Same fund, same day, three leverage figures. The forwards, the cash and the subscription line explain every point between them.
AIFMD leverage is exposure divided by net asset value, computed twice: the gross method excludes cash and counts every derivative at its converted notional with no offsetting, the commitment method keeps cash in and lets qualifying hedges and netting cancel out. On an illustrative €250 million loan fund with €185 million of debt and €120 million of currency forwards, that gives 216.0 per cent gross and 174.0 per cent commitment, and 160.0 per cent once a fully covered subscription line is excluded under AIFMD II.
Worked in full in The AIFMD II Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Commission Delegated Regulation (EU) No 231/2013 expresses leverage as the ratio between the exposure of an AIF and its net asset value, and requires the manager to calculate it under both methods. Article 7 sets out the gross method: exclude cash and cash equivalents held in the base currency that meet its liquidity conditions, convert derivatives into the equivalent position in the underlying, and include the exposure created by reinvesting borrowings. Article 8 sets out the commitment method: the same conversion of derivatives, but with netting and hedging arrangements applied. Directive (EU) 2024/927, which Member States apply from 16 April 2026, then caps the leverage of loan-originating AIFs at 175 per cent if open-ended and 300 per cent if closed-ended, measured on the commitment method, and says that borrowing arrangements fully covered by investors' contractual capital commitments do not count as exposure.
A fictional closed-ended credit fund that originates loans. Figures in € millions; none of them is drawn from a real fund.
| Line | €m |
|---|---|
| Euro senior loans | 300 |
| Dollar loans, euro equivalent | 120 |
| Cash in euros (base currency) | 15 |
| Total assets | 435 |
| Asset-level leverage facility, drawn | 150 |
| Subscription line, drawn, fully covered by undrawn commitments | 35 |
| Net asset value | 250 |
| Currency forwards selling dollars, notional (off balance sheet) | 120 |
The forwards hedge the dollar loans one for one. Their fair value is close to zero, which is exactly why they disappear from a balance sheet reading of leverage and reappear in the regulatory one.
Gross exposure = loans + converted derivatives, cash excluded = 300 + 120 + 120 = 540
Gross leverage = 540 / 250 = 216.0%
Commitment exposure = loans + cash + derivatives after hedging = 300 + 120 + 15 + 0 = 435
Commitment leverage = 435 / 250 = 174.0%
AIFMD II ratio = (435 − 35) / 250 = 160.0%
Excel: =(EurLoans+UsdLoans+Fwd)/NAV and =(EurLoans+UsdLoans+Cash+Fwd-QualifyingHedge-CoveredSubLine)/NAV
Each step moves the number for a reason you can name. The forwards add 48.0 points to the gross figure because the gross method allows no offsetting. Cash takes 6.0 points out of the gross figure and leaves them in the commitment one. The subscription line, which financed loans that sit in the exposure like any others, comes out of the AIFMD II ratio only: 14.0 points.
| Measure | Exposure, €m | Leverage |
|---|---|---|
| Gross method (Article 7) | 540 | 216.0% |
| Commitment method (Article 8) | 435 | 174.0% |
| Commitment, covered subscription line excluded (AIFMD II cap test) | 400 | 160.0% |
As a closed-ended fund, it sits 140.0 points under the 300 per cent cap. At constant net asset value it could borrow another €350 million and reinvest it before the cap binds, so the cap is not this fund's constraint; its facility covenants are. Put the same balance sheet in an open-ended wrapper and the picture changes completely: 160.0 per cent against a 175 per cent cap leaves 15.0 points, or €37.5 million of further borrowing. And if the drawing were not on a subscription line covered by commitments, the open-ended reading would be 174.0 per cent: 1.0 point of headroom.
An unlevered fund holding €235 million of loans and €15 million of cash reports 94.0 per cent gross and 100.0 per cent commitment. A gross figure below 100 per cent is not an error; it is the cash exclusion doing what Article 7 says.
The first table draws more or less on the facility and reinvests the difference in euro loans, holding net asset value at €250 million. The second keeps the balance sheet and changes how much of the forward book qualifies as a hedging arrangement under the commitment method.
| Facility drawn, €m | Gross | Commitment | AIFMD II ratio |
|---|---|---|---|
| 50 | 176.0% | 134.0% | 120.0% |
| 100 | 196.0% | 154.0% | 140.0% |
| 150 | 216.0% | 174.0% | 160.0% |
| 200 | 236.0% | 194.0% | 180.0% |
| 250 | 256.0% | 214.0% | 200.0% |
| Qualifying share | Gross | Commitment | AIFMD II ratio |
|---|---|---|---|
| 0% | 216.0% | 222.0% | 208.0% |
| 50% | 216.0% | 198.0% | 184.0% |
| 100% | 216.0% | 174.0% | 160.0% |
Two things stand out. Every €50 million drawn adds 20 points under all three measures, because the loans it buys are exposure under every method. And if the forwards fail the hedging conditions, the commitment figure, at 222.0 per cent, ends up above the gross one: cash is in, and nothing has been netted. The order "gross is always higher" is a habit, not a rule.
Computing leverage from the balance sheet, as total assets over net asset value, and calling it the commitment figure. Here that shortcut gives 435 over 250, the same 174.0 per cent, by coincidence: the forwards were fully netted and cash happened to be included. Change either condition and the shortcut is wrong. A fund whose forwards do not qualify as hedges is at 222.0 per cent on the regulation and still at 174.0 per cent on the shortcut, and for an open-ended loan-originating fund that is the difference between compliance and a breach of the 175 per cent cap. The second mistake is excluding every subscription line drawing. The AIFMD II carve-out applies to borrowing arrangements fully covered by investors' contractual capital commitments; a line drawn beyond what undrawn commitments cover does not meet that wording, and its drawings stay in the exposure. How far a fund can fall before such a cap breaks is worked in how much markdown breaches the 175 per cent leverage cap.
The fund scoping table, with leverage, the 50 per cent test and the cap per fund, is in the free workbook for this book, along with the markdown that breaches each cap.
Because the gross method excludes cash and cash equivalents held in the base currency. An unlevered fund with 235 million of loans and 15 million of cash has a net asset value of 250 million, a gross exposure of 235 million and gross leverage of 94.0 per cent. On the commitment method the cash stays in, so the same fund reports 100.0 per cent.
The commitment method. Directive (EU) 2024/927 caps loan-originating AIFs at 175 per cent of net asset value if open-ended and 300 per cent if closed-ended, measured as commitment exposure over NAV, and excludes borrowing fully covered by investors' contractual capital commitments. In the worked fund that turns 174.0 per cent into 160.0 per cent.
Yes, when cash is material and the derivatives do not qualify for netting or hedging. With its forwards treated as non-qualifying, the worked fund is at 222.0 per cent on the commitment method against 216.0 per cent gross: the 15 million of cash counts in one and not the other, and nothing offsets the forwards in either.
The fund scoping table that Chapter 2 of The AIFMD II Handbook calls the most useful artefact of the implementation, with leverage computed with fully covered facilities excluded, is in the free workbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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