Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

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Which factor does NOT contribute to illiquidity constraints in alternative investments?

Investment duration
Geographic location of asset
Market regulations
Investor sentiment

The correct answer is: Investor sentiment

Investor sentiment does not contribute to illiquidity constraints in alternative investments because illiquidity is primarily driven by structural and operational factors rather than psychological factors. Investment duration is a critical factor influencing liquidity, as longer-term investments, typical in alternative assets, may take more time to unwind. Meanwhile, the geographic location of an asset plays a role since assets in less active markets or remote areas may have fewer buyers and sellers, leading to reduced liquidity. Market regulations can also impose constraints, as laws and policies may restrict trading practices or impose requirements that inhibit the ease of buying or selling assets. In contrast, while investor sentiment can affect market conditions and perceptions of value, it does not fundamentally change the liquidity characteristics of the underlying assets; thus, it is not a direct contributor to illiquidity constraints in the same way that the other factors are.