- CFA Exams
- 2025 Level I
- Topic 8. Alternative Investments
- Learning Module 1. Alternative Investment Features, Methods, and Structures
- Subject 1. Types and Categories of Alternative Investments
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Subject 1. Types and Categories of Alternative Investments PDF Download
Stocks, bonds and cash are the most commonly known traditional investments. Alternative investments may encompass any non-traditional investments of financial assets such as hedge funds, private equity, venture capital, real estate, commodities, and other assets.
Some of the distinctive characteristics of alternative investments compared with traditional investments:
- Special skills and/or information required.
- Lower liquidity due to their lack of standard markets and limited activities on both sides of the deal.
- Less regulation but rather unique legal and tax considerations.
- Lower transparency - certain alternative investments lack an efficient market mechanism and may subject their valuation to speculations, creating uncertainties. Risks of alternative investments increase due to absent of ready valuation information.
- Higher fees - costs of purchase and sale may be relatively high.
- Limited and potentially problematic historical risk and return data.Investors must be careful in evaluating the historical record of alternative investments as the higher than normal returns may be subject to a variety of biases, and the volatility of returns tend to be underestimated.
Main advantages are diversification benefits and improved returns. Despite unique risks and considerations, alternative investments can be useful tools to improve the risk-return characteristics of an investment portfolio. They can increase diversification and reduce volatility given low correlations to more traditional investments.
Sharpe ratios and many downside risk measures are commonly used to measure risk and return of alternative investments.
Categories
- Private Capital: private equity (PE), private debt.
- Real Assets: real estate, infrastructure, natural resources (commodities, agricultural land and timberland).
- Hedge Funds
User Contributed Comments 6
| User | Comment |
|---|---|
| ankurwa10 | Tip to remember. A for Alpha so Active seeks Alpha, and Passive seeks Beta. |
| nikmouwen | ankurwa10 Thank you, good tip! |
| zackrivers | great tip |
| sals1230 | thanks for that tip! |
| dbedford | Alpha males are active and Beta males are passive. |
| nmech1984 | dbedford, any strategy on bi males? |
I used your notes and passed ... highly recommended!
Lauren
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