Non-traditional investment assets, such as hedge funds, private equity, and real estate.
Alternative investments are non-traditional investment assets that fall outside the conventional categories of stocks, bonds, and cash. These include hedge funds, private equity, real estate, commodities, and other specialized investments. Alternative investments often have unique risk-return profiles and can provide diversification benefits to a portfolio. Analysts must understand the characteristics and due diligence process for alternative investments.
5 minutes
5 Questions
Alternative Investments represent assets beyond traditional stocks, bonds, and cash. The CFA Level 2 curriculum explores these investments in depth, focusing on their unique characteristics, valuation methods, and role in portfolio construction.
Key categories include:
1. Real Estate: Properties and REITs (Real Estate Investment Trusts) that generate income through rents and potential appreciation.
2. Private Equity: Capital invested in private companies, often through buyouts, venture capital, or growth equity strategies.
3. Hedge Funds: Actively managed portfolios employing various strategies like long/short equity, global macro, or event-driven approaches.
4. Commodities: Physical goods such as energy products, precious metals, and agricultural products.
5. Infrastructure: Investments in essential facilities like transportation networks, utilities, and communication systems.
CFA Level 2 examines valuation techniques specific to each alternative asset class. For real estate, this includes the income, cost, and sales comparison approaches. Private equity valuation covers discounted cash flow models, multiples, and internal rate of return calculations.
Portfolio considerations are crucial—alternatives generally offer diversification benefits through lower correlation with traditional assets. However, they present challenges like limited liquidity, higher fees, and complex structures.
Due diligence receives significant attention, particularly manager selection and operational risk assessment. Performance measurement techniques address the unique aspects of these investments, including proper benchmarking and risk-adjusted return metrics.
The curriculum also covers specific investment vehicles, tax implications, and regulatory considerations across different alternative asset classes, providing candidates with comprehensive knowledge for portfolio management and advisory roles.Alternative Investments represent assets beyond traditional stocks, bonds, and cash. The CFA Level 2 curriculum explores these investments in depth, focusing on their unique characteristics, valuation methods, and role in portfolio construction.
Key categories include:
1. Real Estate: Properties …