CFA Exam Results: What Actually Happens Between Submit and Score Release

Alternative Investments is one of the most commonly neglected topic areas in CFA preparation — and one of the most rewarding to study efficiently. At Level 1 it carries 7% of the exam; at Level 2 it is another 5–10%. Combined across both levels, candidates who learn the material properly can bank a disproportionate number of marks relative to the time invested, because the topic is well-defined, the tested formulas are specific and learnable, and the competition is soft — most candidates underinvest here.

This guide covers the full Alternative Investments curriculum for Levels 1 and 2 in a structured format: what each asset class covers, what the exam tests, and the specific formulas and concepts that appear most frequently.

Why Candidates Neglect Alternative Investments

The main reason candidates skip or rush Alternative Investments is that it feels peripheral. Most CFA candidates work in traditional finance — equity or fixed income — and alternative assets feel less directly relevant to their work and harder to conceptualise. Private equity carry calculations and real estate cap rates feel distant compared to CAPM and bond duration.

This is a strategic mistake. The exam does not care about your professional background — it tests the curriculum equally. And Alternative Investments, unlike some other topics, has a well-bounded and learnable set of formulas and concepts. The candidates who perform well here are simply those who studied it.

Section 1: Private Equity

Structure and Mechanics

Private equity (PE) funds are closed-end funds that invest in companies that are not publicly traded (or that are taken private from public markets). The typical PE structure involves a General Partner (GP) who manages the fund and Limited Partners (LPs) who provide the capital. The GP earns a management fee (typically 1.5–2% of committed capital) and a carried interest — a share of profits above a hurdle rate, typically 20% of profits above an 8% hurdle.

The timeline of a PE fund: capital commitment (LPs commit capital), capital calls (the GP calls capital as investments are identified), investment period (portfolio construction), and harvest period (exits through IPOs, sales, or recapitalisation). Most PE funds have a 10-year life with two one-year extension options.

Key Formulas: PE Performance Metrics

These are the four PE performance metrics tested at Level 2 — learn them precisely:

• DPI (Distributions to Paid-In Capital): Cumulative distributions to LPs / Paid-in capital. Measures how much cash has been returned to investors relative to the capital they invested. A DPI of 1.0x means investors have received back exactly what they put in.
• RVPI (Residual Value to Paid-In Capital): Net asset value of the fund / Paid-in capital. Measures the remaining unrealised value relative to invested capital.
• TVPI (Total Value to Paid-In Capital): DPI + RVPI. The total value creation (realised + unrealised) relative to invested capital. Also called the investment multiple or MOIC (Multiple on Invested Capital).
• IRR (Internal Rate of Return): The discount rate that sets the NPV of all cash flows (capital calls as outflows, distributions as inflows) to zero. The most comprehensive PE performance measure because it accounts for the timing of cash flows. GIPS requires the use of IRR for PE performance reporting, not TWR.

The exam frequently asks you to calculate DPI, RVPI, and TVPI given a table of capital calls and distributions, and to interpret what these metrics say about a fund's performance. DPI above 2.0x is generally considered strong for a buyout fund; below 1.0x means investors have not yet recouped their capital (but RVPI may still make the total picture positive).

Carried Interest Calculation

Carried interest = GP's share of profits above the hurdle rate. If a fund has a 20% carry above an 8% hurdle: if the fund returns 15%, the GP earns 20% of the profit above the 8% hurdle. Whether the hurdle is a hard hurdle (GP earns carry only on profits above the hurdle) or a soft hurdle (GP catches up to full carry once the hurdle is cleared) changes the calculation. Know both variants.

Section 2: Real Estate

Direct Real Estate Valuation Methods

Real estate can be valued using three approaches, all of which appear on the exam:

• Income Approach — Direct Capitalisation: Value = Net Operating Income / Cap Rate. NOI is calculated as gross potential rent minus vacancy and credit losses minus operating expenses (not including depreciation or debt service). The cap rate reflects the required return adjusted for expected NOI growth — a lower cap rate implies a higher price relative to income.
• Income Approach — DCF: Project NOI over a hold period, plus the terminal value at the end of the hold period (usually estimated by applying a cap rate to the final year's NOI), and discount at the required return. More flexible than direct capitalisation but requires more assumptions.
• Sales Comparison Approach: Value the property relative to comparable recent transactions, adjusted for differences in size, location, condition, and lease terms. Used as a cross-check and the primary method when income data is unreliable.
• Cost Approach: Land value plus depreciated replacement cost of improvements. Used for specialised properties with no comparable sales or income data (government buildings, churches). Less relevant for typical investment real estate.

Key formula: NOI = Gross Potential Rent × (1 – Vacancy Rate) – Operating Expenses. Never include financing costs (interest, debt service) in NOI — they are a function of capital structure, not the property's earning power.

REIT Valuation

Real estate investment trusts (REITs) are publicly traded vehicles that own income-producing real estate. REIT-specific valuation metrics tested at Level 1 and 2:

• Funds from Operations (FFO): Net income + Depreciation – Gains on property sales. The most common REIT profitability measure, because depreciation is a non-cash charge that distorts reported earnings for real estate companies.
• Adjusted FFO (AFFO): FFO – Recurring maintenance capital expenditure – Straight-line rent adjustments. A more conservative measure of distributable cash flow.
• Net Asset Value (NAV): Market value of properties – Liabilities. REITs trading at a discount to NAV may be undervalued; those trading at a premium may reflect the market's expectation of future acquisitions or above-market management.

Section 3: Hedge Funds

Strategies Tested

The CFA curriculum covers six primary hedge fund strategy categories. Know the definition and risk/return characteristics of each:

• Long/Short Equity: Long undervalued stocks, short overvalued stocks. Net long bias is common. The short book provides a hedge but introduces short squeeze risk.
• Global Macro: Top-down directional bets on currencies, interest rates, commodities, and equity indices based on macroeconomic views. High volatility, high potential return.
• Event-Driven: Merger arbitrage (buy target, short acquirer in announced M&A), distressed debt investing, special situations. Returns depend on deal completion probability.
• Relative Value (Market Neutral): Exploit pricing relationships between related securities — pairs trading, convertible arbitrage, fixed income relative value. Low net market exposure; returns from spread convergence.
• Managed Futures (CTA): Trend-following strategies across futures markets. Rules-based, diversified across asset classes.
• Emerging Market: Long positions in equity, fixed income, or currencies of emerging market countries. High country-specific risk; limited short-selling in many markets.

Fee Structure

Hedge funds typically charge a management fee (1–2% of AUM) and a performance fee (20% of profits above the high-water mark). The high-water mark ensures the manager only earns performance fees on new profits — if the fund loses value, the manager must recover those losses before earning performance fees again. This aligns incentives and prevents the manager from earning fees on the same gains twice.

Section 4: Commodities and Infrastructure

Commodities

Commodities are tested primarily at Level 1 through the framework of commodity futures returns. Total commodity futures return has three components: roll yield (the return from rolling expiring futures contracts into new ones — positive when the curve is in backwardation, negative in contango), collateral yield (the return on the cash collateral posted against futures positions — typically Treasury bill yield), and spot return (the change in the underlying commodity price).

Backwardation (futures price below spot) and contango (futures price above spot) are terms every candidate must know. Markets in backwardation typically indicate physical supply tightness; contango reflects ample supply or high storage costs. The roll yield is the primary source of total return difference between passively managed commodity indices in different market conditions.

Infrastructure

Infrastructure investments (toll roads, airports, utilities, pipelines) are characterised by long asset lives, inflation-linked revenues, stable and predictable cash flows, high barriers to entry, and typically regulated or quasi-monopoly status. They provide portfolio diversification benefits and act as an inflation hedge. The main risks are regulatory risk (governments can change the pricing framework), construction risk (for greenfield investments), and demand risk (traffic or volume risk for assets without revenue guarantees).

Study Approach: Making Alternative Investments Work for You

The most efficient study approach for Alternative Investments is formula-focused and concept-focused, with relatively less time on institutional background. The exam does not typically ask you to describe the regulatory environment for hedge funds or the history of private equity — it tests formulas, definitions, and the ability to identify which alternative asset class characteristics match a given scenario.

Build a formula sheet covering: NOI calculation, cap rate valuation, FFO and AFFO, DPI/RVPI/TVPI, commodity futures return components (roll yield, collateral yield, spot return), and carried interest calculation. Review this sheet weekly in the final month of preparation.

For practice, our Level 1 and Level 2 mock exams include Alternative Investments questions broken down to the sub-topic level — private equity metrics, real estate valuation, hedge fund strategies — so you can identify precisely where your preparation is thin without guessing.

The candidates who treat Alternative Investments as a bonus topic — doing just enough to avoid catastrophic underperformance — leave marks on the table. The candidates who invest 15–20 focused hours in this topic at Level 1 and another 15 hours at Level 2 consistently score above 70% and bank easy marks that support their overall result.