CFA Level I subject

Alternative Investments practice questions

Alternative Investments questions emphasize private capital, real estate, infrastructure, natural resources, hedge funds, digital assets, and performance measurement. This section currently includes 109 public practice questions across 24 topic modules, with explanations, formulas, traps, and key takeaways.

Indicative public exam weight: 7-10%. Start with a topic guide when you need focused review, or use adaptive mode for mixed practice and due reviews.

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1. Alternative Investment Features, Methods, and Structures

9 public questions with explanations, formulas, and exam traps.

2. Alternative Investment Performance and Returns

9 public questions with explanations, formulas, and exam traps.

3. Investments in Private Capital: Equity and Debt

9 public questions with explanations, formulas, and exam traps.

4. Real Estate

9 public questions with explanations, formulas, and exam traps.

5. Infrastructure

9 public questions with explanations, formulas, and exam traps.

6. Natural Resources

8 public questions with explanations, formulas, and exam traps.

7. Hedge Funds

8 public questions with explanations, formulas, and exam traps.

8. Introduction to Digital Assets

8 public questions with explanations, formulas, and exam traps.

Alternative Fee Calculation

1 public question with explanations, formulas, and exam traps.

Alternative Investment Features, Methods, and Structures

3 public questions with explanations, formulas, and exam traps.

Alternative Investment Performance and Returns

6 public questions with explanations, formulas, and exam traps.

Digital Assets

2 public questions with explanations, formulas, and exam traps.

Features, Methods, and Structures

1 public question with explanations, formulas, and exam traps.

Fees and Returns

1 public question with explanations, formulas, and exam traps.

Hedge Funds

5 public questions with explanations, formulas, and exam traps.

Introduction to Digital Assets

3 public questions with explanations, formulas, and exam traps.

Investments in Private Capital: Equity and Debt

3 public questions with explanations, formulas, and exam traps.

Methods and Structures

1 public question with explanations, formulas, and exam traps.

Natural Resources

4 public questions with explanations, formulas, and exam traps.

Natural Resources and Commodities

1 public question with explanations, formulas, and exam traps.

Ownership and Compensation

1 public question with explanations, formulas, and exam traps.

Private Capital

2 public questions with explanations, formulas, and exam traps.

Private Capital Diversification

1 public question with explanations, formulas, and exam traps.

Real Estate and Infrastructure

5 public questions with explanations, formulas, and exam traps.

Easy

Alternative Investments

1. Alternative Investment Features, Methods, and Structures

An investment is best classified as an alternative investment when it is:

Easy

Alternative Investments

1. Alternative Investment Features, Methods, and Structures

Compared with a fund investment, a direct investment in an alternative asset most likely provides the investor with:

Easy

Alternative Investments

1. Alternative Investment Features, Methods, and Structures

In a typical limited partnership alternative investment structure, the general partner is best described as the party that:

Moderate

Alternative Investments

1. Alternative Investment Features, Methods, and Structures

A pension plan has committed to a private equity fund and is invited to invest directly alongside the fund in one portfolio company, paying reduced fees on that additional exposure. This invitation is best described as:

Moderate

Alternative Investments

1. Alternative Investment Features, Methods, and Structures

A hedge fund requires investors to keep capital invested for one year after subscription and then provide 60 days of written notice before redeeming. The one-year requirement is best described as:

Moderate

Alternative Investments

1. Alternative Investment Features, Methods, and Structures

A private capital fund has committed capital of USD80 million. During the investment period, the management fee is 1.5% of committed capital. The fund has called USD50 million and invested USD46 million. The annual management fee is closest to:

Very Difficult

Alternative Investments

1. Alternative Investment Features, Methods, and Structures

A fund-of-funds invests USD100 million in underlying hedge funds. The underlying funds report an 8.0% net return to the fund-of-funds before fund-of-funds fees. The fund-of-funds charges a 1.0% management fee on beginning assets and a 10% incentive fee on gains remaining after its management fee. The net return to the end investor is closest to:

Easy

Alternative Investments

1. Alternative Investment Features, Methods, and Structures

An alternative investment fund has a hurdle rate, a high-water mark, and a clawback provision. The provision most directly intended to prevent the manager from being paid twice for recovering prior losses is the:

Easy

Alternative Investments

1. Alternative Investment Features, Methods, and Structures

For an investor comparing fund investment, co-investment, and direct investment in infrastructure, the most accurate ranking from least investor control to greatest investor control is:

Easy

Alternative Investments

2. Alternative Investment Performance and Returns

Appraisal-based valuation of private real estate most likely causes reported returns to appear:

Easy

Alternative Investments

2. Alternative Investment Performance and Returns

A hedge fund database that includes only funds still operating at the end of the sample period is most likely affected by:

Easy

Alternative Investments

2. Alternative Investment Performance and Returns

The return measure that incorporates both distributions already received and residual value still held, but ignores the timing of cash flows, is best described as:

Moderate

Alternative Investments

2. Alternative Investment Performance and Returns

A fund begins the year with USD50 million and ends the year with USD58 million before fees. The manager charges a 2% management fee on beginning assets and a 20% incentive fee on gains remaining after the management fee. The investor net return is closest to:

Moderate

Alternative Investments

2. Alternative Investment Performance and Returns

A private capital fund has paid-in capital of USD40 million, cumulative distributions of USD28 million, and residual value of USD36 million. The multiple of invested capital is closest to:

Moderate

Alternative Investments

2. Alternative Investment Performance and Returns

A project requires an initial investment of USD100 million and is expected to distribute USD40 million at the end of Year 1 and USD80 million at the end of Year 2. The IRR is closest to:

Very Difficult

Alternative Investments

2. Alternative Investment Performance and Returns

A hedge fund begins the year at USD200 million and ends the year at USD232 million before fees. The high-water mark is USD215 million. The fund charges a 1% management fee on ending gross value and a 20% incentive fee. The hurdle rate is 5%, and incentive fees and hurdle considerations are determined after management fees. The investor net return is closest to:

Very Difficult

Alternative Investments

2. Alternative Investment Performance and Returns

An analyst observes that a private real estate index has a high Sharpe ratio and very low monthly volatility. The most appropriate interpretation is that the analyst should:

Easy

Alternative Investments

2. Alternative Investment Performance and Returns

A newly launched hedge fund reports five years of prior returns to a commercial database only after its strong early record becomes marketable. The bias most directly illustrated is:

Easy

Alternative Investments

3. Investments in Private Capital: Equity and Debt

Private equity is best described as capital that is:

Easy

Alternative Investments

3. Investments in Private Capital: Equity and Debt

A strategy that provides capital to early-stage companies with high growth potential and uncertain operating histories is best described as:

Easy

Alternative Investments

3. Investments in Private Capital: Equity and Debt

Compared with private equity, private debt most likely provides investors with:

Moderate

Alternative Investments

3. Investments in Private Capital: Equity and Debt

A private equity fund experiences negative reported performance in its early years because management fees and organizational costs are incurred before portfolio exits occur. This pattern is best described as:

Moderate

Alternative Investments

3. Investments in Private Capital: Equity and Debt

A private equity fund sells a portfolio company to an operating company in the same industry. This exit route is best described as a:

Moderate

Alternative Investments

3. Investments in Private Capital: Equity and Debt

A private debt instrument that combines senior and subordinated debt into a single loan facility is most accurately described as:

Very Difficult

Alternative Investments

3. Investments in Private Capital: Equity and Debt

A limited partner committed USD60 million to a private equity fund. The fund has called USD45 million. Cumulative distributions are USD18 million, and residual value is USD36 million. Based on called capital, the fund MOIC is closest to:

Easy

Alternative Investments

3. Investments in Private Capital: Equity and Debt

A buyout fund increases expected equity returns mainly by using debt to finance the acquisition of mature companies and by improving operations. The risk most directly increased by the debt financing is:

Very Difficult

Alternative Investments

3. Investments in Private Capital: Equity and Debt

An investor is concerned that committing to a single private equity fund in a recession vintage could dominate realized results. The most appropriate way to reduce this timing risk is to:

Easy

Alternative Investments

4. Real Estate

A publicly traded real estate investment trust most likely provides investors with:

Easy

Alternative Investments

4. Real Estate

The real estate feature that most directly means no two properties are exactly identical is:

Easy

Alternative Investments

4. Real Estate

A fully leased, high-quality office property in a major market with modest leverage and stable income is most consistent with a:

Moderate

Alternative Investments

4. Real Estate

A property has potential gross rental income of USD1,200,000, expected vacancy and collection losses of 5% of potential gross income, and operating expenses of USD420,000. Using a capitalization rate of 6.5%, the indicated property value is closest to:

Moderate

Alternative Investments

4. Real Estate

An investor buys a property for USD10 million using USD4 million of equity and USD6 million of interest-only debt. During the year, the property produces NOI of USD550,000, interest expense is USD360,000, and the property value rises to USD10.8 million. Ignoring transaction costs and taxes, the investor equity return is closest to:

Moderate

Alternative Investments

4. Real Estate

An analyst is evaluating a retail property with high exposure to a single tenant whose lease expires next year. The most relevant property-specific risk is:

Very Difficult

Alternative Investments

4. Real Estate

A property generates expected annual NOI of USD900,000. Market capitalization rates decline from 7.5% to 6.0% while NOI is unchanged. The property value increase is closest to:

Very Difficult

Alternative Investments

4. Real Estate

A private real estate fund reports quarterly values based mainly on appraisals, while a listed REIT reports prices daily in the public market. The private fund's reported return series is most likely to show:

Very Difficult

Alternative Investments

4. Real Estate

A real estate allocation is expected to provide inflation sensitivity because rents can reset over time and replacement costs may rise with the price level. The most accurate caveat is that:

Easy

Alternative Investments

5. Infrastructure

Infrastructure investments are best described as investments in:

Easy

Alternative Investments

5. Infrastructure

A toll road and an electricity transmission network are most accurately classified as:

Easy

Alternative Investments

5. Infrastructure

A project to build a new airport on undeveloped land is best described as:

Moderate

Alternative Investments

5. Infrastructure

An infrastructure asset earns revenue under a long-term agreement requiring a government entity to pay for availability, regardless of actual usage. The revenue structure is best described as:

Moderate

Alternative Investments

5. Infrastructure

The risk that a regulator changes the allowed return on a privately operated water utility is most accurately described as:

Moderate

Alternative Investments

5. Infrastructure

A regulated electricity distribution asset has tariffs linked to inflation. This feature most likely provides:

Easy

Alternative Investments

5. Infrastructure

An investor wants infrastructure exposure with the lowest construction risk and relatively stable cash flows. The most appropriate strategy is:

Easy

Alternative Investments

5. Infrastructure

A port has stable historical cash flows but revenue depends on shipping volume. A recession reduces trade activity sharply. The risk most directly realized is:

Easy

Alternative Investments

5. Infrastructure

The most accurate distinction between real estate and infrastructure is that infrastructure assets generally:

Easy

Alternative Investments

6. Natural Resources

A parcel of undeveloped land held primarily for future price appreciation is best classified as:

Easy

Alternative Investments

6. Natural Resources

A timberland investment differs from raw land because timberland most likely:

Easy

Alternative Investments

6. Natural Resources

Crude oil and copper are most accurately classified as:

Moderate

Alternative Investments

6. Natural Resources

A commodity futures strategy earns a 6% spot return, a -3% roll return, and a 2% collateral return. The total return is closest to:

Moderate

Alternative Investments

6. Natural Resources

Commodities are often considered potential inflation hedges because:

Easy

Alternative Investments

6. Natural Resources

An investor seeking direct exposure to the current spot price of gold buys a gold futures-based fund. The most accurate caution is that the fund return will also be affected by:

Moderate

Alternative Investments

6. Natural Resources

For a storable commodity, the forward price is most likely higher than the spot price when:

Easy

Alternative Investments

6. Natural Resources

A farmland investment reports low historical volatility based on infrequent private appraisals. The most accurate risk interpretation is that:

Easy

Alternative Investments

7. Hedge Funds

A hedge fund strategy that seeks to profit from announced mergers by buying target shares and shorting acquirer shares is most accurately classified as:

Easy

Alternative Investments

7. Hedge Funds

A fund-of-funds hedge fund vehicle most likely offers:

Moderate

Alternative Investments

7. Hedge Funds

A long/short equity manager is long undervalued stocks and short overvalued stocks while maintaining close to zero net market exposure. The strategy is most accurately described as:

Moderate

Alternative Investments

7. Hedge Funds

A relative value hedge fund that buys undervalued convertible bonds and hedges equity sensitivity by shorting the issuer's stock is most accurately classified as:

Moderate

Alternative Investments

7. Hedge Funds

A hedge fund borrows securities from a prime broker to sell short. The risk that losses force rapid repurchase of the securities at rising prices is best described as:

Very Difficult

Alternative Investments

7. Hedge Funds

A hedge fund begins the year at USD100 million and ends the year at USD118 million before fees. The high-water mark is USD110 million. The fund charges a 2% management fee on ending gross value and a 20% incentive fee above the high-water mark after management fees. The investor net return is closest to:

Very Difficult

Alternative Investments

7. Hedge Funds

A hedge fund has low beta to equities but uses substantial derivatives leverage and trades with several OTC counterparties. The most accurate risk assessment is that:

Very Difficult

Alternative Investments

7. Hedge Funds

A hedge fund index shows strong historical returns, but poorly performing funds stopped reporting and successful funds added prior returns when entering the database. The index is most likely affected by:

Easy

Alternative Investments

8. Introduction to Digital Assets

Distributed ledger technology is best described as technology that:

Easy

Alternative Investments

8. Introduction to Digital Assets

Loss of the private keys controlling a digital wallet most directly creates:

Moderate

Alternative Investments

8. Introduction to Digital Assets

A bank uses a blockchain-based system to settle tokenized securities between institutional clients. The application is best described as:

Moderate

Alternative Investments

8. Introduction to Digital Assets

Compared with owning a cryptocurrency directly, investing through a regulated exchange-traded product most likely reduces:

Moderate

Alternative Investments

8. Introduction to Digital Assets

A stablecoin is most accurately described as a digital asset that:

Very Difficult

Alternative Investments

8. Introduction to Digital Assets

An investor says that adding a small cryptocurrency allocation must reduce portfolio risk because its historical correlation with equities has sometimes been low. The most accurate response is that:

Easy

Alternative Investments

8. Introduction to Digital Assets

A digital asset custodian stores private keys offline but has weak procedures for authorizing withdrawals. The most relevant residual risk is:

Easy

Alternative Investments

8. Introduction to Digital Assets

The most accurate distinction between blockchain exposure and cryptocurrency exposure is that:

Moderate

Alternative Investments

Alternative Fee Calculation

A private fund begins the year with NAV of USD50 million and ends before fees at USD58 million. It charges a 1.5% management fee on beginning NAV and a 20% incentive fee on gains above a 7% hard hurdle, calculated after deducting the management fee. The net return is closest to:

Easy

Alternative Investments

Alternative Investment Features, Methods, and Structures

Compared with traditional investments in publicly traded stocks and bonds, alternative investments most likely exhibit:

Moderate

Alternative Investments

Alternative Investment Features, Methods, and Structures

Marisol Vega is a limited partner in Andean Growth Partners, a private capital fund with USD120 million of committed capital. The fund's investment period has ended, and the partnership agreement now sets the 2.0% annual management fee on invested capital remaining in the portfolio. The fund has called USD90 million, of which USD75 million was invested in portfolio companies, and investments with an original cost of USD15 million have been exited. The annual management fee is closest to:

Very Difficult

Alternative Investments

Alternative Investment Features, Methods, and Structures

A sovereign wealth fund with a small alternative-investments team decides to accept every co-investment opportunity offered by its general partners in order to lower its blended fee load. The most significant concern with this approach is that:

Easy

Alternative Investments

Alternative Investment Performance and Returns

An index provider revises a hedge fund index so that funds that stopped reporting remain in the historical record and newly added funds contribute performance history only from their inclusion date onward. Relative to the unadjusted index, the revised index's historical average return is most likely:

Moderate

Alternative Investments

Alternative Investment Performance and Returns

Kestrel Bay Fund begins the year with net asset value of USD80 million and ends the year at USD89.6 million before fees. The fund charges a 1% management fee on beginning NAV and a 15% incentive fee subject to a 6% soft hurdle. The hurdle is measured on the return net of the management fee, and once the hurdle is exceeded the incentive fee applies to the entire gain net of the management fee. The investor's net return is closest to:

Very Difficult

Alternative Investments

Alternative Investment Performance and Returns

Two years ago, Tarn River Fund reached its high-water mark of USD120 million. Last year the fund declined to a net asset value of USD105 million and paid no incentive fee. This year the fund ends at USD126 million before fees. The fund charges a 1.5% management fee on beginning NAV, and a 20% incentive fee applies to gains, measured after deducting the management fee, above the greater of the high-water mark and an 8% hard hurdle level computed on beginning NAV. This year's investor net return is closest to:

Easy

Alternative Investments

Alternative Investment Performance and Returns

Fund Xanthe reports a since-inception IRR of 22% with a multiple of invested capital of 1.4x, while Fund Ypres reports a since-inception IRR of 14% with a multiple of invested capital of 1.9x. The most accurate interpretation of these results is that:

Moderate

Alternative Investments

Alternative Investment Performance and Returns

A general partner finances new acquisitions with a subscription credit line and delays calling limited partner capital for several quarters after each deal closes. Compared with calling capital at the time of each acquisition, this practice most likely:

Very Difficult

Alternative Investments

Alternative Investment Performance and Returns

Helios Buyout Fund III acquires a company for USD100 million at the start of Year 1, funding the purchase entirely with a subscription credit line. At the end of Year 1, the fund calls USD100 million from its limited partners and repays the line's principal. The company is sold at the end of Year 2 for USD160 million; USD4 million of accrued credit line interest is paid from the sale proceeds, and the remaining USD156 million is distributed to the limited partners. Measured from the limited partners' cash flows, the fund's since-inception IRR is closest to:

Moderate

Alternative Investments

Digital Assets

A token recorded on a distributed ledger provides no contractual cash flow, has uncertain regulatory treatment, and is held through a lightly regulated offshore platform. The risks most specific to this exposure are:

Moderate

Alternative Investments

Digital Assets

A bank uses distributed ledger technology to reduce reconciliation time in cross-border settlement while maintaining permissioned access for regulated institutions. This application is best described as:

Moderate

Alternative Investments

Features, Methods, and Structures

An institutional investor contributes capital directly into a single infrastructure project alongside a private infrastructure fund that controls sourcing, due diligence, and operational oversight. The investor's method is best described as:

Moderate

Alternative Investments

Fees and Returns

A hedge fund begins the year with NAV of USD100 million. The high-water mark is USD112 million. The fund ends the year before fees at USD116 million. Management fee is 2% of beginning NAV, and incentive fee is 20% of gains above the high-water mark, calculated after the management fee is separately charged. The investor's net return is closest to:

Easy

Alternative Investments

Hedge Funds

Hedge fund manager Lena Okafor takes leveraged long and short positions in currencies, sovereign bonds, and equity index futures based on her views of central bank policy and global growth trends. Her strategy is most accurately classified as:

Moderate

Alternative Investments

Hedge Funds

Following heavy redemption requests during a market drawdown, a hedge fund invokes a provision in its offering documents that limits total investor withdrawals to 10% of fund assets in any single quarter. This provision is best described as a:

Very Difficult

Alternative Investments

Hedge Funds

A hedge fund's net asset value stands 30% below its high-water mark after two losing years, and most investor capital remains subject to the original fee terms. The fund's incentive fee structure most likely encourages the manager to:

Moderate

Alternative Investments

Hedge Funds

A hedge fund holds long positions in undervalued equities and short positions in overvalued equities within the same sector, targeting near-zero beta to the broad equity market. The strategy is best described as:

Moderate

Alternative Investments

Hedge Funds

A hedge fund reports unusually smooth monthly returns despite holding hard-to-value distressed securities and using side pockets. The appraisal issue most likely affecting performance analysis is:

Easy

Alternative Investments

Introduction to Digital Assets

Compared with a proof-of-work consensus mechanism, a proof-of-stake mechanism most likely:

Moderate

Alternative Investments

Introduction to Digital Assets

A proposed change to a blockchain's protocol is adopted by only part of the network, and the ledger permanently splits into two incompatible chains, each supporting its own token. This event is best described as:

Very Difficult

Alternative Investments

Introduction to Digital Assets

Wei Lin wants long-term exposure to the spot price of a cryptocurrency and compares three implementations: holding the coins directly through a qualified custodian, a spot-based exchange-traded product, and a futures-based exchange-traded product. If the cryptocurrency's futures curve is persistently upward sloping, the implementation least likely to track the spot price over a multi-year horizon is:

Easy

Alternative Investments

Investments in Private Capital: Equity and Debt

A buyout fund exits a portfolio company by selling it to another private equity firm. This exit route is best described as:

Moderate

Alternative Investments

Investments in Private Capital: Equity and Debt

The private credit arm of Banco Aurora provides a loan to a profitable mid-sized manufacturer. The loan is contractually subordinated to the company's senior secured bank debt and includes detachable warrants on the borrower's equity. This instrument is most accurately classified as:

Very Difficult

Alternative Investments

Investments in Private Capital: Equity and Debt

Priya Raman, chief investment officer of a family office, wants private equity exposure but wishes to shorten the period of negative reported returns caused by early fees and unrealized portfolio costs. Holding strategy and manager quality constant, the approach most likely to achieve this objective is:

Moderate

Alternative Investments

Methods and Structures

Compared with a diversified alternative investment fund, a direct investment in one toll road most likely provides:

Easy

Alternative Investments

Natural Resources

A commodity futures market is in backwardation. For an investor who maintains a long position by repeatedly rolling expiring contracts into later-dated contracts, this condition most likely:

Moderate

Alternative Investments

Natural Resources

A fully collateralized long commodity futures strategy earns a total return of 5.2% for the year. Over the same period, the spot price return of the underlying commodity is 4.0% and the collateral return is 3.1%. The roll return is closest to:

Very Difficult

Alternative Investments

Natural Resources

Inventories of a storable industrial metal fall to unusually low levels, and manufacturers place a high premium on holding immediate physical supply to avoid production stoppages. The most likely effect on the metal's futures curve is that it:

Moderate

Alternative Investments

Natural Resources

Timberland returns are often described as having a biological growth component. The most accurate implication is that timberland:

Moderate

Alternative Investments

Natural Resources and Commodities

An investor gains commodity exposure through fully collateralized futures. Spot commodity prices are unchanged, the collateral earns 3%, and the futures curve is in contango so expiring contracts are rolled into higher-priced longer contracts. The futures-based return is most likely:

Moderate

Alternative Investments

Ownership and Compensation

In a limited partnership private fund, the general partner's carried interest is best described as:

Moderate

Alternative Investments

Private Capital

A fund invests in established private companies using significant acquisition debt, operational restructuring, and planned exits through sale or IPO. The strategy is best classified as:

Moderate

Alternative Investments

Private Capital

A private debt fund provides a senior secured loan to a middle-market company whose cash flows are stable but whose public bond market access is limited. Compared with private equity, the private debt investment most likely has:

Moderate

Alternative Investments

Private Capital Diversification

A large endowment adds private capital to a public equity and bond portfolio. The diversification benefit is most credible when private capital returns are:

Easy

Alternative Investments

Real Estate and Infrastructure

An equity real estate manager acquires an apartment complex with elevated vacancy, plans targeted renovations and re-leasing, and expects to sell once occupancy stabilizes. This strategy is best classified as:

Moderate

Alternative Investments

Real Estate and Infrastructure

An appraiser values an office property using the income approach. A comparable property recently sold for USD12.5 million and generates annual net operating income of USD875,000. The subject property has potential gross income of USD1,600,000, vacancy and collection losses of 6% of potential gross income, and operating expenses of USD454,000. The value of the subject property is closest to:

Very Difficult

Alternative Investments

Real Estate and Infrastructure

An infrastructure analyst compares three assets: a school facility receiving fixed availability payments from a government counterparty, a regulated water utility with inflation-linked tariffs, and an unregulated toll road whose revenue depends entirely on traffic volumes. The most accurate ranking of expected cash flow variability, from lowest to highest, is:

Moderate

Alternative Investments

Real Estate and Infrastructure

A pension plan wants exposure to stabilized office properties but requires daily liquidity and small ticket sizes. The most appropriate implementation is most likely:

Moderate

Alternative Investments

Real Estate and Infrastructure

An asset has high upfront capital costs, long operating life, essential-service demand, and revenue partly linked to inflation through regulation or concession agreements. The asset is best classified as: