
- Benefit: This protects sensitive financial data and ensures the security of your banking operations in an era of spiraling cyber risk.

To explore Narvi's banking solutions for AIFs, book a demo via the link below:

Updated April 30, 2025Author: Aaron Woolner is a financial journalist with over a decade of experience covering banking, insurance, fintech, and regulatory topics. Having led editorial teams at prominent publications like Capital.com and Asia Risk, Aaron delivers informed and compelling insights from across Asia and Europe.

Narvi Payments Oy Ab is an Authorized Electronic Money Institution (EMI). Narvi’s EMI license is granted by the Finnish Financial Supervisory Authority (FIN FSA) with the registration number 3190214-6. Narvi’s license is Passportised to all European Union countries.

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