Smash the 2026 CAIA Exam – Invest in Success with This Ultimate Practice Test!

Active management in alternative investments is primarily about strategically buying and selling assets to capitalize on perceived inefficiencies in the market. This approach often involves thorough analysis and research to identify opportunities where assets may be mispriced or underappreciated, allowing the manager to execute trades that could yield higher returns than passive strategies.

This frequent trading and active decision-making process are essential in alternative investments, which can include hedge funds, private equity, and real estate, as these asset classes may have unique opportunities that can be exploited. Managers apply various strategies, including long/short positions, market timing, and asset allocation adjustments, to outperform benchmark indices and achieve superior returns for their investors.

In contrast, choices discussing passive investing, elimination of risk, or a focus purely on fixed income investments do not accurately convey the nature of active management within the context of alternative investments. These alternatives focus less on exploiting market movements and more on static strategies, whereas active management is inherently dynamic and seeks to navigate complexities within diversified asset classes.