Summary
AIFMD II: harmonisation or divergence?
In the corporate world, the AIFMD II comes in at the start of Q2, meaning that there is less than a quarter to finalise change management projects.
AIFMD II arrives with familiar ambitions: strengthen investor protection, improve financial stability, and tidy up a regulatory framework that has grown uneven across Member States. On paper, it looks incremental. In practice, for hedge funds and asset management groups operating across the EU and UK, it is anything but.
What AIFMD II really does is lock in post-Brexit realities while subtly shifting the centre of regulatory gravity back towards control, substance and liquidity. For international groups, particularly those managing complex strategies across public and private markets, the directive forces questions about operating models that have been left largely untouched since 2019.
Core themes
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Delegation
Delegation is not restricted under AIFMD II, but it is reframed as a supervisory risk indicator rather than a benign operating choice. The directive expands reporting on delegation arrangements, requiring granular disclosure of:
- which portfolio management and risk management functions are delegated,
- to whom (including sub-delegates),
- for how long,
- and over what proportion of assets and FTE resources.
While the legislation stresses that delegation data is not, in itself, evidence of insufficient substance, it is clear the direction of travel is that EU regulators want visibility, comparability and leverage to challenge group models.
For non-EU-headed groups with EU AIFM subsidiaries, it’s important to be vigilant of group operations. Investment authorities that sit de facto in London but de jure in the EU will increasingly be tested through:
- governance minutes,
- escalation records,
- risk oversight evidence,
- and local decision-making capacity.
This is less about “letterbox entities” in the crude sense, and more about whether EU AIFMs can credibly demonstrate independent judgement, particularly in volatile or specialised asset classes.
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Liquidity risk management
The directive introduces a mandatory framework for liquidity management tools (LMTs), requiring open-ended AIFs to:
- pre-select at least two LMTs from a harmonised list,
- embed them in fund documentation,
- and be operationally ready to deploy them.
This aligns closely with IOSCO and ESRB thinking but can be seen as a philosophical divide with the UK, where the FCA’s CP25/38 focusses on liquidity reality. The FCA explicitly challenges the assumption that daily dealing is always appropriate, particularly where portfolios include less liquid listed securities, small-cap equities or assets with episodic liquidity.
Where the EU approach embeds LMTs as a systemic safeguard, the UK approach is more overtly behavioural: discouraging first-mover advantage, interrogating fund design, and implicitly questioning distribution models that normalise liquidity mismatch.
For international groups, the challenge will be common application cross-jurisdictionally:
- EU AIFMD II focuses on harmonisation and supervisory tools,
- the UK focuses on outcomes, governance judgement and consumer impact.
This can result in dual liquidity narratives for similar strategies and firms must be mindful of this in practice.
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Private credit and loan origination
One of the most material substantive changes in AIFMD II is the formal regulation of loan-originating AIFs.
For managers active in private credit, infrastructure debt or asset-backed lending, AIFMD II introduces:
- leverage caps differentiated by fund structure,
- borrower concentration limits,
- mandatory risk retention,
- and constraints that effectively curb pure originate to distribute models
This signals a more prescriptive EU approach to private credit, reflecting concerns about scale, leverage and interconnectedness rather than treating it solely as an alternative funding source.UK regulation, by contrast, remains principles-based and fragmented across existing regimes.
For cross-border groups, this creates:
- structural divergence between EU and UK private credit products,
- pressure to run parallel strategies with different risk parameters,
- and complexity in investor messaging for “similar” funds that are no longer substantively aligned.
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Depositary and cash monitoring
AIFMD II also strengthens and clarifies depositary oversight, particularly around: cash monitoring, complex asset flows and cross-border custody arrangements.
For hedge funds trading across listed and OTC markets, and for managers with energy, infrastructure or real-asset exposure, this is likely to translate into higher depositary scrutiny, longer onboarding and increased operational friction.
While framed as investor protection, the practical impact is cost and delay, particularly where structures involve SPVs, commodity flows or non-standard settlement mechanics.
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Reporting and data: operational divergence
AIFMD II expands the scope for supervisory reporting and gives ESMA greater power to standardise templates and data fields. The stated goal is efficiency and reduced duplication, but for international groups, the reality is more nuanced. However, detailed RTS and ITS on reporting formats are not due until 2027, meaning reporting change will land later than other AIFMD II reforms.
EU reporting is becoming more granular, more centralised and more comparable across Member States.
UK reporting, meanwhile, is evolving independently, with a strong emphasis on usefulness over volume.
For firms, this means:
- increased reliance on data infrastructure – getting the basics right,
- reconciliation between EU and UK datasets,
- and higher structural compliance costs, rather than transitional change management alone.
Does AIFMD II bring the EU and UK closer together? On substance, no. On outcomes, sometimes.
Both regimes are converging around liquidity realities when it comes to investor outcomes, governance accountability, and systemic risk awareness. But they are diverging in regulatory philosophy.
The EU is looking at rules to ensure consistency across 27 Member States. The UK is leaning into discretion, supervision and behavioural change, particularly under the Consumer Duty and liquidity reforms.
For international groups, this means AIFMD II formalises divergence while narrowing the space for informal workarounds.
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AIFMD II and the acceleration of technology dependency
One of the more understated consequences of AIFMD II is how sharply it raises expectations around demonstrability.
Delegation, liquidity risk management and supervisory reporting are not new concepts. What changes under AIFMD II is the regulator’s ability and intent to require firms to evidence, with precision, how those controls operate in practice and under stress.
For many international asset managers, this exposes a structural weakness. Operating models are often heavily manual, fragmented across multiple systems, or reliant on informal governance processes that are difficult to evidence retrospectively. Under AIFMD II, those models become harder to defend.
Enhanced delegation reporting requires EU AIFMs to demonstrate not only where functions are delegated, but how oversight is exercised on an ongoing basis. That means being able to show monitoring of delegates, escalation and challenge, decision-making at EU entity level, and continuity of control during periods of market stress. For UK–EU groups in particular, this increasingly pushes firms towards integrated governance, risk and oversight tooling, not because technology is mandated, but because manual oversight does not scale under supervisory scrutiny.
The same dynamic applies to liquidity risk management. AIFMD II’s requirement to pre-select and operationally embed liquidity management tools reflects a broader regulatory shift reinforced by IOSCO guidance and recent FCA consultation away from reactive intervention and towards ex ante liquidity preparedness. Liquidity management under stress depends on timely portfolio-level data, scenario analysis that captures both redemption and non-redemption pressures, and governance frameworks that allow tools to be activated quickly, consistently and defensibly. Where liquidity data is fragmented across portfolio systems, risk tools and administrator reporting, firms face real challenges meeting those expectations across multiple funds and jurisdictions.
As a result, AIFMD II indirectly accelerates demand for consolidated data architectures, integrated liquidity analytics and systems that link portfolio composition, investor behaviour and governance decision-making. This is less about innovation, and more about operational resilience through coherence.
AIFMD II also intersects with a wider regulatory focus on outsourcing and third-party risk. As AIFMs rely more heavily on administrators, risk engines, liquidity tools and analytics providers, regulators are paying closer attention to dependency risk, data integrity and the AIFM’s ability to oversee outsourced functions effectively. Technology often becomes the solution to AIFMD II’s operational demands, but it also becomes part of the regulatory risk landscape itself.
In that sense, AIFMD II does not simply drive technology adoption. It raises the bar for how technology is selected, integrated and governed and exposes operating models where systems add complexity rather than control.
Final thoughts
The key impact of AIFMD II is that it raises the evidentiary bar for defending current operating models.
Firms will need to:
- reassess delegation and governance substance,
- revisit liquidity assumptions embedded in fund design,
- segment strategies more clearly by jurisdiction,
- and accept that regulatory arbitrage is becoming less defensible.
Those who use the updated legislation as a prompt to rationalise structures, clarify authority and align liquidity with reality will be better placed not just for EU supervision, but for the next phase of UK reform as well.
