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Subject 2. Investment Methods PDF Download

Investors can access alternative investments in three ways.

Fund Investing

The investor contributes capital to a fund which makes investments on the investor's behalf.

Advantages:

  • access to fund manager's services and expertise;
  • passive management;
  • diversification;
  • less capital required.

Disadvantages:

  • need to pay for funds' services (fees);
  • too many funds to select from: due diligence required.

Co-Investing

The investor invests in asset indirectly through the fund, but also possess rights to invest directly in the same assets.

Advantages:

  • can learn from fund's process for better direct investing;
  • reduced fees;
  • more active management of the portfolio and deeper relationship with the manager.

Disadvantages: a bit of in between fund investing and direct investing.

Direct Investing

The investor makes a direct investment in an asset without using an intermediary.

Advantages:

  • cost efficient (no management fees to pay);
  • great flexibility;
  • highest level of control over how the asset is managed.

Disadvantages:

  • requires management expertise;
  • lack of diversification;
  • less access to a fund manager's sourcing network;
  • requires greater levels of due diligence due to the absence of a fund manager;
  • higher capital requirements.

Investors conduct due diligence prior to investing in alternative investments. The due diligence approach depends on the investment method.

Learning Outcome Statements

b. describe characteristics of direct investment, co-investment, and fund investment methods for alternative investments;

CFA® 2022 Level I Curriculum, Volume 5, Module 47

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I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
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