CFA Level 1 Alternative Investments

Alternative investments sit outside the traditional universe of publicly traded stocks, bonds, and cash — and understanding what defines them is the first step to mastering this topic area. This module establishes the foundational architecture of the alternatives landscape: what makes an investment "alternative," how these investments are categorised, and how they are accessed. You will learn the three primary methods through which investors gain exposure — direct investment, co-investment, and fund investment — and understand the trade-offs each involves in terms of control, cost, diversification, and operational complexity. The module then turns to the ownership and compensation structures that are distinctive to alternatives, including the mechanics of management fees, performance fees, carried interest, hurdle rates, and high-water marks. These structural features are not just administrative detail — they directly shape the incentives of managers and the net returns to investors, and the CFA Level 1 exam tests your ability to understand and apply them.

• ▸ Alternative Investment Features & Categories — Private Capital, Real Assets, Hedge Funds
• ▸ Investment Methods: Fund, Co-Investment & Direct
• ▸ Ownership & Compensation Structures

Measuring performance in alternative investments is more complex than in traditional asset classes, and this module equips you with the tools the exam requires. You will learn how to appraise alternative investment performance using methods appropriate to the illiquid, irregular cash flow profiles these assets typically generate. The module covers the calculation and interpretation of alternative investment returns both before and after fees — including the interaction between management fees and performance fees, the effect of hurdle rates, and the impact of the high-water mark provision on performance fee crystallisation. Because fee structures in alternatives can be layered and compounding, the ability to move cleanly between gross and net return figures is a tested skill. This module builds that fluency directly.

• ▸ Performance Appraisal of Alternative Investments
• ▸ Alternative Investment Returns & Return Calculations
• ▸ Relative Returns & Survivorship Bias

Private capital — the universe of equity and debt investments made outside public markets — is one of the most significant and fastest-growing segments of the alternatives landscape. This module covers both sides of it. On the equity side, you will learn the defining features of private equity: the stages of financing from venture capital through growth equity and buyouts, the role of leverage in value creation, exit mechanisms, and the investment characteristics that distinguish private equity from publicly listed equity. On the debt side, the module covers private debt — including direct lending, mezzanine financing, venture debt, and distressed debt — and the investment characteristics of each. Across both, you will examine the diversification benefits that private capital can provide within a broader portfolio, and the specific risk and return profile that distinguishes this asset class from its public market equivalents.

• ▸ Private Equity: Investment Categories & Exit Strategies
• ▸ PE Risk–Return, Private Debt & Diversification Benefits

Real estate and infrastructure share important characteristics — long asset lives, inflation linkage, and relatively predictable cash flows — but they are distinct asset classes with different risk drivers, return profiles, and roles in a portfolio. This module covers both. For real estate, you will examine the features and characteristics of the asset class itself, including the distinction between residential, commercial, and industrial property, and then turn to the investment characteristics of real estate as an asset class — covering direct ownership, REITs, and other indirect vehicles, along with the sources of return, valuation considerations, and the role real estate plays in diversification. For infrastructure, the module covers the defining features of infrastructure assets — their natural monopoly characteristics, regulated revenue streams, and long duration — and the investment characteristics of infrastructure as an asset class, including why its return profile differs from both equities and traditional fixed income.

• ▸ Real Estate: Features & Investment Characteristics
• ▸ Infrastructure: Features & Investment Characteristics

Natural resources encompass a broad and internally diverse set of investments — raw land, timberland, farmland, and commodities — each with its own distinct economics, return drivers, and role in a portfolio. This module works through each category systematically. You will learn the investment features and characteristics of land-based natural resources: how timberland generates biological growth as a return component independent of market conditions, how farmland returns are tied to commodity prices and land appreciation, and how each behaves differently across economic cycles. The module then covers commodities as an asset class — their spot and futures pricing dynamics, the sources of commodity returns including roll yield and collateral return, and their historical behaviour as an inflation hedge. Throughout, the focus is on the sources of risk, return, and diversification that each natural resource investment brings to a broader portfolio.

• ▸ Natural Resources Features: Land, Farmland & Timberland
• ▸ Commodity Investment Forms, Features & Pricing
• ▸ Natural Resource Risk, Return & Diversification

Hedge funds occupy a unique position in the alternatives landscape — they can take long and short positions across virtually any asset class, use leverage and derivatives, and pursue return profiles that are genuinely uncorrelated with traditional markets. This module covers what hedge funds are, how they differ from other asset classes and investment vehicles, and how to analyse them from an investment perspective. You will learn the major hedge fund strategies — including long/short equity, global macro, event-driven, relative value, and managed futures — and understand the return sources, risk exposures, and liquidity characteristics of each. The module also covers the forms and vehicles through which hedge fund exposure is accessed, including funds of funds and managed accounts, and examines the sources of risk, return, and diversification that hedge fund allocations have historically provided within institutional portfolios.

• ▸ Hedge Fund Features & Strategies — Equity, Event-Driven, Relative Value, Opportunistic
• ▸ Hedge Fund Investment Forms: Direct & Indirect
• ▸ Hedge Fund Risk, Return & Diversification

Digital assets represent the newest and most rapidly evolving category within the CFA Level 1 alternatives curriculum. This module builds a rigorous foundation for understanding them — starting with the underlying technology. You will learn how distributed ledger technology works, what distinguishes it from centralised record-keeping, and what financial applications it enables beyond cryptocurrencies, including tokenisation of assets, smart contracts, and decentralised finance. The module then turns to digital assets as an investment category: the types of digital assets that exist, their investment features and characteristics, how they compare to other alternative asset classes on dimensions of risk, return, liquidity, and regulatory exposure, and the forms and vehicles through which investors can access them. Given the rapid pace of development in this space, the module is grounded firmly in the CFA Institute's 2026 learning outcomes — giving you exactly what the exam requires, presented with the rigour the topic deserves.

• ▸ Distributed Ledger Technology — PoW/PoS, Networks, Asset Types
• ▸ Digital Asset Investment Features
• ▸ Digital Asset Investment Forms & Risk/Return/Diversification