CAIA Level II study guide
CAIA Level II · Work through your exam, one topic at a time.
CAIA Level II is the second and final examination in the Chartered Alternative Investment Analyst program, the professional credential for people who allocate capital to, or manage money within, alternative asset classes. It is generally taken after Level I and is aimed at candidates who already command the vocabulary of alternatives and now need to apply it: structuring, due diligence, risk budgeting, valuation, and portfolio-level decisions rather than pure definitions. The CAIA Level II study guide has 7 sections and about 2,060 words.
01Asset Allocation and Institutional Investors
Institutional allocators frame alternatives with risk rather than capital weights: risk budgeting and marginal contribution to risk, factor-based allocation, and the practical limits of mean–variance (estimation error, resampling, and Black–Litterman, which blends CAPM equilibrium returns Π = λΣw with subjective views). Pensions need liability-driven investing and surplus optimization, where the discount rate reflects liability risk, not the expected asset return.
308 words, about 2 min02Private Equity
Private equity analysis starts with the cash flow profile (J-curve: capital calls early, distributions later) and performance metrics: IRR, TVPI (DPI + RVPI), and public market equivalents such as the Kaplan–Schaar PME, which discounts contributions, distributions, and NAV at the index return; PME above 1.0 means the fund beat the index. Value creation decomposes into EBITDA growth, multiple expansion, and leverage.
306 words, about 2 min03Real Assets
Real assets span commodities, real estate, infrastructure, natural resources, and timberland/farmland. Commodity futures total return = spot (price) return + roll yield + collateral yield; backwardation (futures below spot) produces positive roll yield for a long position, contango produces negative roll yield.
309 words, about 2 min04Hedge Funds and Managed Futures
Hedge fund analysis covers strategy classification (equity long/short, event driven, relative value, macro, managed futures/CTA), fee mechanics (2/20 with a high-water mark and sometimes a hurdle), and liquidity terms (lockups, notice periods, gates, side pockets). Database biases - survivorship, backfill, and self-selection - make reported index returns upward biased, so treat index data skeptically.
294 words, about 1 min05Credit and Structured Products
Credit analysis prices expected loss: EL = PD × LGD, where LGD = 1 − recovery, and the spread also compensates for liquidity and risk premium. Distinguish nominal spread from option-adjusted spread (OAS strips out embedded option cost), and spread duration from effective duration.
292 words, about 1 min06Ethics, Professional Standards, and Compliance
Ethics questions test the CFA Institute Code and Standards and the Asset Manager Code as applied to alternatives: fiduciary duty, reasonable basis and diligence, conflicts of interest (GP/LP economics, co-investment allocation, fee offset), soft dollars and directed brokerage, allocation of limited opportunities such as oversubscribed IPOs, performance presentation, misrepresentation (including by omission), independence and objectivity (gifts, referral fees), confidentiality, market manipulation, material nonpublic information, and whistleblowing. GIPS compliance requires firm-wide claim, defined composites, documented discretion, and a valuation policy appropriate to illiquid assets.
272 words, about 1 min07Emerging Topics in Alternative Investments
Emerging topics cluster into four areas. Digital assets: blockchain settlement, tokenization of real assets and private funds, stablecoins, DeFi protocols, CBDCs, custody, valuation, and fragmented regulation.
279 words, about 1 min