CFA Level 1 Alternative Investments
Alternative Investments introduces asset classes beyond traditional stocks and bonds — real estate, private equity, hedge funds, commodities, and infrastructure — and why investors add them to a portfolio.
What Counts as an “Alternative”
Broadly, anything outside traditional public equity and fixed income falls into this category: real estate, private equity and venture capital, hedge funds, commodities, infrastructure, and digital assets, among others.
Why Investors Use Alternatives
Alternatives are often added to portfolios for diversification (since their returns don’t always move in step with traditional markets), the potential for higher returns in exchange for higher risk or illiquidity, and access to unique return drivers not available through public markets.
Illiquidity as a Defining Feature
Many alternative investments (private equity, real estate, infrastructure) are far less liquid than publicly traded stocks and bonds — you generally can’t sell your stake quickly, which is a risk investors need to be compensated for, often through an “illiquidity premium.”
Hedge Funds
Level 1 introduces common hedge fund strategies (long/short equity, global macro, event-driven, among others) and typical fee structures (management and performance fees), along with how hedge funds differ from traditional mutual funds in terms of regulation and investor access.
Private Equity and Venture Capital
This covers how private equity firms invest in and often actively manage private companies, and how venture capital specifically funds early-stage companies with high growth potential and correspondingly high risk.
Real Estate and Commodities
Real estate investment can occur directly or through vehicles like REITs (real estate investment trusts); commodities investment can occur through direct ownership, futures contracts, or commodity-linked securities — each with different risk, liquidity, and access characteristics.
Why This Topic Matters for Portfolio Construction
Understanding alternatives’ unique risk-return characteristics and low correlation with traditional assets is foundational for the asset allocation and portfolio construction concepts that become much more central at Level 3.
Quick Tip
Focus on understanding why each alternative asset class behaves differently from traditional stocks and bonds (illiquidity, unique return drivers) rather than memorizing every strategy name — the ‘why’ is what connects to later portfolio management topics.
Frequently Asked Questions
Common candidate questions about this topic
What are examples of alternative investments?
Real estate, private equity and venture capital, hedge funds, commodities, and infrastructure are common examples covered at Level 1.
Why do investors add alternatives to a portfolio?
Common reasons include diversification benefits, potential for higher returns, and access to return drivers not available through traditional public markets.
What is a REIT?
A real estate investment trust — a vehicle that allows investors to gain exposure to real estate through publicly traded shares rather than direct property ownership.