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Discuss how to judge whether alternative investments suit a given investor

CFA® Level III · Portfolio Construction · Asset Allocation to Alternative Investments · L3.PC.3.e

The idea

Suitability turns on the investor's characteristics rather than on the asset's appeal. A long horizon is needed to wait out lock-ups and the J-curve of private funds. Size matters: diversifying across vintages and managers requires scale, and small investors may be restricted to less attractive or more costly vehicles. The investor needs expertise and governance capacity to select and monitor managers, or must pay for an adviser or fund of funds. Liquidity needs and tolerance for limited transparency must fit, and there may be regulatory or eligibility limits on who may invest. A good recommendation links each feature to the client's constraints. Endowment-style allocations do not suit investors lacking the governance to run them.

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