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Alternative Investment Features, Methods, and Structures

2025 Curriculum CFA® Program Level I Alternative Investments

Overview

Alternative Investments are grouped together not because they have similar features but instead because they have characteristics distinct from traditional investments. Investing in alternatives can be done through fund investing, co-investing, or direct investing. Alternative investments typically offer investors greater diversification and higher expected returns than traditional investments but often involve longer-term, illiquid investments in less efficient markets. Investing in alternatives requires specialized knowledge. Alternative investments typically rely on more complex and richer compensation structures than traditional investments in order to better align manager and investor incentives over longer periods.

  • Alternative investments are investments other than ownership of traditional asset classes (public equity and fixed-income instruments and cash) and include private capital, real assets, and hedge funds.
  • Private capital includes private equity and private debt. Real assets include real estate, infrastructure, and natural resources. Hedge funds may invest across both traditional and alternative asset classes and are distinguished by their investment approach, which often includes leverage, derivatives, or other strategies.Investors often consider alternative investments in pursuit of greater portfolio diversification and/or increased expected returns. In doing so, they usually face longer investment periods, reduced liquidity, and less efficient markets than for more traditional assets.
  • Alternative investment fund investors fully outsource the control and management of investments in exchange for relatively high fees, while co-investment and direct investment methods involve greater investor effort and control over the selection and management of assets in exchange for relatively lower fees.
  • Another common type of alternative investment structure is a limited partnership in which responsibilities are flexibly allocated between investors and managers—with managers as general partners and investors as limited partners. Limited partnerships usually have more complex compensation structures, which include both management and performance fees. 
  • Additional alternative investment structures include trusts and limited liability companies.


     

Learning outcomes

The candidate should be able to:

  • describe features and categories of alternative investments;
  • compare direct investment, co-investment, and fund investment methods for alternative investments;
  • describe investment ownership and compensation structures commonly used in alternative investments.

1 PL Credit

If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.