Accessing Alternatives: Funds, Replication and Tokenization
Access alternatives through funds, direct holdings, secondaries, co-investments, listed vehicles, replication or tokenized claims. Compare the underlying exposure, investor rights, fees, liquidity and funding obligations; an easier transfer process does not automatically make the asset more liquid.
The key decisions, at a glance
| Concept | What to do | Watch for |
|---|---|---|
| Primary fund | Delegate selection while committing capital for future calls. | An unfunded commitment is still an obligation. |
| Co-investment | Add exposure to a specific deal alongside a sponsor. | Lower fees do not offset concentration automatically. |
| Secondary | Buy an existing interest and assess its remaining obligations. | A discount to reported NAV is not guaranteed profit. |
| Direct investment | Take more responsibility for sourcing, execution and oversight. | Greater control requires suitable resources and expertise. |
1. Primary fund
Delegate selection while committing capital for future calls.
Watch for: An unfunded commitment is still an obligation.
2. Co-investment
Add exposure to a specific deal alongside a sponsor.
Watch for: Lower fees do not offset concentration automatically.
3. Secondary
Buy an existing interest and assess its remaining obligations.
Watch for: A discount to reported NAV is not guaranteed profit.
4. Direct investment
Take more responsibility for sourcing, execution and oversight.
Watch for: Greater control requires suitable resources and expertise.
Original worked case
A discounted secondary still needs capital
Given: An interest reports $20m NAV and is offered at a 15% discount. The buyer also assumes $4m of uncalled commitments. Ignore transfer fees and financing.
01 Purchase price
$20m × 85% = $17m.
02 Funding envelope
$17m price + $4m possible calls = $21m before other costs.
03 Risk check
Reassess the NAV date, underlying assets and expected distributions.
Answer and interpretation
The $3m headline discount does not establish a realized return. Future funding and valuation changes can dominate it.
Change one assumption
If the underlying NAV is marked down to $16m, the $17m purchase price is already above that updated mark before future calls.
Independent teaching example with the stated assumptions. Not an official exam question, marking key or observed market trend.
Understand the method
Part 1
Primary funds, secondaries and co-investments solve different problems
A primary commitment supports a fund investing over its future deployment period. A secondary purchase acquires an existing interest, usually with an established portfolio and remaining commitments. A co-investment places capital alongside a lead sponsor in a specific transaction. These routes change visibility, concentration, timing and the work required from the investor.
A secondary discount to reported NAV is not automatically a bargain. The NAV may be stale, the assets may require further funding and the timing of distributions may be uncertain. A co-investment may reduce some fee layers while increasing deal concentration and the need for timely independent diligence. Compare the complete cash-flow and governance obligations, not just entry price or management fees.
Part 2
Direct and listed real-asset routes trade control for implementation
Direct ownership can provide control over operations, financing and disposal but requires expertise, scale and concentrated capital. A private fund delegates those tasks while imposing manager selection, fees and fund terms. A listed vehicle can provide smaller position sizes and exchange trading, while its price reflects public-market sentiment, leverage and the vehicle’s governance.
Compare exposures on a consistent basis. A listed property company may differ from a private property portfolio in geography, asset quality and debt. A difference in measured volatility can also reflect daily trading versus periodic appraisal. It is therefore unsafe to attribute all observed differences to the access wrapper or to conclude that appraisal-based exposure is inherently less risky.
Part 3
Replication targets exposures, not an identical manager experience
Factor-based replication estimates a hedge-fund return relationship and implements exposures using accessible instruments. A trading-rule approach attempts to reproduce a strategy’s economic mechanism more directly. Both can offer transparency and liquidity, but the replicated result can differ from the original fund because of changing exposures, nonlinear payoffs, illiquid assets and implementation costs.
Evaluate which part of the return is being replicated and which part is omitted. A liquid equity and credit-factor basket cannot automatically recreate a manager’s private restructurings or security-specific skill. Historical fit is useful evidence only when the inputs, estimation window and out-of-sample performance are examined. Treat unexplained residuals as uncertain rather than guaranteed future alpha.
Part 4
Tokenization changes the record and transfer process, not every risk
A tokenized interest may represent a claim on a fund, security or other asset through a digital record. The economic analysis still needs to establish the holder’s rights, the issuer or intermediary obligations, custody arrangements and redemption process. A token can be transferable while the underlying asset remains illiquid or the transfer is restricted to eligible holders.
Map the digital and traditional records together. Determine which record establishes ownership, how errors are corrected and what happens if the platform or service provider fails. Any efficiency claim should specify the process improved, such as settlement or administration. It should not imply that technology alone eliminates counterparty, valuation, legal or funding risk.
Access-route comparison
Primary fund
- Potential advantage
- Delegated sourcing across a future portfolio
- Trade-off to evaluate
- Blind-pool selection and uncertain calls
Secondary interest
- Potential advantage
- More existing-asset visibility
- Trade-off to evaluate
- Stale NAV and remaining obligations
Co-investment
- Potential advantage
- Specific deal exposure and negotiated terms
- Trade-off to evaluate
- Concentration and rapid diligence
Listed / replicated exposure
- Potential advantage
- Tradability and implementation access
- Trade-off to evaluate
- Tracking, factor and public-market differences
Tokenized claim
- Potential advantage
- Potential process and transfer efficiencies
- Trade-off to evaluate
- Rights, intermediaries and underlying liquidity remain
More worked practice
Original teaching cases. Use the stated assumptions; these are not official exam questions or marking keys.
A listed access vehicle can diverge from reported asset value
Given: A listed vehicle begins with reported NAV of $100 per share and a market price of $90. Later, reported NAV falls to $95 while the share price rises to $99. Ignore dividends, fees and changes in share count.
- 1Reported NAV return is 95/100 - 1 = -5%.
- 2The shareholder price return is 99/90 - 1 = 10%.
- 3The initial 10% discount to NAV becomes a 99/95 - 1 = 4.21% premium.
Interpretation: Trading liquidity and changing discounts can create an investor experience different from reported underlying performance. This path does not prove listed access is superior; it shows why wrapper pricing and valuation timing need separate analysis.
Check your understanding
Answer first, then open the explanation. These checks are original practice and do not generate an exam score.
1. Why can a co-investment require more investor expertise?
The investor must evaluate a concentrated transaction, often within a short timetable, rather than relying entirely on a diversified fund mandate.
2. Does a replication model promise the manager’s future alpha?
No. It targets selected exposures or rules and can omit changing, nonlinear or idiosyncratic sources of return.
3. What must be checked before comparing listed and private asset returns?
Underlying assets, leverage, fees, valuation frequency, currency and cash-flow timing, as well as the wrapper.
Common questions
Are secondaries always less risky than primaries?
No. A more seasoned portfolio may provide additional information, but price, asset quality, concentration and remaining obligations determine risk.
Are co-investments always fee free?
No. Terms vary. Use the actual agreement and include transaction and internal due-diligence costs.
Sources and scope
The sources below establish their stated framework or subject context. Calculations and cases are our own teaching material; these sources do not endorse them or establish complete exam coverage.
- CAIA curriculum and study tools
Official curriculum, companions and required readings for the exam year. The current page now links to 2027 materials.
- AIMA: Investment manager due diligence questionnaires
Industry due diligence framework. Our workpapers are original examples, not reproduced AIMA templates.
- ILPA: Principles and best practices
Alignment, governance and transparency in private fund relationships. Our fee and transaction cases use independently stated terms.
- CFA Institute Research Foundation: Hedge Fund Replication (2009)
Historical conceptual reference for factor and trading-strategy replication, not a claim about current products or performance.
- BIS / FSI: Financial stability implications of tokenisation
Tokenized financial assets and their liquidity, operational and interconnected risks. Not a legal assessment of a particular token.
- CAIA 2027 curriculum overview
Published topic categories and Emerging Topics reading titles for 2027. The overview is not the complete learning-objective list.
By MiloPrep editorial team. Updated 10 October 2026. Independent study notes, not affiliated with or endorsed by CAIA Association. How we prepare our content.
Notes
- * Study scope: Selected study concepts, not complete curriculum coverage. Match your sitting to the official exam-year materials; CAIA’s current resource page now links to 2027. ↩ Return to content