Free CFA Level I Alternative Investments Practice Questions

DeFi encompasses financial applications built on decentralized blockchain networks, using smart contracts to automate services such as lending, borrowing, trading, and insurance without relying on traditional financial intermediaries like banks. Choice A is the opposite of DeFi — centralized operation contradicts the core 'decentralized' premise. Choice C describes a central bank digital currency (CBDC), which is government-controlled and centralized, fundamentally different from DeFi.

A side pocket segregates illiquid, hard-to-value, or distressed assets from the main liquid portfolio. Investors allocated to the side pocket cannot redeem that portion until those assets are sold or otherwise realized, preventing forced sales at depressed prices and treating all investors equitably regardless of redemption timing. Choice B describes a fee accrual mechanism, not a side pocket. Choice C describes manager co-investment or a separately managed account, a different structural concept unrelated to side pockets.

Pension funds with long-dated, inflation-linked defined benefit liabilities benefit most from this asset. The 30-year concession creates long duration cash flows that match the long-dated nature of pension liabilities, while the CPI escalator hedges inflation risk — together reducing the asset-liability mismatch.
Choice A is incorrect because a 30-year CPI-linked asset is very long duration; short-duration investors seek assets with near-term cash flows, not 30-year concession assets.
Choice C is incorrect because toll road concessions generate contracted, regulated revenue rather than open-ended capital appreciation — they are income assets, not equity growth assets.