SFDR Article 6 funds: meaning, scope and market practice What is an SFDR Article 6 fund? Where are SFDR Article 6 funds commonly established? How Article 6 differs from SFDR Articles 8 and 9 Interaction between SFDR and non-EU fund structures How Harneys can help

SFDR Article 6 funds: meaning, scope and market practice What is an SFDR Article 6 fund? Where are SFDR Article 6 funds commonly established? How Article 6 differs from SFDR Articles 8 and 9 Interaction between SFDR and non-EU fund structures How Harneys can help

The Sustainable Finance Disclosure Regulation (SFDR) is one of the most consequential pieces of EU financial regulation to emerge in recent years. It establishes a classification framework for financial products based on their sustainability characteristics, dividing them broadly into three categories under Articles 6, 8 and 9. While much of the market's attention has focused on the higher-tier classifications - Article 8 (products that promote environmental or social characteristics) and Article 9 (products with sustainable investment as their objective) - the reality is that the vast majority of funds in the market sit within Article 6. This article explains what an SFDR Article 6 fund is, where they are typically established, how they differ from Articles 8 and 9 products, and how SFDR interacts with non-EU fund structures - a question of particular significance for managers domiciling funds in offshore jurisdictions such as the Cayman Islands, the British Virgin Islands and Bermuda. An SFDR Article 6 fund is a financial product that does not promote environmental or social characteristics (Article 8) and does not have sustainable investment as its objective (Article 9). In practical terms, Article 6 is the default classification: any fund that does not make specific ESG commitments in its investment process falls within this category. Article 6 does not mean a fund ignores sustainability risks entirely. Under Article 6(1) of the SFDR, managers of Article 6 products must still disclose the manner in which sustainability risks are integrated into their investment decisions, or explain why sustainability risks are not considered relevant. This is a disclosure obligation, not an investment mandate — the fund is not required to adopt any ESG strategy, but it must be transparent about its approach. Article 6 funds must also comply with pre-contractual disclosure requirements under Article 6(2), including a statement in offering documents on whether and how the product considers principal adverse impacts (PAIs) on sustainability factors. Where PAIs are not considered, an explanation must be provided. A common misconception is that Article 6 funds are "non-ESG" or sit outside the SFDR framework. This is incorrect. Every financial product offered by an EU-regulated financial market participant falls within the scope of the SFDR and must be classified. Article 6 is simply the baseline category for products that do not make affirmative ESG commitments beyond the minimum disclosure requirements. Article 6 funds are established across a wide range of jurisdictions, both within and outside the EU. The SFDR classification itself does not dictate where a fund must be domiciled - it is a disclosure regime that applies to the manager (or, more precisely, to the financial market participant making the product available), not to the fund vehicle itself. Within the EU, Article 6 funds are commonly structured in Luxembourg, the largest European fund domicile. Luxembourg offers well-established regulatory frameworks and is home to the majority of UCITS and EU-regulated alternative investment funds. Many managers without an ESG-specific strategy will establish their funds in Luxembourg and classify them as Article 6 funds by default. Outside the EU, a significant number of funds that are classified as Article 6 — or that would be classified as such if marketed into the EU — are domiciled in offshore jurisdictions. The Cayman Islands remains the dominant global fund domicile for alternative investment funds, particularly hedge funds, private equity vehicles and venture capital structures. The British Virgin Islands and Bermuda are also well-established fund jurisdictions. These offshore fund structures do not fall directly within the scope of the SFDR, but SFDR classification becomes relevant when the fund is marketed to EU investors by an EU-regulated manager or distributor, or where a non-EU manager delegates to or is managed by an EU-regulat...

AIFMD explained: scope, thresholds, exemptions and compliance

The Alternative Investment Fund Managers Directive (AIFMD) is the cornerstone of EU regulation for managers of non-UCITS investment funds. It determines which fund managers require authorisation, sets asset thresholds that trigger full regulatory obligations, and establishes the framework for marketing alternative investment funds to EU investors. It also created a passport allowing AIFMs to market their funds throughout the EEA without relying on National Private Placement Rules (NPPRs). This note sets out the scope of AIFMD, the key thresholds and exemptions available, how the directive applies to EU and non-EU managers, as well as recent changes introduced by AIFMD II. The Alternative Investment Fund Managers Directive (Directive 2011/61/EU), commonly known as AIFMD, is the primary EU regulatory framework governing managers of alternative investment funds (AIFs). It was adopted in 2011 and transposed into national law across EU member states by July 2013. AIFMD was subsequently amended by Directive (EU) 2024/927 (AIFMD II), which had to be transposed by member states by 16 April 2026. AIFMD regulates alternative investment fund managers (AIFMs), not the funds themselves. Its core objectives are: Investor protection through enhanced transparency and disclosure requirements Systemic risk monitoring across the alternative investment fund sector A harmonised regulatory and supervisory framework for AIFMs operating across the EU An AIF is defined broadly as any collective investment undertaking that raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and which is not a UCITS fund. This definition captures hedge funds, private equity funds, real estate funds, infrastructure funds, fund of funds and other non-UCITS structures. AIFMD applies to any entity that manages one or more AIFs, regardless of the legal form of those funds or whether they are open-ended or closed-ended. The directive captures both EU AIFMs and, in certain circumstances, non-EU AIFMs. Funds within scope Private equity and venture capital funds (including carried interest and co-investment vehicles) Hedge funds (including single-strategy and multi-strategy vehicles) Real estate, infrastructure and debt funds Fund of funds structures Any other collective investment scheme that does not require authorisation under the UCITS Directive Key regulated activities Portfolio management and risk management (these are the minimum functions that define an AIFM) Marketing of AIF units or shares to investors in the EU Administration, valuation and ancillary services (where performed by the AIFM) Delegation arrangements (the AIFM remains responsible even where functions are delegated to third parties) Structures outside scope Certain structures are expressly excluded from AIFMD, including holding companies, institutions for occupational retirement provision (IORPs), supranational institutions (such as the EIB and EBRD), central banks, national governments and bodies managing social security and pension funds, employee participation or savings schemes, securitisation special purpose entities, and single-investor vehicles where the investor itself has management control. AIFMD provides a registration regime for smaller EU-AIFMs that fall below certain asset thresholds. These sub-threshold AIFMs are exempt from the full scope of AIFMD but remain subject to registration and reporting obligations with their home member state regulator. De minimis thresholds (Article 3) EUR 100 million: applies where the AIFs managed include funds that employ leverage. This threshold is calculated on the total value of assets under management (AuM), including any assets acquired through leverage. EUR 500 million: applies where the AIFs managed are unleveraged and have no redemption rights exercisable during a period of five years from the date of initial investment. EU AIFMs that fall below these...

Cayman Islands investment funds and hedge funds explained What are Cayman Islands investment funds? Key features of Cayman Islands funds Benefits of investing in Cayman Islands funds How to set up a fund in the Cayman Islands How Cayman Islands funds compare to other fund jurisdictions Role of CIMA in regulating Cayman Islands mutual funds Typical US manager use cases and common master-feeder structures How Harneys can help

The Cayman Islands is the world's leading domicile for hedge funds and alternative investment vehicles. Its combination of regulatory pragmatism, tax neutrality, legal certainty and deep service-provider infrastructure makes it the jurisdiction of choice for managers launching funds that accept institutional and sophisticated investor capital. This guide explains the principal fund structures available, their key features, the formation process, the role of the Cayman Islands Monetary Authority (CIMA), and how Cayman compares with competing jurisdictions. A Cayman Islands investment fund is a collective investment scheme organised under Cayman law to pool capital from investors and deploy it in accordance with a defined investment strategy. The legislative framework draws primarily on the Mutual Funds Act (as revised) and the Private Funds Act (as revised), which together regulate the two broad categories of fund: 1. Mutual funds – open-ended vehicles that issue redeemable interests and are regulated under the Mutual Funds Act. 2. Private funds – closed-ended vehicles that issue non-redeemable interests and are regulated under the Private Funds Act. Common legal structures include the exempted limited partnership (the dominant private fund vehicle), the exempted company, the segregated portfolio company (SPC) and the unit trust. The choice of structure depends on factors such as investor base, strategy and liability ring-fencing requirements. Cayman hedge funds share a set of characteristics that have driven the jurisdiction's dominance: Tax neutrality – No income tax, capital gains tax, withholding tax or corporate tax is levied at the fund level, ensuring a single layer of taxation at the investor's home jurisdiction. Flexible investment mandates – Funds may invest across asset classes, including equities, credit, digital assets, derivatives and real assets, with no statutory restrictions on strategy. Investor familiarity – Institutional allocators, pension funds, endowments and sovereign wealth funds routinely accept Cayman fund documentation as market standard. Deep service-provider ecosystem – A mature network of administrators, custodians, auditors, prime brokers, directors and legal counsel supports the full fund lifecycle. Robust legal framework – English common law underpins the Cayman legal system, providing predictable contract enforcement, experienced courts and a well-developed body of fund-related case law. The jurisdiction delivers a combination of commercial and structural advantages that benefit both managers and investors: Speed to market – A standard Cayman fund can be launched in two to three months, where documentation is in agreed form and service providers are engaged. No exchange controls – Capital moves freely into and out of the jurisdiction without restriction, supporting global multi-currency strategies. Regulatory proportionality – CIMA applies risk-based supervision tailored to fund type and investor sophistication, avoiding the prescriptive operational requirements seen in onshore regimes. Global recognition – Cayman fund vehicles are widely accepted by US, European and Asian counterparties and satisfy the due diligence requirements of major institutional gatekeepers. Liability segregation options – SPCs allow managers to ring-fence assets and liabilities of individual strategies within a single legal entity, reducing cost and complexity for multi-strategy platforms. The formation process is well-established and follows a predictable sequence: Structuring and strategy definition – The manager works with Cayman counsel to select the appropriate vehicle (exempted limited partnership, exempted company or SPC), agree on governance arrangements and confirm the regulatory classification (mutual fund or private fund). Service-provider engagement – The fund appoints an administrator, an auditor (where required), a custodian/prime broker (where required), and independent directors (where required). Doc...

Duties and obligations of a director of a Cayman Islands fund

This guide provides an overview of the powers, duties and obligations of a director of an exempted company incorporated under the Companies Act of the Cayman Islands (Companies Act) which is registered with the Cayman Islands Monetary Authority (CIMA) as a fund (Fund). This guide is limited to those Funds registered with CIMA under section 4(3) or 4(4)(a) of the Mutual Funds Act (a Mutual Fund) and those Funds registered with CIMA under the Private Funds Act (a Private Fund) as well as the law and practice of the Cayman Islands. Other duties, obligations and potential liabilities may also arise under the laws of other jurisdictions. There is no precise definition of a 'director' under Cayman Islands law. The directors of a Fund may be individuals or corporate bodies and they are the persons with ultimate responsibility for the management and conduct of the Fund's affairs. The first directors of a Fund (whether described as 'executive' or 'non-executive') are typically appointed by the initial subscribers to the Fund or otherwise in accordance with the articles of association of the Fund (Articles). The register of directors maintained by the Fund will be prima facie evidence of the identity of the directors from time to time. A person undertaking the activities of a director without being formally appointed may be found to be acting as a 'de facto director'. Also, if the duly appointed directors of a Fund are found to be acting in accordance with the directions or instructions of another person then that person may be found to be acting as a 'shadow director'. A person is not deemed to be a shadow director however by reason only that the directors act on advice given by such person in a professional capacity, so that an investment adviser of a Fund making recommendations to the directors as to the purchase or sale of investments should not usually constitute a shadow director. Executive directors, non-executive directors, shadow directors and de facto directors are all subject to the duties and obligations set out in this guide. When deciding whether or not to act as a director of a Fund, the following points should be considered: Who will be the other directors of the Fund? Will your fellow directors have the ability to work with you to properly coordinate the proper oversight and management of the Fund? Any other interests you may have in the overall structure of the Fund and its advisers or service providers. If you are a connected person (for example, a principal of the Fund's investment manager) you may want to consider either not sitting on the board of the Fund or making sure that you are in a minority position. These measures will reduce the potential for conflicts of interest to arise which could increase the risk of your actions later being challenged by the investors of the Fund as not being in accordance with your duties to the Fund. The expectations of the Fund's key investors. They may be comfortable with a board of directors comprised of connected persons or they may require the Fund to have one or more directors independent of the Fund's investment manager. This is something that you may wish to discuss further with the Fund's representatives and the Fund's current or proposed key investors before agreeing to accept any appointment as a director. You need to have sufficient and relevant knowledge and experience to discharge your duties as a director. It is up to you to acquire and maintain sufficient knowledge to enable you to carry out your role. You should use the Fund's professional advisers to provide advice on any areas or transactions of which you are unsure. In particular, you should ensure that you are able to properly read and understand the financial information relating to the Fund, including its financial statements. If there is anything that you do not understand, then you should promptly obtain professional advice. Whether the Fund has in place, or will be obtaining, any directors and officers ...

Establishing an Incubator or Approved Fund in the British Virgin Islands

These extremely popular and flexible funds are governed by the Securities and Investment Business (Incubator and Approved Funds) Regulations, Revised Edition 2020, as amended (the Regulations) and the Incubator and Approved Funds Guidelines. The British Virgin Islands (BVI) has often been described as the "home" of the emerging manager and these two fund products further reinforce that message. The incubator fund is aimed at start-up managers looking to establish a track record and test a strategy in the most cost- efficient manner. The approved fund is aimed at managers looking to establish a fund for a small, private and longer-term offering in a tested and respected funds jurisdiction. In order to qualify as an incubator or approved fund, a fund must fall within the requisite thresholds regarding (i) the number of investors, (ii) the maximum value of its net assets and (iii) the minimum initial contributions by each investor (incubator funds only). An approved fund is also required to appoint an administrator to ensure suitable oversight of its operations. The key features of incubator & approved funds Rapid approval times by the Financial Services Commission (the Commission) ensuring that the fund can be launched within a timescale that meets the manager's requirements Light regulation and minimal ongoing regulatory obligations Limited mandatory information to be contained in an offering document means that the fund can operate using a short-form term sheet, keeping legal costs and time associated with set-up to a minimum Stripped back requirements for mandatory functionaries to be appointed (other than the appointment of an administrator for an approved fund). The manager can therefore elect to only appoint functionaries they believe the fund requires from the outset No requirement to conduct an audit or file audited financial statements The incubator fund has a two-year validity period (with the possibility to extend this by a maximum of 12 months on application to the Commission), which gives the manager time to test their strategy and determine whether the fund is viable before committing to operate as a private, professional or approved fund Option to convert to a private or professional fund at a later date, should the fund outgrow the applicable restrictions Ability to commence business within two business days of lodging a complete application for approval with the Commission Criteria for the incubator & approved funds Number of investors: Incubator and approved funds must have no more than 20 investors. Once this limit is met, the Regulations allow a reasonable time to upgrade the fund to the next level, ensuring a smooth continuity of operation Minimum investment: For incubator funds only, each investor must be a "sophisticated private investor", which simply means that they were invited to invest in the fund and must make a minimum initial investment of US$20,000. There is no prescribed minimum investment amount for approved funds Total assets: The net assets of an incubator fund must not at any time exceed US$20 million. The net assets of an approved fund must not at any time exceed US$100 million Valuation policy: The fund is required to maintain a clear and comprehensive policy for the valuation of its assets (Fund Property) with procedures that are sufficient to ensure that the valuation policy is effectively implemented. The valuation policy shall: Be appropriate for the nature, size, complexity, structure and diversity of the fund and the Fund Property Be consistent with the provisions concerning valuation in its constitutional documents and term sheet/offering document Require valuations to be undertaken at least on an annual basis Include procedures for preparing reports on the valuation of the Fund Property Specify the mechanisms in place for disseminating valuation information and reports to investors Minimum investor disclosures: Each investor must be provided with a written warning (either in a pr...