Funds and Asset Management: Structures, Limits and Liquidity
What this domain tests
Funds and Asset Management tests product structures, investment limits, liquidity, valuation, costs and distribution. Expect UCITS and AIFMD rules, MiFID II product governance, PRIIPs and ESG disclosures.
Core rules
- UCITS may invest only in eligible assets and must respect diversification limits, including the 5/10/40 rule: no more than 10% in one issuer, and holdings above 5% may not exceed 40% in aggregate.
- AIFMD requires an authorised AIFM, a depositary, leverage reporting, remuneration rules and investor disclosures.
- Liquidity management needs redemption terms, liquidity buckets, stress testing and a documented escalation plan; gates and side pockets are constrained.
- Valuation must be independent, documented and managed for conflicts of interest.
- Costs include ongoing charges and performance fees; performance fees should have a high-water mark and clear methodology.
- SFDR classification drives pre-contract and website disclosures.
Worked example
A UCITS holds 8% in issuer A, 7% in B and 6% in C. Each is below 10%, and the aggregate above 5% is 21%, below 40%, so the portfolio complies. If issuer A rises to 11%, the fund breaches the 10% limit and must rebalance. If redemptions reach 15% in a week and the liquid bucket is 20%, the fund can meet them, but a 30% stress may trigger the liquidity plan.
Traps
- Applying the 5/10/40 rule only to equities.
- Charging performance fees without a high-water mark.
- Using an ESG label without evidence.
- Ignoring valuation timing and dilution.