5
Concepts
3
Formulas
1
Decisions
3
Quiz Questions
This reading explains why alternative investments behave differently from traditional investments and how candidates should compare access methods such as funds, co-investments, and direct ownership. For Level 1, the exam angle is usually practical: identify the structure, recognize the fee or liquidity implication, and choose the best comparison point.
Go to the CFA Level 1 Alternative Investments hub| Alternative investment feature | Method or structure | CFA Level 1 exam angle | Quick example |
|---|---|---|---|
| Illiquidity | Private fund lock-up or direct asset ownership | Investors may not redeem quickly, so required return and suitability matter. | A private equity fund can lock capital for years before exits. |
| Manager access | Fund investment | Professional management and diversification come with layered fees. | An LP commits capital to a GP-managed fund. |
| Lower fee access | Co-investing | Co-investments can reduce fees but increase deal-specific concentration. | An LP invests alongside the GP in one portfolio company. |
| Control | Direct investment | Direct ownership gives more control but requires expertise and due diligence. | An investor buys and operates an infrastructure asset directly. |
| Performance compensation | Management fee plus carried interest | Separate fixed fees from incentive fees and know hurdle/high-water-mark logic. | A 2 and 20 fund charges annual management fees and carried interest on gains. |
Co-investing means an investor puts capital into a specific deal alongside the fund sponsor or general partner. The Level 1 distinction is that co-investing can offer lower fees and more direct exposure than a commingled fund, but it also reduces diversification and requires stronger deal analysis.
Most private funds use a limited partnership structure. The general partner sources, manages, and exits investments. Limited partners contribute capital, receive distributions, and usually have limited control. Candidates should connect committed capital, capital calls, management fees, carried interest, hurdle rates, and high-water marks to investor returns.
Compared with public equities and bonds, alternative investments tend to have lower liquidity, less transparent valuation, higher fees, more complex due diligence, and different regulatory treatment. The potential benefits are diversification, inflation sensitivity, access to private return sources, and active manager skill.
5 concepts covered in this module.
Private capital (PE, VC), Real assets (real estate, infrastructure, natural resources), Hedge funds, Digital assets.
Fund investment (LP in fund), Co-investment (alongside GP), Direct investment (own the asset directly).
GP: manages fund, has unlimited liability. LPs: passive investors, limited liability. Management fee + performance fee.
Typical: 2% management fee (on committed/invested capital) + 20% performance fee (carried interest) above hurdle rate.
Illiquidity, long time horizons, complex strategies, less regulation, higher fees, potentially higher returns.
3 essential formulas for this module.
Where: Typically 1-2% annually
Where: Typically 20% above hurdle
Where: What the investor actually earns
1 decision frameworks to guide your analysis.
Visual overview of how concepts connect in this module.
Everything on this page becomes interactive on the study dashboard, free.
No signup required. Create an account anytime to save progress.
Try it right here
Alt Investment Categories
Tap to reveal the answer