CFA Level II Alternative Investments

CFA Level II Alternative Investments covers four readings: commodities and commodity derivatives, real estate investment types, publicly traded real estate securities, and hedge fund strategies. Each reading asks you to compare characteristics, interpret exposures, and in several cases calculate a specific result. Use the directory below to find the note that matches what you need to study.

Key Takeaways

• Commodity analysis connects sector characteristics, spot-futures relationships, return components, swaps, and index construction.

• Real estate analysis starts with the type of ownership claim, then moves to value drivers, due diligence, and valuation method selection.

• Publicly traded real estate analysis adds NAVPS, FFO and AFFO, and share valuation using NAV, multiples, and DCF methods.

• Hedge fund analysis distinguishes strategy implementation, risk exposure, and the effect of an allocation on a broader portfolio.

• The verb in each learning outcome determines what you need to do: describe, compare, calculate, interpret, or evaluate.

What You Need to Know for CFA Level II

Alternative Investments at CFA Level II focuses on how different investment strategies and assets are analyzed, valued, and used within portfolios. The topic covers four main areas.

Commodities and Commodity Derivatives

Understand how commodity markets work, including the roles of market participants, commodity sectors, and price cycles. Learn how commodity futures are priced, how futures returns are broken down, and how swaps provide commodity exposure.

Real Estate Investments

Examine different ways to invest in real estate and the factors that influence property values. Focus on valuation methods, due diligence, ownership structures, and the limitations of real estate market indexes.

Publicly Traded Real Estate Securities

Learn how publicly traded real estate investments are structured and valued. Understand key measures such as net asset value per share (NAVPS), funds from operations (FFO), and adjusted funds from operations (AFFO), including how analysts use them to assess real estate securities.

Hedge Fund Strategies

Explore the main hedge fund strategy categories and how they generate returns. Understand the role of risk factors, the characteristics of different strategies, and how hedge fund allocations can affect overall portfolio risk and diversification.

Outcome counts refer to the official learning outcome statements, not exam question counts or topic weights.

Browse CFA Level II Alternative Investments Study Notes

Introduction to Commodities and Commodity Derivatives

These eight notes cover physical and derivative commodity markets. You compare sector characteristics, examine futures pricing and curve shapes, break total return into its components, and see how swaps and indexes create different commodity exposures.

• Commodity Sectors and the Commodity Life Cycle . Compare commodity sector features and production-to-consumption cycles that shape supply, demand, and price behavior.

• Commodity Valuation vs Equities and Bonds . Distinguish commodity valuation, which relies on supply and demand, from equity and bond cash-flow methods.

• Commodity Futures Market Participants . Identify hedgers, speculators, and arbitrageurs by their economic exposure and trading purpose.

• Contango, Backwardation, Spot-Futures Relationships, and Roll Return . Analyze curve shape, convergence, and how roll return differs across contango and backwardation.

• Theories of Commodity Futures Returns . Compare insurance, hedging-pressure, and storage theories that explain commodity futures return patterns.

• Commodity Futures Total Return: Spot, Roll, and Collateral Return . Calculate and interpret the spot, roll, and collateral components of futures return.

• Commodity Swaps and Commodity Exposure . Trace fixed and floating swap legs to see how they create specific commodity exposures.

• Commodity Index Construction and Return Effects . Explain how weighting, maturity choice, and rolling rules affect commodity index returns.

Overview of Types of Real Estate Investment

These six notes cover real estate claims, property economics, and performance measurement. You compare ownership claims, connect value drivers to portfolio role, review commercial property types, and apply due diligence findings to valuation and index interpretation.

• Real Estate Investment Forms and Features for Valuation . Compare public, private, debt, and equity claims and the features that drive their valuation.

• Economic Value Drivers and Portfolio Role of Real Estate . Connect leases, local market conditions, and operating costs to property value and portfolio role.

• Commercial Property Types and Investment Characteristics . Compare property types by lease structure, tenant risk, operating demands, and economic sensitivity.

• Real Estate Due Diligence and Valuation Approaches . Translate due diligence findings into valuation assumptions and the choice of valuation method.

• Real Estate Valuation Using Direct Capitalization and DCF . Review direct capitalization and discounted cash flow assumptions used in commercial property valuation.

• Real Estate Investment Indexes: Construction and Potential Biases . Assess appraisal smoothing, transaction selection, and lag effects that bias index returns.

Investments in Real Estate through Publicly Traded Securities

These five notes cover listed real estate securities. You distinguish REIT structures, estimate net asset value per share, interpret FFO and AFFO, and apply NAV, multiples, and DCF approaches to REIT share valuation.

• Publicly Traded Real Estate Securities and REIT Types . Distinguish REIT and other listed real estate business models and their cash flow claims.

• REIT NAVPS Valuation . Estimate net asset value per share from forecast net operating income and senior claims on assets.

• REIT Valuation Using FFO and AFFO . Interpret FFO and AFFO adjustments and understand their comparability limits across REITs.

• REIT Share Valuation Using NAV, Multiples, and DCF . Calculate and interpret REIT share value using asset-based, relative-value, and cash flow approaches.

• Publicly Traded Real Estate Securities vs Private Vehicles . Compare access, liquidity, control, and valuation tradeoffs between listed and private real estate.

Hedge Fund Strategies

These nine notes cover hedge fund classification and strategy analysis. You compare strategy families, assess implementation and risk, interpret factor model exposures, and evaluate how a hedge fund allocation changes a traditional portfolio.

• Hedge Fund Strategy Classification . Classify hedge fund strategy families by return mechanism, implementation approach, and principal source of risk.

• Equity-Related Hedge Fund Strategies . Compare long-short, short-bias, and equity market-neutral exposures and their implementation risks.

• Event-Driven Hedge Fund Strategies . Assess merger arbitrage and distressed strategy catalysts, implementation, and asymmetric outcome risk.

• Relative Value Hedge Fund Strategies . Explain convergence trades and the funding and liquidity risks behind relative value positions.

• Opportunistic Hedge Fund Strategies . Compare global macro and managed futures approaches and their conditional role in a portfolio.

• Specialist Hedge Fund Strategies . Analyze specialist volatility and reinsurance strategies, their tail risk, and liquidity constraints.

• Multi-Manager Hedge Fund Strategies . Compare fund-of-funds and platform structures by manager overlap, fee layers, and flexibility.

• Factor Models for Hedge Fund Risk Exposures . Interpret average and state-dependent factor sensitivities and the limits of estimated alpha.

• Hedge Fund Allocation Impact in a Traditional Portfolio . Evaluate how a hedge fund allocation affects portfolio return, risk, fees, and liquidity.

Where to Start Your Alternative Investments Review

• Confused about futures return. Start with curve shape and roll return, then use the total return note to separate spot, roll, and collateral contributions.

• Studying REIT valuation. Review investment and security types first, then use the NAVPS and FFO/AFFO notes for inputs before the integrated share valuation note.

• Reviewing hedge fund strategies. Identify the strategy family, study its implementation and risks, then examine factor exposures and portfolio allocation effects.

• Working through property analysis. Connect investment form and value drivers to due diligence and valuation approaches, then review index biases when comparing measured performance.

These are study suggestions, not a required sequence.

Common Mistakes When Reviewing Alternative Investments

Reading a futures curve as a return forecast

A contango or backwardation label describes curve shape, not a guaranteed total return. Roll return, spot return, and collateral return each contribute separately. Review the commodity return notes to separate these components before drawing a conclusion.

Mixing up property value, equity NAV, and per-share value

Property value, net asset value, and net asset value per share answer different questions. Identify the claim and the unit before you select inputs, especially in REIT valuation where NAVPS and share price are not the same number.

Treating a strategy label or smoothed return as proof of low risk

Appraisal-based real estate returns and some hedge fund strategy labels can understate underlying economic risk. A smoothed index or a market-neutral label does not mean exposure is low. Separate measured returns from actual risk exposure before you evaluate a strategy or an index.

Memorizing terms without practicing the required LOS action

Knowing what FFO or a roll return is does not mean you can calculate or interpret it under exam conditions. Use the child note that matches the required action, whether that is a calculation, a comparison, or an evaluation.

FAQs About CFA Level II Alternative Investments