European Investment Funds Explained: UCITS, AIFs, AIFMD and the ELTIF Regime As I’ve previously written, I am working on a framework for tokenizing European Long Term Investment Fund operation (ELTIF 2.0) on a public, smart-contract enabled blockchain like Ethereum. You can read more about it here: https://illya.sh/threads/tokenizing-european-long-term-investment-funds-eltif-2-0-on This is financial markets legislation heavy topic, and it involves several regulations and directives, each one meticulously outlining rules and exceptions which together form a framework for operating various investment funds in the European Union. I come across many negative commentaries regarding EU regulations in general, but not so many explaining those regulations. In general, there is not much information covering this topic on the internet, and if you ask ChatGPT to explain it - it will likely take you several iterations and back-and-forth to understand it. Since this falls under my current area of work - I thought that it would be useful to share the knowledge, and provide a clear and concise starting point for anyone looking into investment funds legislation and practical application in the European Union. So first of all let’s start with the definition of a “fund”. EU law doesn’t have a unanimous definition for what constitutes a fund. Instead, it defines rules for two collective investment schemes: 1️⃣ Undertakings for Collective Investment In Transferable Securities (UCITS) defined in Directive 2009/65/EC 2️⃣ Alternative Investment Funds (AIFs) defined in AIFMD Directive 2011/61/EU UCITS is defined as an undertaking whose sole purpose is collective investment in transferable securities and other liquid financial assets, with the holders of UCITS units/shares being able to redeem/repurchase them on demand out of UCITS’s assets/holdings. The strict list of eligible assets is defined in Article 50 of Directive 2009/65/EC and it includes: 1️⃣ Transferable securities, which are securities that are negotiable/tradable on capital markets, such as shares/equities and bonds. 2️⃣ Money market instruments 3️⃣ Deposits with credit institutions 4️⃣ Certain financial derivatives As per Article 5, a UCITS must be managed by “management company”, which is defined as a company whose regular business is to manage UCITS (Article 2(1)(b)), or set up as a self-managed investment company under Articles 29-31. As per Article 6(1) this management company must be authorized. Before a UCITS is authorized its’s management company must be authorized. Alternative Investment Fund (AIF) is defined in Directive on Alternative Investment Fund Managers (AIFMD) to encompass all undertakings that raise capital from investors, invest according to a clearly defined investment policy for the benefit of the investors, and do not require UCITS authorization. In this sense, AIF is a functional classification, and it explicitly captures other collective investments that do not fall under the UCITS definition, as per Directive 2009/65/EC. As a general rule, anything that’s a collective investment undertaking, but not a UCITS is an AIF. That definition comes directly from AIFMD Article 4. An AIF must always be managed by an Alternative Investment Fund Manager (AIFM). Under Article 4(1)(b) of AIFMD, an AIFM is defined as “legal persons whose regular business is managing one or more AIFs”. Article 5 from AIFMD further reinforces this idea by requiring every AIF to have a single AIFM legally responsible for its compliance. This management entity can either be external (external AIFM) or the AIF may be managed internally with the AIF itself obtaining AIFM authorization. Article 6(1) mandates that no entity may manage an AIF, unless they are authorized as an AIFM (i.e. the managing entity must be authorized). The AIFM in an AIF is equivalent to the “management company” in UCITS. European Long Term Investment Fund (ELTIF), defined in Regulation (EU) 2015/760, and later amended by Regulation (EU) 2023/606 , is a type of Alternative Investment Fund (AIF). All ELTIF are AIF, but in order for an AIF to be ELTIF, it must meet the requirements outlined in the regulation and is subject for authorization. As such, under the EU law, ELTIF is not a distinct class of funds/collective investment schemes, but rather a legal label that an AIF can apply for. Since an ELTIF is an AIF, it is also managed by an AIFM. So what distinguishes an ELTIF from a “regular” AIF? In short, it’s the type of assets that the collective investment undertaking holds. Among others, an ELTIF must invest ≥55% of its capital into eligible assets, which include real assets (e.g. real estate) and STS securitizations. Moreover, an ELTIF cannot invest into commodities, the use of financial derivatives is only allowed for hedging and there are limits on borrowing/leverage. So why would one bother with the ELTIF label? Well, having the ELTIF label means your collective investment undertaking product is available to retail (i.e. to non-professional investors) EU-wide. An ELTIF allows you to offer illiquid investments to retail in the whole European Union In conclusion - EU law defines a fund as a collective investment undertaking, and it can be of two types: UCITS or AIF. An ELTIF is a type of AIF, which comes with retail EU passport benefits. This article doesn’t aim to be exhaustive, but rather to be used as the basis for forming a mental model on the legal structure of funds in the European Union, and how the ELTIF fits into the framework.