CFA Level 2 Alternative Investments
Level 2 Alternative Investments applies real valuation and analysis techniques to real estate, private equity, and other alternative asset classes, moving beyond Level 1’s introductory survey.
Real Estate Valuation
This covers approaches like the income approach (capitalizing expected income into a value estimate) and comparable sales approaches, giving you actual tools for estimating real estate value rather than just describing the asset class conceptually.
Private Equity Analysis
Level 2 introduces how private equity investments are structured and valued, including the use of leverage in buyout transactions and how returns are measured for illiquid, privately held investments.
Why Private Equity Valuation Is Different
Without a continuously observable market price, private equity valuation relies more heavily on periodic estimates and comparable transaction data, introducing more judgment and uncertainty than valuing a publicly traded stock.
Commodities
This section covers how commodity returns are generated (spot price changes, roll yield, and collateral yield when investing through futures), and why commodity investment return drivers differ meaningfully from traditional equity or fixed income returns.
Hedge Fund Analysis
Level 2 goes deeper into evaluating hedge fund strategies and performance, including awareness of biases in hedge fund return data (like survivorship bias) that can make reported performance look better than the true, broader picture.
Why This Topic Matters More at Level 2 Than Its Weight Suggests
Alternative investments’ unique valuation challenges (illiquidity, limited price transparency) make this a conceptually rich topic that rewards careful study, even though its exam weight is often comparable to or slightly less than the largest topics.
Study Approach
Focus on understanding why each alternative asset class requires a different valuation approach than traditional securities — that conceptual understanding often matters more here than memorizing every formula.
Quick Tip
Focus study time on understanding why alternative investments need different valuation approaches (illiquidity, limited price transparency) rather than memorizing every formula — that conceptual grounding helps you reason through unfamiliar vignette scenarios.
Frequently Asked Questions
Common candidate questions about this topic
What valuation approaches are used for real estate at Level 2?
The income approach (capitalizing expected income) and comparable sales approaches are the main methods introduced.
Why is private equity harder to value than public equity?
Without a continuously observable market price, valuation relies more on periodic estimates and comparable transactions, introducing more judgment and uncertainty.
What is survivorship bias in hedge fund data?
A bias where funds that closed or performed poorly drop out of databases over time, making the remaining reported average performance look better than the true historical picture.