Reading 58: Introduction to Alternative Investments
The CFA curriculum is always changing and this last reading of Level 1 has been completely overhauled by the Institute and is considered a new reading. There is only this one reading regarding alternative investments, but you still don’t want to overlook the material in this section. As alternatives become more important in the market, it’s safe to expect this to play a bigger role in higher level curriculums in the future.
Alternative investments include any assets that do not fall into the traditional asset class categories of equity and fixed income. It can include derivatives, real estate, commodities, short-selling of stocks, or many others. Common characteristics of alternative investments include limited liquidity, low correlation of returns with traditional assets, lax regulation, low transparency, and special tax and legal considerations. The primary benefit of investing in alternatives is the diversification effect due to the low correlation of returns compared to traditional investments.