Common categories of Alternative Investments include:
- Hedge funds, which use various strategies to aim for positive returns.
- Private capital, including private equity (e.g., leverage buyout, venture capital) and private debt (e.g., direct lending, mezzanine loans).
- Real estate, comprising residential and commercial sectors.
- Natural resources, such as commodities, timberland, and farmland.
- Infrastructure, which encompasses buildings, bridges, roads, etc.
Alternative investments may involve non-traditional approaches, allowing flexibility with derivatives, leverage, illiquid assets, and short positions, encompassing traditional and less traditional assets. Active management is typical in Alternative Investments, exploring hedge funds, private equity, real estate, commodities, and infrastructure, emphasizing their common characteristics and role in diversification and potentially higher returns.
| Alternative Investments | ||
|---|---|---|
| Topic Weight | Number of Questions | |
| Level 1 | 7-10% | 13-18 |
| Level 2 | 5-10% | 4-8 |
What to Expect in CFA Level 1 Alternative Investments
This topic explores Alternative Investments, including hedge funds, private equity, real estate, commodities, and infrastructure. In this curriculum, CFAI defines Alternative Investments, their common characteristics, and their usefulness in creating diversification and higher returns.
Exam Weighting
The CFA Level I Alternative Investment weighs 7-10% of the total exam content, so approximately 13-18 CFA Level I exam questions focus on this topic.
| No. of Learning Modules | No. of Formulas |
|---|---|
| 7 | Nearly 15 |
Level 1 Alternative Investments 2026 Syllabus, Readings, and Changes
The CFA Level 1 exam includes 7 total learning modules for 2026. Numerous new texts have been added to the curriculum at all 3 levels, substantially expanding the focus on the topic area of Alternative Investments.
| No. of Learning Modules – 7 | No. of LOS – 22 | |
|---|---|---|
Summary This reading provides a comprehensive introduction to Alternative Investments. Alternative investments are asset classes or investment vehicles that supplement traditional long-only stocks, bonds, and cash positions. Alternative investments include 5 main categories: hedge funds, private capital, natural resources, real estate, and infrastructure. | ||
This significant change expands the discussion of alternatives and gives more information on how to use them in an investment strategy. In-depth exploration of alternative asset classes, risk management, and alternative investment structures are combined with fundamental knowledge to produce a simplified learning experience.
Alternative Investment Features, Methods, Structures, Performance, and Returns
This topic focuses on understanding the features and categories of alternative investments. It delves into the distinctions between direct investment, co-investment, and fund investment methods within alternative investments.
Additionally, the discussion explores prevalent investment ownership and compensation structures commonly employed in alternative investments.
Investments in Private Capital: Equity and Debt
Since they may be infrequently and/or privately traded, pricing, valuation, and performance can be much more difficult to assess for alternative investments. This learning module explores the factors, models, and circumstances that impact performance evaluation.
Private Capital, Real Estate, Infrastructure, Natural Resources, and Hedge Funds
This learning module looks at the various categories of alternative investments and their specific characteristics, risks, and returns.
Introduction to Digital Assets
This topic explores the financial applications of distributed ledger technology. It explains the investment features of digital assets and provides a comparative analysis with other asset classes. The discussion also covers various investment forms and vehicles utilized in digital asset investments. Additionally, it involves analyzing sources of risk, return, and diversification within the landscape of digital asset investments.
CFA Alternative Investments Level 1 Sample Questions and Answers
These sample questions are typical of the probing multiple-choice questions on the L1 exam. During the exam, you have about 90 seconds to read and answer each question, carefully designed to test knowledge from the CFA curriculum. UWorld’s question bank is built to expose you to exam-like questions and illustrate and explain the concepts tested thoroughly.
At the end of 20X4, a hedge fund had $25 million in assets under management (AUM). The fund has the following fee structure, high-water mark, and 20X5 results:
| Selected Data | |
|---|---|
| Management fee (average assets) | 1% |
| Incentive fee (net of management fee) | 10% |
| Soft hurdle rate | 6% |
| High-water mark (millions) | $27 |
| Year-end fund assets 20X5 (millions) | $30 |
Assuming no inflows or outflows, the incentive fee (in $) earned by this hedge fund for 20X5 is closest to:
- 109,000
- 272,500
- 300,000
A hedge fund manager wants the power to liquidate positions in a well-organized way whenever necessary and plans to impose restrictions on investors’ ability to redeem capital. Which of the following restrictions would be most appropriate?
- Notice period
- Lockup period
- Redemption fee
For the general partner in a private equity or venture capital fund, which of the following waterfall distribution methods is most advantageous compared to the others?
- Clawback
- Deal-by-deal
- Whole-of-fund
What to Expect in CFA Level 2 Alternative Investments
These readings focus on real estate, private equity, and commodities and describe real estate investments, both private and public, and methods for analysis and evaluation. Private equity, including venture capital and leveraged buyouts, is examined from the perspectives of a private equity firm evaluating equity portfolio investments and an investor considering participation in a private equity fund. Strategies involving commodity hedging are also discussed.
The CFA Level 2 Alternative Investment (AI) is fundamental to passing CFA Level 2 and succeeding in the CFA overall.
Exam Weighting
CFA Alternative Investment has a weighting of 5-10% of the total exam content, such that approximately 4-8 questions or 1-2 item sets focus on this topic.
| No. of Learning Modules | No. of Formulas |
|---|---|
| 4 | Around 20 |
Level 2 Alternative Investments 2026 Syllabus, Readings, and Changes
The 2026 CFA Level 2 exam comprises 4 learning modules. Notably, Private Equity Investments have been removed from the readings, and Hedge Fund Strategies have been introduced into the curriculum.
| No. of Learning Modules – 4 | No. of LOS – 29 | |
|---|---|---|
|
Summary
These learning modules focus on the following categories of Alternative Investments: real estate, private equity, and commodities. Real estate investments, both private and public, are described, and methods for analysis and evaluation are presented. Private equity, including venture capital and leveraged buyouts, is examined from the perspectives of a private equity firm evaluating equity portfolio investments and of an investor considering participation in a private equity fund. |
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Although it is commonly known that real estate contributes significantly to a balanced portfolio’s diversification, you should be aware of how significantly the risk profile of real estate investments varies depending on the type of asset. The Real Estate Investments material describes the risk profile of real estate debt vs equity (as a lender or owner of mortgage-backed securities), primarily focusing on commercial real estate.
Overview of Types of Real Estate Investments
Real estate property holds substantial importance within investment portfolios, offering an appealing source of current income.
This learning module comprehensively compares the features, classifications, primary risks, and fundamental structures of public and private real estate investments. It also delves into real estate’s roles in portfolios and the factors determining its economic value.
The module also explores various commercial property types, shedding light on their unique investment traits. It covers the due diligence procedures applicable to both private and public equity real estate investments. Additionally, it addresses real estate investment indexes, including their construction methods and potential biases
Investments in Real Estate through Publicly Traded Securities
These learning modules compare various characteristics, classifications, and risks for public and private real estate investments. They also describe the valuation principles and approaches for pricing alternative assets and discuss the advantages and disadvantages of investing in real estate through publicly traded securities compared to private vehicles.
Introduction to Commodities and Commodity Derivatives
This reading discusses commodities and commodity futures, including scenarios of contango and backwardation for futures prices.
Hedge Fund Strategies
This topic classifies hedge fund strategies, including equity-related, event-driven, relative value, opportunistic, specialist, and multi-manager strategies. It delves into the investment characteristics, strategy implementation, and the role each plays in a portfolio. Additionally, the discussion encompasses how factor models can be utilized to comprehend hedge fund risk exposures and evaluate the impact of allocating to a hedge fund strategy within a traditional investment portfolio.
CFA Alternative Investments Level 2 Sample Questions and Answers
These sample questions exemplify the level of complexity and depth encountered in the Level 2 exam. They are presented as item sets, each accompanied by a vignette that creates a scenario designed to assess your understanding of the CFA Level 2 curriculum. It’s worth noting that each vignette applies to 4 questions on the actual exam, but we’ve included a few extra questions to enhance your learning experience. We strongly recommend reviewing the detailed answer explanations provided for each question. UWorld’s question bank will familiarize you with exam-style questions and provide comprehensive explanations to help you grasp the tested concepts thoroughly.
Which of Li’s statements on Tailwind’s fund structure is incorrect ?
- Statement 1
- Statement 2
- Statement 3
Which governance provision most likely addresses GP gross negligence?
- No-fault divorce
- Key man clause
- Removal for cause
When speaking about costs associated with investing in private equity, Heng is incorrect with regard to:
- annual audit costs
- significant performance fees
- dilution costs when the firm starts new funds
What to Expect in CFA Level 3 Alternative Investments?
Alternative Investments does not appear as a separate topic area at Level 3. Instead, AI concepts including private equity, real estate, commodities, and hedge fund exposures are integrated into portfolio allocation, risk budgeting, and multi-asset strategies within Portfolio Management.
How to Study for CFA Alternative Investments?
Alternative Investments broaden a diversified portfolio beyond traditional long-only assets such as stocks, bonds, and cash. This topic introduces five major categories such as hedge funds, private equity, real estate, natural resources, and infrastructure. Level 1 focuses primarily on qualitative concepts and introductory characteristics, while Levels 2 and 3 explore deeper valuation approaches, return drivers, risks, structures, and due-diligence considerations.
Strategy Differentiation: Understanding the differences among hedge fund strategies such as long/short equity, event-driven, macro, and relative value is important for recognizing how each strategy generates returns and manages risk.
Quantitative Aspects: Level 1 is mainly qualitative, but candidates must still understand key performance metrics, return calculations, fee structures, and measures such as incentive fees and carried interest, especially as they become more important in Level 2.
Minimal Calculator Use: Most questions in Alternative Investments require conceptual understanding rather than heavy calculations, making it one of the less math-intensive CFA topics at Level 1.
Steep Learning Curve: Because many candidates have limited exposure to private equity, hedge funds, real assets, or commodities, this topic introduces a significant amount of new terminology, market structures, investment vehicles, and valuation models across Levels 1 and 2.
Frequently Asked Questions (FAQs)
How do I study for Level 1 Alternative Investments for the CFA Exam?
The learning modules and practice questions predominantly emphasize conceptual understanding, particularly focusing on definitions and contextual comprehension. That makes them relatively easy to score well on. While a limited number of calculations are involved, primarily about cost analysis and the impact of fee structures on returns, these, too, can be mastered with practice.
The most effective approach to preparing for the exam is to engage with a comprehensive QBank that spans all chapters and readings. The UWorld CFA QBank provides over 100 questions, each accompanied by detailed answer explanations, extensively covering the domain of artificial intelligence.
How do I practice CFA Level 1 Alternative Investments questions?
After moving through a QBank, the next step is taking mock exams to see how you are doing with the content. UWorld’s CFA mock exams closely replicate the actual CFA L1 exam experience to help you prepare and boost your confidence on test day. Like the actual CFA Exam, our mock exams consist of two 2-hour, 15-minute sessions, each with 90 multiple-choice questions spanning multiple subjects. These are not included in the standard QBank.
How do I practice CFA L1 Alternative Investments formulas?
Understanding the underlying concept of each formula will help you memorize related concepts and formulas. Think of it as a mathematical depiction of the concept rather than memorizing phrases 1 by 1. As you build this foundation of understanding, reinforce it through repetition and application. Look at our CFA L1 Formula Sheet page for further resources and tips.
Is CFA level 2 Alternative Investments hard?
Similar to the Level 1 curriculum, the Level 2 readings delve into their subject matter with greater depth and detail, making them inherently more challenging.
What topics are included in the CFA Alternative Investments syllabus?
The Alternative Investments syllabus includes hedge funds, private equity, real estate, private credit, infrastructure, commodities, valuation methods, fee structures, performance metrics, liquidity considerations, and due-diligence processes, with Level 1 emphasizing qualitative characteristics and Level 2 focusing on valuation and return analysis.
How many Alternative Investments questions appear on the CFA exam?
Alternative Investments typically represents about 7–10% of the Level 1 exam, which equals roughly 13–18 questions, and 5–10% of the Level 2 exam, which corresponds to one to two item sets depending on the testing cycle.
What is the difference between Alternative Investments in Level 1 and Level 2?
Level 1 provides an introductory overview of alternative asset classes, investment structures, and return drivers, while Level 2 introduces deeper valuation techniques, fee impact calculations, return decomposition, and detailed analysis of private equity, real assets, and hedge fund strategies.
Does Alternative Investments appear as a stand-alone topic in CFA Level 3?
Alternative Investments does not appear as a stand-alone topic at Level 3, but concepts such as private equity, real estate, and hedge fund strategies appear within Portfolio Management, especially in asset allocation, liquidity management, and return expectation readings.
Which Alternative Investments topics are considered the hardest?
The most challenging areas include private equity valuation, carried interest and fee waterfall calculations, real estate return drivers, hedge fund strategy classification, and performance attribution due to the conceptual depth and variety of investment structures.
Is Alternative Investments heavily quantitative?
At Level 1, Alternative Investments is mostly qualitative with limited calculations related to fees and performance metrics; at Level 2 it becomes more quantitative with greater emphasis on valuation, return analysis, and fee-adjusted performance.