United States
Hong KongAlternatives: real estate, private markets and commodities
Alternatives include real estate and REITs, limited partnerships, private equity, hedge funds and commodities. They can add diversification, and they bring illiquidity, higher costs, complex taxation and often accreditation requirements.
Everything outside listed equities, bonds and cash. A wide category held together by shared constraints rather than shared characteristics.
Real estate and REITs
Direct ownership gives control, the ability to borrow against the asset, and depreciation deductions, and brings illiquidity, concentration and management effort.
A real estate investment trust gives listed exposure with daily liquidity. REITs must distribute the large majority of taxable income, so the yield is high and most of it is taxed as ordinary income rather than as qualified dividends.
That tax treatment is the examinable point, and it is the reason REITs are usually held in tax-deferred accounts.
Limited partnerships
A general partner manages and bears unlimited liability; limited partners contribute capital with liability limited to the investment.
Income and losses pass through to the partners, reported on a Schedule K-1 that frequently arrives after the filing deadline. Passive activity loss rules generally limit deducting losses against anything other than passive income.
A limited partnership loss is a passive loss and can usually only offset passive income, with the remainder suspended until the activity is disposed of. That rule sits in the tax domain and questions cross between them constantly.
Private equity and hedge funds
Long lock-ups, high minimums, performance fees, limited transparency and accreditation requirements.
An accredited investor generally means income above USD 200,000, or USD 300,000 jointly, in each of the two most recent years with a reasonable expectation of the same, or net worth above USD 1,000,000 excluding the primary residence. Certain professional certifications also qualify.
Those thresholds are examinable and worth holding exactly.
Commodities
Direct ownership, futures, or funds tracking an index. Historically low correlation with equities, no income, and futures-based exposure carries roll costs that can diverge substantially from spot prices.
Gold in particular is taxed as a collectible at a maximum rate above the usual long-term capital gains rate, which surprises clients and appears in questions.
When to recommend them
Where the client has the liquidity to tolerate lock-ups, the sophistication to understand the structure, sufficient assets that a meaningful allocation does not concentrate the portfolio, and a genuine diversification rationale.
Where a question describes a client with modest assets, a short horizon or a near-term liquidity need, alternatives are the distractor rather than the answer.
Dollar limits and rate thresholds here are indexed annually. Confirm the current figure before relying on it, and expect the exam to test the rule rather than the number.
Common questions
How are REIT distributions taxed?
Mostly as ordinary income rather than as qualified dividends, because REITs must distribute the large majority of taxable income. That is why they are usually held in tax-deferred accounts.
What is an accredited investor?
Generally income above USD 200,000, or 300,000 jointly, in each of the two most recent years with the same expected, or net worth above USD 1,000,000 excluding the primary residence. Certain professional certifications also qualify.
How are limited partnership losses treated?
As passive losses, generally deductible only against passive income, with the remainder suspended until the activity is disposed of.
How is gold taxed?
As a collectible, at a maximum rate above the usual long-term capital gains rate. It surprises clients and it appears in questions.
When are alternatives suitable?
Where the client has liquidity to tolerate lock-ups, sophistication to understand the structure, enough assets that a meaningful allocation does not concentrate the portfolio, and a genuine diversification rationale.