Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

Which alternative asset type is primarily differentiated by its institutional structure?

1. Hedge funds.

2. Structured products.

3. Private equity.

4. Real assets.

The correct answer is: Private equity.

Private equity is primarily differentiated by its institutional structure, which is characterized by a complex arrangement of funds, management companies, and investors. This structure typically involves a committed capital approach where investors, known as limited partners, pledge funds for a specific period, often extending over several years. The private equity firm, acting as the general partner, manages these investments with a focus on acquiring and managing private companies or assets, often employing leverage to enhance returns. The structure facilitates a concentrated investment approach, allowing private equity firms to actively engage with portfolio companies to drive operational improvements and strategic growth. This distinct framework of fund formation, investor roles, and investment durations sets private equity apart from other alternative assets, such as hedge funds, structured products, or real assets, which may not have the same level of dedicated institutional organization and long-term capital commitment.