CFA Institute Alternative Investments Review

Comprehensive vocabulary flashcards covering the key terms, fee structures, investment methods, and asset classes within the alternative investments curriculum as detailed in the lecture transcript.

Side letter

Agreements between the general partner and one or more limited partners that exist outside the LPA and whose terms override or modify the original limited partnership agreement terms to address unique legal, regulatory, or reporting requirements.

Committed capital

The total amount that the limited partners have promised to fund future investments; it often serves as the basis for management fees in private equity funds to encourage selective investing.

Clawback provision

A performance fee modification that grants limited partners the right to reclaim a portion of the general partner’s performance fee, usually activated when gains are lost on later deals.

High-water mark

The highest value of the fund investment achieved at a performance fee crystallization date, net of fees, which must be recuperated from declines before new performance fees can be charged.

Catch-up clause

A provision that allows a general partner to accelerate performance fees once a fund exceeds a specified soft hurdle rate.

Hurdle rate

A minimum rate of return, typically $8\%$, that the General Partner must exceed in order to earn the performance fee.

Hard hurdle rate

A fee structure where the incentive fee is based only on the return that is in excess of a specified hurdle rate.

Soft hurdle rate

A fee structure where the incentive fee is calculated on the entire annual gross return as long as the set hurdle is exceeded.

American waterfall

A distribution method also known as deal-by-deal, where performance fees are collected on a per-deal basis, allowing the GP to get paid before LPs receive their initial investment and preferred return on the entire fund.

Whole-of-fund (European) waterfall

A distribution method more advantageous to limited partners where the GP does not participate in any profits until the LPs receive their initial investment and the hurdle rate for the aggregate fund.

Co-investment

An arrangement where an investor invests in assets indirectly through a fund but also possesses rights to invest directly in the same assets alongside the fund.

Lockup period

A required period of time, common in hedge funds, before investors are permitted to make withdrawals or redeem shares.

Mezzanine debt

Private credit that is subordinated to senior secured debt but senior to equity in the borrower’s capital structure; it often includes warrants or conversion rights to provide equity participation.

Venture debt

Private debt funding provided to start-up or early-stage companies that may be generating little or negative cash flow.

Unitranche debt

A hybrid loan structure that combines different tranches of secured and unsecured debt into a single loan with a single, blended interest rate.

Trade sale

An exit strategy where a portion or division of a private company is sold to a strategic buyer interested in increasing the scale and scope of the existing business.

Growth capital

Also known as minority equity investing, this refers to investments where the firm takes a less-than-controlling interest in mature companies looking to expand or restructure.

Special Purpose Acquisition Company (SPAC)

A vehicle used for exiting a portfolio company that offers advantages such as fixed valuation, flexibility of transaction structure, and association with seasoned sponsors.

Greenfield investment

Infrastructure projects involving assets that are yet to be constructed, typically representing early-stage, higher-risk investments focused on capital appreciation.

Brownfield investment

Redevelopment of existing infrastructure or privatizations where financial and operating history is available, often appealing to investors seeking stable returns.

Social infrastructure assets

Infrastructure directed toward human activities, such as educational, health care, social housing, and correctional facilities.

Core real estate

A strategy characterized by well-leased, high-quality institutional real estate in the best markets, delivering stable returns primarily from income.

Contango

A condition in commodity futures markets where the forward curve is upward sloping because futures prices are higher than the spot price.

Backwardation

A condition where spot prices are higher than forward prices (downward sloping curve), often occurring when inventories are low and the convenience yield exceeds the cost of carry.

Convenience yield

A non-cash benefit of physical ownership of a commodity that reflects a preference for holding the physical asset rather than a derivative contract.

Market-neutral funds

Hedge funds that take long and short positions to maintain a net position neutral to market risk, ideally aiming for an overall beta of approximately zero.

Activist strategy

A hedge fund strategy where managers secure enough equity to influence a company’s policies, restructuring, or management to create a corporate outcome.

Convertible bond arbitrage

A relative value strategy seeking to exploit mispricing between a convertible bond and its component parts (the underlying bond and embedded stock option).

Tokenization

The process of representing ownership rights to physical assets on a blockchain or distributed ledger.

dApps

Decentralized applications that allow peer-to-peer interactions via smart contracts without a central coordinating mechanism.