Alternative Investment Funds (AIFs) vs. Actively Managed Certificates (AMCs): A Comparative Analysis for Digital Asset Managers

Introduction

In the world of asset management, the choice of investment vehicles is crucial. In Europe, two popular options are Alternative Investment Funds (AIFs) and Actively Managed Certificates (AMCs). Both have their unique advantages and disadvantages. Understanding these differences can help digital asset managers make informed decisions. This blog post will explore the key differences between AIFs and AMCs, focusing on their cost structures, subscription processes, investable assets, and reporting/administration differences.

TL;DR Comparison

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Alternative Investment Funds

The Alternative Investment Fund (AIF) functions as an investment fund with the flexibility to allocate capital across various asset classes. It is exempt from requiring approval from CSSF (Commission de Surveillance du Secteur Financier). AIFs are obligated to select an accredited external Alternative Investment Fund Manager (AIFM). Since this AIFM is based within the European Union, AIF possesses the capability to use a specialized passporting process to offer their shares, units, or partnership interests to knowledgeable investors throughout the EU.

Setup

Establishing an Alternative Investment Fund (AIF) in Luxembourg requires a few steps. Initially, it is necessary to secure a fund manager license as per the AIFM Directive. An efficient approach to accomplish this is by forming a SARL (Société à responsabilité limitée), a private limited liability company, and obtaining the license, enabling the SARL to function as the General Partner (GP) of the newly constituted fund. 

After this, the fund must be registered - or more accurately, notified - to the CSSF. The AIF may be constituted in different forms, but often it is set up as a Special Limited Partnership (SLP). An SLP is a contractual fund and has no legal personality.

On average, the entire procedure, from inception to final registration, spans approximately 4 months. (Note on the timing: it could be faster assuming all the documentation is reviewed and signed promptly, but from personal experience, in reality, it does take longer)

Costs

The financial aspect of setting up a AIF typically sees higher expenditures in the inaugural year, primarily due to initial setup costs which can range between $30k to $50k. Following the establishment of the fund, there are recurring yearly costs which greatly vary based on the chosen Fund Administrator. These ongoing costs could either be approximately $60k/year plus a commission on the fund's fees, or alternatively a flat fee of up to $80k annually. Therefore, potential fund managers should anticipate these costs when considering the establishment and operation of a AIF in Luxembourg. The chosen fee structure may vary depending on specific needs and the financial strategy of the fund (e.g. the higher the NAV calculation frequency, the higher the cost).

Operations

Custody

AIFs offer considerable flexibility as long as the chosen custody method is explicitly defined in the fund's offering memorandum. This could range from utilizing a cryptocurrency exchange, such as Binance or Kraken, to employing an institutional Multi-Party Computation (MPC) custody solution, examples being Fireblocks or Copper. The options extend to self-custody as well, where assets are stored directly in a cold wallet, or a hot wallet like Safe (formerly Gnosis Safe) or Metamask. This variety of custody solutions ensures that managers can choose the method most suitable to their specific risk profile and technological sophistication.

Order Execution

Given this degree of flexibility, orders can be executed directly without any restrictions on the strategy. Trading orders can be executed through cryptocurrency exchanges as well as through Decentralized Finance (DeFi). Fund managers can tap into a variety of methods such as Decentralized Exchanges (DEXs), staking protocols, and more. 

Distribution

The size of the funds (combined sum of multiple compartments and classes) is subject to a limit, capped at 100 million EUR in assets under management (AUM). Furthermore, they are designed specifically for distribution to professional investors, in line with the MiFID II definition. Potential investors have three distinct avenues for investing in the fund: 

1. directly subscribing to the fund; 
2. utilizing a bank via an in-nominee subscription; 
3. or leveraging a clearing system, which also involves a bank, with the fund identified through its ISIN code. 

These multiple pathways provide a range of options for investors, catering to different preferences and allowing them to choose the most convenient and effective method of investment.

On-Chain Admin

As AIFs offer complete freedom regarding the administration process, they present themselves as the optimal choice for launching on-chain funds in Luxembourg. Using Fume, the AIF’s flexibility is combined with DLT traceability. The shareholders' registrar and the fund’s metrics (e.g. official NAV calculations, fees, and more) can be transparently recorded on-chain without any intermediary approval. Get in touch to learn more.

Actively Managed Certificates (AMCs)

An Actively Managed Certificate (AMC) is a dynamic debt instrument issued by a Special Purpose Vehicle. It functions as a structured product comprising a diversified portfolio of underlying assets, which can include an array of components such as liquid securities, bonds, funds, shares, derivatives, and currencies. Characteristically, an AMC follows a specific composition of these assets or an index, with the composition subject to change over time under the discretion of an external asset manager. AMCs present a quick time-to-market advantage when an asset manager decides to deploy their own strategy, providing significant flexibility and a cost-effective method to develop, test, and execute investment strategies. Performance tracking of the strategy is achieved through the evaluation of a synthetic strategy basket or a tailor-made index comprised of individual notional strategy components that are actively curated.

Setup

The issuance of an AMC often requires the establishment of a Special Purpose Vehicle (SPV). Remarkably, the time to market for an AMC is impressively short, typically spanning just a few weeks. However, the regulatory requirements for issuing an AMC can vary across jurisdictions, with some requiring the asset manager to hold a valid asset management license. Consequently, asset managers must ensure they adhere to the regulations pertinent to their jurisdiction when considering the issuance of an AMC. Alternatively, a manager can act as an external advisor and rely on another manager’s license. Contrary to AIFs, certificates are limited to a single share class. Therefore, a new AMC needs to be issued for any different fee structure (e.g. lower management/performance fee for larger investment tickets). 
Note: an AMC could also be issued by a bank, but generally it is not the case for digital assets-related products.

Costs

The cost associated with establishing and maintaining an AMC for digital assets primarily hinges on the chosen service provider or administrator. Typically, one can expect to encounter initial setup costs of approximately $10k in the first year. Following this initial phase, there will be ongoing annual costs to consider, which tend to average around $20k. Therefore, substantially lower than an AIF.

Operation

Custody

Although more cost-efficient in the setup and administration side, AMC offers less flexibility for custody. It is generally limited to some regulated custodians, or alternatively, crypto exchanges (e.g. Kraken or Coinbase).

Order Execution

In case the AMC has been set up with the commissioner as an external advisor, trading orders are communicated to the official manager to be executed. Because of regulatory requirements, these methods could be as rudimental as a text email, or a spreadsheet with the new intended rebalanced position.

Alternatively, if the commissioner holds an asset management license, the orders can be executed directly from the crypto exchange (trade access only, no withdrawal rights).

Distribution

An AMC is often traded on a stock exchange, providing daily liquidity (much higher compared to most AIFs) to the instrument. Moreover, the distribution of an AMC has more flexibility. Although generally intended for Professional & Qualified Investors across Europe through public offering, AMCs could be even distributed to a limited amount (less than 150/year) of retail investors. Although AMCs seem to be very appealing for distribution, note that in reality, most investors outside of Switzerland aren’t very familiar with this instrument. Therefore even though they technically “can” invest, they sometimes feel more confident in investing in an actual fund.

On-Chain Admin

As AMCs subscriptions and redemptions are often processed through the stock exchange, they don’t present themselves as a viable option to enhance traceability and efficiency via an on-chain administration. Check out Fume’s offering to learn more about on-chain funds.

Conclusion

Both investment funds and AMCs have their unique advantages and can be suitable for different investment strategies and investor profiles. While investment funds offer professional management and diversification, AMCs provide flexibility, cost-efficiency, and transparency. The choice between the two will depend on factors such as the asset manager's investment strategy, cost considerations, and the needs and preferences of their clients.