Risk Limits

Definition

Risk limits are predefined boundaries that restrict how much risk an allocator can take. They may include maximum allocations to an asset class, concentration caps by manager, leverage limits, liquidity requirements, drawdown thresholds, or counterparty constraints. Risk limits exist to enforce discipline and prevent unmanaged exposures from threatening obligations or mission. Allocator Context Institutional allocators document risk limits in the IPS and investment mandates, often with monitoring and escalation procedures. Family offices may adopt fewer written limits, but commonly enforce constraints through internal guidelines or principal preferences. Decision Authority Crossing risk limits typically triggers escalation to an investment committee or board. Exceptions are often possible but require justification and are usually slow. For many allocators, risk limits are “hard constraints” that cannot be bypassed without governance action. Why It Matters for Fundraising Managers who understand and proactively address allocator risk limits reduce friction. If a strategy requires leverage, concentrated bets, or illiquidity, the manager must explain how it fits within policy constraints—or it will stall. Key Takeaways Risk limits are enforceable boundaries Exceptions are rare and governance-heavy Monitoring drives rebalancing and sizing Risk-limit fit is essential for closing allocations