What CFA Level 1 Alternative Investments actually tests
Alternative Investments is 7-10% of the Level 1 exam:
| Area | What it covers |
|---|---|
| Alternative Investment Features | Low liquidity, limited transparency, high fees, unique legal structures |
| Hedge Funds | Strategies (long/short equity, global macro, event-driven), 2-and-20 fee structures, lock-up periods |
| Private Equity | LBOs, venture capital, growth equity, J-curve, IRR, TVPI, DPI, RVPI, NAV |
| Real Estate | Direct vs. indirect, REITs, capitalization rate, NOI, DCF valuation, leverage |
| Commodities | Storage costs, convenience yield, contango vs. backwardation |
| Infrastructure | Greenfield vs. brownfield, concession agreements, inflation linkage |
Recent context
Preqin forecasts the global alternatives market growing from roughly $14 trillion to $23 trillion — nearly half the size of the entire US equity market. That real growth is exactly why CFA Institute added a dedicated Private Markets specialized pathway at Level 3: the buy-side industry is expanding fastest in exactly the areas this topic introduces at a foundational level.
Sample question: Direct Capitalization (Real Estate)
Alternative Investments · Medium difficulty
A commercial property generates annual net operating income (NOI) of $360,000. Comparable properties in the market trade at a capitalization rate of 8%. Using direct capitalization, what is the estimated value of the property?
A. $2,880,000
B. $3,600,000
C. $4,500,000
D. $5,760,000
The correct answer is C — $4,500,000.
Direct capitalization: Value = NOI / cap rate = $360,000 / 0.08 = $4,500,000. Note the inverse relationship — a lower cap rate implies a higher property value for the same NOI, since the market is paying more per dollar of income (usually reflecting lower perceived risk or a stronger local market).
Direct capitalization: Value = NOI / cap rate = $360,000 / 0.08 = $4,500,000. Note the inverse relationship — a lower cap rate implies a higher property value for the same NOI, since the market is paying more per dollar of income (usually reflecting lower perceived risk or a stronger local market).