{"id":41246,"date":"2022-10-10T06:19:12","date_gmt":"2022-10-10T06:19:12","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=41246"},"modified":"2026-02-26T10:37:31","modified_gmt":"2026-02-26T10:37:31","slug":"investment-methods-in-alternative-investments","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/investment-methods-in-alternative-investments\/","title":{"rendered":"Investment Methods in Alternative Investments"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Categories, Characteristics, and Compensation Structures of Alternative Investments (2025 CFA\u00ae Level I \u2013 Alternative Investments \u2013 Module 1)\",\n  \"description\": \"CFA\u00ae Level I \u2013 Alternative Investments (Module 1). This lesson explains the major categories of alternative investments and their key characteristics. Learn the differences between direct, co-investment, and fund investment approaches, as well as common investment and compensation structures such as management fees, performance fees, carried interest, and incentive-based arrangements.\",\n  \"uploadDate\": \"2022-10-12\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/lTgv8Ls0lFY\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=lTgv8Ls0lFY\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/lTgv8Ls0lFY\",\n  \"duration\": \"PT36M04S\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"What is most likely a disadvantage of co-investing?\",\n    \"text\": \"Which of the following is most likely a disadvantage of co-investing?\\n\\nA. It may be subject to adverse selection bias.\\n\\nB. The investor won\u2019t enjoy fund diversification benefits.\\n\\nC. Selecting the right fund is not easy because of information asymmetry.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A. Co-investing may be subject to adverse selection bias because fund managers might allocate more attractive opportunities to their own capital while offering less attractive deals to co-investors. Lack of diversification is typically a disadvantage of direct investing, and information asymmetry is more commonly associated with fund investing.\"\n    }\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"@id\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2022\/10\/Img_1-5-1-1536x1179.jpg#image\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2022\/10\/Img_1-5-1-1536x1179.jpg\",\n  \"contentUrl\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2022\/10\/Img_1-5-1-1536x1179.jpg\",\n  \"name\": \"Investment Methods in Alternative Investments\",\n  \"caption\": \"Illustration depicting investment methods used in alternative investments.\",\n  \"description\": \"Visual summary from the CFA Level 1 *Investment Methods in Alternative Investments* page showing different approaches, techniques, or vehicles used when investing in alternative assets such as hedge funds, private equity, real estate, commodities, and other non-traditional investment categories.\",\n  \"encodingFormat\": \"image\/jpeg\",\n  \"width\": 1536,\n  \"height\": 1179,\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  },\n  \"creditText\": \"AnalystPrep\",\n  \"copyrightNotice\": \"\u00a9 AnalystPrep\",\n  \"mainEntityOfPage\": {\n    \"@type\": \"WebPage\",\n    \"@id\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/investment-methods-in-alternative-investments\/\"\n  },\n  \"isPartOf\": {\n    \"@type\": \"WebPage\",\n    \"@id\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/investment-methods-in-alternative-investments\/\"\n  }\n}\n<\/script>\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/lTgv8Ls0lFY\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Methods of investing in alternative investments include:<\/p>\n<ul>\n<li>Fund investing.<\/li>\n<li>Co-investing.<\/li>\n<li>Direct investing.<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-44242 size-full\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2022\/10\/Img_1-5-1.jpg\" alt=\"\" width=\"1590\" height=\"1220\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2022\/10\/Img_1-5-1.jpg 1590w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2022\/10\/Img_1-5-1-300x230.jpg 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2022\/10\/Img_1-5-1-1024x786.jpg 1024w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2022\/10\/Img_1-5-1-768x589.jpg 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2022\/10\/Img_1-5-1-1536x1179.jpg 1536w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2022\/10\/Img_1-5-1-400x307.jpg 400w\" sizes=\"auto, (max-width: 1590px) 100vw, 1590px\" \/><\/p>\n<div style=\"text-align: center; margin: 20px 0 24px;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 10px 18px; border: 2px solid #1a73e8; border-radius: 999px; background: #f5f9ff; color: #1a73e8; text-decoration: none; font-weight: 600; font-size: 14px;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Compare alternative investment methods with CFA-style practice <\/a><\/div>\n<h2>Fund Investing<\/h2>\n<p>In fund investing, investors contribute capital to a fund, and then the fund identifies, chooses, and makes investments on behalf of the investors. Investors pay a fee based on the value of the fund managers\u2019 assets. In addition, they pay a performance fee if the fund manager delivers a return above the benchmark.<\/p>\n<p>Fund investing can be termed as indirect investing in alternative assets. This is because fund investors\u2019 investment decisions are based on whether to invest in a fund or not. Furthermore, investors do not influence a fund\u2019s investments.<\/p>\n<p>Fund investing applies to all types of alternative investments.<\/p>\n<h3>Advantages of Fund Investing<\/h3>\n<ul>\n<li>Fund investing requires less investor involvement compared to direct and co-investing.<\/li>\n<li>The alternative investment option is accessible to anyone, regardless of their expertise.<\/li>\n<li>Diversification benefits come from the multiple investments found in a single fund.<\/li>\n<li>It requires a low minimum capital compared to the other investments.<\/li>\n<\/ul>\n<h3>Disadvantages of Fund Investing<\/h3>\n<ul>\n<li>It is costly since an investor must pay management and performance fees.<\/li>\n<li>An investor is expected to conduct due diligence when selecting the appropriate fund.<\/li>\n<li>There are exit restrictions due to lockups and similar limitations.<\/li>\n<\/ul>\n<h2>Co-investing<\/h2>\n<p>In co-investing, an investor indirectly invests in assets through a fund. Nevertheless, the investor owns the rights (co-investment rights) to invest in the same assets directly. Intuitively, co-investing allows the investor to make parallel investments when the fund identifies a lucrative deal.<\/p>\n<h3>Advantages of Co-investing<strong>\u00a0<\/strong><\/h3>\n<ul>\n<li>An investor can learn from the fund\u2019s expertise and improve at direct investing.<\/li>\n<li>Investors co-invest an additional amount into an investment, often without paying management fees on the capital they used for direct investments.<\/li>\n<li>Co-investing allows investors to be more actively involved in managing their portfolios than fund investing.<\/li>\n<\/ul>\n<h3>Disadvantages of Co-investing<strong>\u00a0<\/strong><\/h3>\n<ul>\n<li>Co-investors have limited control over the investment selection process compared to direct investing.<\/li>\n<li>It may be subject to adverse selection. \u00a0A fund may offer less attractive investment opportunities to the co-investor while allocating capital to more appealing deals.<\/li>\n<\/ul>\n<ul>\n<li>Co-investing requires an investor to be more actively involved since they must evaluate both investment opportunities and the fund manager.<\/li>\n<\/ul>\n<h2>Direct Investing<\/h2>\n<p>In direct investment, an investor directly invests in an asset without using any intermediary. Direct investing, therefore, gives investors higher control and flexibility when selecting investments, financing methods, and approaches. However, investing directly in alternative investments is most popular among established private equity and real estate investors. Pension funds and sovereign wealth funds may also invest in infrastructure and natural resources.<\/p>\n<h3>Advantages of Direct Investing<strong>\u00a0<\/strong><\/h3>\n<ul>\n<li>An investor avoids paying ongoing management fees to an external manager.<\/li>\n<li>Direct investing allows an investor to create a portfolio of investments that suits their needs.<\/li>\n<li>Direct investing provides an investor with the utmost flexibility and control over their investment.<\/li>\n<\/ul>\n<h3>Disadvantages of Direct Investing<strong>\u00a0<\/strong><\/h3>\n<ul>\n<li>Direct investing requires a greater level of investment expertise.<\/li>\n<li>A direct investor won\u2019t enjoy the diversification benefits of fund investing.<\/li>\n<li>Direct investing requires more significant levels of due diligence because of the absence of a fund manager.<\/li>\n<li>Compared to fund investing, it requires a higher minimum capital.<\/li>\n<\/ul>\n<h2>Due Diligence for Fund Investing, Direct Investing, and Co-investing<\/h2>\n<p>In direct investment, an investor chooses the company to invest in. However, there is a need for high and competence-based due diligence before they invest in a private company.<\/p>\n<p>Fund investing provides the benefits of a diversified portfolio, but this advantage comes at an additional cost. Even though the fund performs due diligence on the ventures to invest in, the investor, too, must perform due diligence on the fund manager, before investing in a fund.<\/p>\n<p>In co-investing, the general partner assists the investor in performing direct due diligence on a portfolio company.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p><strong>\u00a0<\/strong>Which of the following is\u00a0<em>most<\/em>\u00a0<em>likely<\/em>\u00a0a disadvantage of co-investing?<\/p>\n<p>A. It may be subject to adverse selection bias.<\/p>\n<p>B. The investor won\u2019t enjoy fund diversification benefits.<\/p>\n<p>C. Selecting the right fund is not easy because of the information asymmetry.<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is\u00a0<strong>A<\/strong>.<\/p>\n<p>Co-investing may be subject to adverse selection bias. This is because the fund avails less attractive investment opportunities to the co-investor while allocating its own capital to more appealing deals.<\/p>\n<p><strong>B<\/strong>\u00a0<strong>is<\/strong>\u00a0<strong>incorrect<\/strong>. Being unable to enjoy the diversification benefits is a disadvantage of direct investing, not co-investing.<\/p>\n<p><strong>C<\/strong>\u00a0<strong>is<\/strong>\u00a0<strong>incorrect<\/strong>. Selecting the right fund is difficult because information asymmetry is a disadvantage of fund investing.<\/p>\n<\/blockquote>\n<div style=\"text-align: center; margin-top: 46px;\"><a style=\"display: inline-block; padding: 18px 58px; background-color: #2563eb; color: #ffffff; text-decoration: none; border-radius: 14px; font-weight: bold; font-size: 17px; letter-spacing: 0.3px;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Start Free Trial \u2192 <\/a><\/div>","protected":false},"excerpt":{"rendered":"<p>Methods of investing in alternative investments include: Fund investing. Co-investing. Direct investing. Compare alternative investment methods with CFA-style practice Fund Investing In fund investing, investors contribute capital to a fund, and then the fund identifies, chooses, and makes investments on&#8230;<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[11],"tags":[],"class_list":["post-41246","post","type-post","status-publish","format-standard","hentry","category-alternative-investments","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Investment Methods in Alternative Investments | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Learn about fund investing, co-investing, and direct investing in alternative assets, and their advantages and risks.\" \/>\n<meta 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