Alternative Investments
Exam Weight: ~2 questions (2% of exam)
Alternative investments are non-traditional products that carry unique risks, liquidity constraints, and structural characteristics. This unit covers five categories: limited partnerships (DPPs), exchange-traded notes (ETNs), leveraged funds, inverse funds, and structured products.
Why do you need to know this? The exam tests whether you can identify the defining features and risks of each product type and determine when they are (and are not) suitable for a given client.
What You'll Learn
- Limited partnerships: GP/LP structure, pass-through taxation, DPP types, passive loss rules, and suitability
- Exchange-traded notes: the tracking error vs credit risk tradeoff, tax advantages, and issuer risks
- Leveraged funds: daily reset mechanics, volatility decay, and why they fail long-term investors
- Inverse funds: short-term hedging use cases and why they are not permanent portfolio protection
- Structured products: principal protection mechanics, MLCDs, issuer credit risk, and suitability