Volatility

Definition

Volatility describes how much returns fluctuate over time. Higher volatility implies greater uncertainty of outcomes and typically requires tighter sizing controls. Volatility is an imperfect proxy for risk—especially in strategies with asymmetric payoffs or illiquid pricing—but it remains a common standardized risk measure used by allocators. Allocator Context Allocators assess volatility at the strategy and total portfolio level to align risk with objectives and constraints. In public markets, volatility can be measured directly from return series. In private markets, volatility is often understated due to appraisal smoothing, so allocators rely on qualitative risk analysis and stress assumptions. Decision Authority Volatility targets or limits may be embedded in risk budgets and IPS constraints. Committees use volatility and related measures to evaluate whether risk posture remains appropriate and to justify rebalancing or exposure adjustments. Why It Matters for Fundraising Managers should communicate risk in allocator terms: expected variability, downside scenarios, and how volatility relates to the strategy’s design. Overstating “low volatility” without discussing liquidity and valuation methodology can reduce trust. Key Takeaways Volatility is a standard risk input Illiquid strategies often understate volatility Risk budgets and sizing are volatility-aware Credibility comes from scenario-based explanations