Launching EU investment hubs: US Fund Managers: launching an in-house AIFM in Luxembourg – New York office Snippet

US fund managers (USFMs) frequently use Luxembourg fund vehicles (Lux Funds) to meet EU investors’ expectations and to facilitate efficient fundraising in the EU. The latter is made possible through an EU marketing passport, which requires the appointment of an EU alternative investment fund manager (AIFM) by the Lux Fund.

AIFMs are responsible for key functions such as risk management, portfolio management and valuation. While EU AIFMs typically delegate portfolio management back to the USFM, the EU AIFM must maintain oversight via a designated conducting officer.

An AIFM can be based within or outside the EU and it can be an in-house entity or a third party. USFMs typically opt to appoint a Luxembourg third-party AIFM (Host AIFM) for their Lux Fund. That’s due to the cost and complexity of setting up a Luxembourg in-house AIFM. Launching a Luxembourg in-house AIFM usually becomes economically viable at around at least EUR 5 billion in commitments to the Lux Fund(s).

Apart from cost-efficiency considerations, USFMs consider insourcing AIFM functions to enhance confidentiality, address investor preferences and retain full control over the investment and marketing processes.

From a regulatory standpoint, an in-house AIFM must be authorized and supervised by the Luxembourg financial regulator (CSSF). The authorization process generally takes 12–18 months, with a full launch typically occurring within 24 months.

In terms of staffing, a team of 5 to 6 full-time employees is generally required to launch a Luxembourg in-house AIFM. Depending on AuM, investment strategy and investor profile (retail vs. professional), the CSSF may require additional staffing, particularly in senior roles such as risk management and valuation. That said, USFMs rarely build in-house AIFMs from scratch. They often leverage existing Luxembourg personnel to cover certain AIFM functions.

In-house AIFMs often start lean, focusing on a single strategy, and they gradually scale their operations in line with fundraising cycles (often, every 2–3 years).

USFMs generally do not charge an additional in-house AIFM fee to the Lux Fund beyond their management fee. Conversely, Host AIFM fees are charged to the Lux Fund (and thus the investors) on top of the management fee.

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