The line between open-ended and closed-ended alternative investment funds is becoming harder to draw as evergreen and semi-liquid structures gain ground. In this expert contribution, Sebastiaan Hooghiemstra and Marco Loria, both senior associates in the investment management practice group of Loyens & Loeff Luxembourg, argue that AIFMD II requires a more dynamic, rights-based reading of the existing classification test.
The distinction between open-ended and closed-ended alternative investment funds, or AIFs, has long been a cornerstone of European fund regulation. Commission Delegated Regulation (EU) No 694/2014 (the ‘CDR 2014’) draws a seemingly clear line: an AIF is open-ended where, at the request of an investor, its units or shares may be redeemed or repurchased out of the fund’s assets prior to liquidation. Any other AIF arell closed-ended. When that definition was adopted, the market context was relatively stable. Open-ended funds were typically vehicles with predictable redemption cycles, while closed-ended funds were characterized by fixed terms and capital lock-ups.
However, that alignment has weakened over time. The past years has seen the rise of rolling-vintage, run-off and semi-liquid evergreen funds combining perpetual duration with capped or discretionary redemption mechanics. Coupled with AIFMD 2’s heightened regulatory consequences, classification has become materially more complex, exposing the limits of a purely static reading of CDR 2014.
Current AIFMD II definition no longer sufficient
The CDR 2014 remains formally unchanged. Under the regulatory technical standards governing the determination of an AIF’s type, an AIF is classified as open-ended where, at the request of an investor, its units or shares may be redeemed or repurchased out of the assets of the fund prior to the commencement of its liquidation or wind-down, in accordance with the procedures and frequency set out in its fund documentation. Any AIF that does not meet this criterion is treated as closed-ended.
While this definition appears clear, its apparent simplicity masks a structural limitation. The framework is built around a binary test that looks exclusively to the formal existence of investor redemption rights, without further qualifying their legal nature, degree of enforceability, or practical operation. The decisive question is reduced to whether investors may, at their request, redeem their units or shares prior to liquidation or wind-down. Liquidity risk, economic substance and the mechanics through which redemptions are actually affected are deliberately abstracted away.
That abstraction was workable when the definition was conceived, but it now proves fragile. Modern fund designs increasingly decouple legal form from economic function. The rise of rolling-vintage, run-off and semi-liquid evergreen structures, combing perpetual duration with capped, deferred or discretionary redemption mechanics, exposes the limits of a definition that treats all pre-liquidation redemption rights as functionally equivalent. Such funds may fall formally within, or outside, the open-ended category despite exhibiting risk profiles that differ materially from both frequently dealing open-ended funds and classical closed-ended vehicles.
As a result, the difficulty today is not merely one of application, but of definition. A purely literal or static reading of the CDR 2014 criteria is no longer capable of capturing the regulatory distinctions that AIFMD 2 now seeks to draw. What is required is an interpretative recalibration: one that remains anchored in the text, but reads investor redemption rights dynamically, by reference to their legal enforceability, practical operation and relevance to liquidity risk, in light of contemporary fund mechanics and regulatory purpose.
A three-question framework for classification
1. Do investors have a redemption right before liquidation?
This first question acts as the gateway test. If the fund documentation does not contemplate any form of pre-liquidation redemption, the fund is closed-ended by design. Where a pre-liquidation mechanism exists, the analysis turns to the legal nature and effects of that mechanism.
2. Redemption right or redemption request: does investor’s initiative create a legal obligation to redeem?
The core distinction is whether investor initiative crystallizes into an enforceable obligation on the fund manager, or if it merely constitutes a non-binding request. Where the manager is required to process redemptions subject to predefined conditions, a redemption right exists. Alternatively, where the manager retains unconditional discretion to decline or postpone redemptions indefinitely, no such right is conferred.
3. Do LMTs in the fund documentation manage redemption pressure, or confirm its absence?
The final practical check therefore focuses on how redemption mechanics are operationalized through liquidity management tools (“LMTs”). Where LMTs are designed to be triggered by investor’s behaviour and objectively defined thresholds, they evidence that redemption rights can generate liquidity pressure that must be managed. Where LMTs remain entirely discretionary and are not linked to investor-initiated exit, they confirm that redemption requests do not translate into fund-level obligations.
Discretionary redemptions
Viewed through a dynamic reading of CDR 2014, semi-liquid evergreen funds with discretionary redemption mechanics do not form a homogeneous category. Their classification does not depend on whether liquidity is contemplated or periodically offered, but on whether investors hold a redemption right exercisable prior to liquidation, and on how that right is operationalized in the fund documentation.
Where fund documents allow investors to submit redemption requests during the life of the fund but reserve to the AIFM or manager absolute discretion as to whether, when and to what extent those requests are satisfied, no redemption right arises in the first place. Although a pre-liquidation mechanism exists in form, investor initiative does not crystallize into a legal obligation on the fund. In such structures, the manager is under no duty to generate liquidity, accelerate asset disposals or otherwise take fund-level action in response to exit intent. Investors expressly accept that they may remain invested for an indefinite period. In substance and in law, these funds remain properly classified as closed-ended, notwithstanding the presence of periodic request mechanics.
The analysis changes where discretion is circumscribed. Where fund documentation confines discretion to objectively defined and proportionate limits, such as regulatory constraints, AML/KYC considerations, predefined liquidity thresholds or a pure condition-precedent framework (e.g, asset sale proceeds becoming available), and removes the ability to defer redemptions indefinitely, investor initiative gives rise to an enforceable entitlement. In that case, redemption exists not merely in form but in substance: the investor can, at its own initiative and subject to pre-defined conditions, compel the fund to engage with its exit request.
It is at this stage that LMTs become decisive. Where LMTs are embedded in the fund documentation and must be deployed once objective triggers linked to investors’ behaviour are met, they do not negate the redemption right. They operationalize it by managing redemption pressure in line with AIFMD II’s regulatory logic. Conversely, where gating, suspensions or deferrals remain wholly discretionary and untethered from investor-initiated thresholds, they confirm that no redemption right exists in a functional sense.
The decisive criterion is therefore not whether liquidity is constrained, staged or deferred, but whether fund documentation transforms investor initiative into a legally relevant obligation capable of generating redemption pressure. Where it does, even in a heavily managed form, the fund falls within the open-ended paradigm. Where it does not, discretionary redemption remains just that: a request, not a right.
Concluding observations
CDR 2014 was drafted against a markedly different market backdrop. Its text, however, has not been overtaken by events. Properly interpreted, it remains capable of accommodating modern evergreen structures without distortive reclassification or doctrinal revision.
Semi-liquid evergreen funds with discretionary redemption mechanics do not fall outside the open-ended/closed-ended framework; they test its application. The decisive question is not whether liquidity is constrained or episodic, but whether fund documentation transforms investor initiative into an enforceable redemption right capable of generating liquidity pressure. If it does, the fund is open-ended, even if that right is tightly managed. Conversely, if redemption remains a discretionary request, the fund remains closed-ended, notwithstanding periodic liquidity features.
The task for managers and regulators is therefore not to invent new categories or retreat into formalism, but to apply the existing test with discipline and purpose. A dynamic, rights-based reading of CDR 2014 preserves legal coherence, aligns with the regulatory logic of AIFMD II, and provides a defensible basis for classifying today’s semi-liquid evergreen funds.
Sebastiaan Hooghiemstra is a senior associate in the investment management practice group of Loyens & Loeff Luxembourg. Marco Loria is a senior associate in the investment management practice group of Loyens & Loeff Luxembourg.
