Risk is more than volatility
Risk is often shorthand for volatility — the variability of prices or quarterly returns. While this may suffice for liquid public markets, it is inadequate for private funds, alternative vehicles, and illiquid commitments that lack observable pricing.
Risk in structured investment vehicles is multidimensional. It includes:
For investors — especially those without institutional due diligence teams — risk is not an abstract number. It determines how, when, and whether capital can be deployed and retrieved, and how much capital is actually at risk under different scenarios.
At Nomera Capital, we begin risk analysis with structure, not with historical volatility.
Structural Risk Dimensions
Below are five core dimensions that define risk in investment funds and structured vehicles.
1. Liquidity and lock-in risk
Liquidity risk is the mismatch between the investor's ability to exit and the fund's liquidity provisions.
In regulated mutual funds, liquidity is explicit: periodic redemption windows, notice periods, and daily NAVs. In private equity and venture capital, liquidity is implicit: investor capital is committed for extended periods, and secondary markets are limited.
Key questions include:
The absence of transparent liquidity mechanisms is not risk neutral — it is structural risk.
2. Concentration and position risk
Concentration risk emerges when a vehicle's capital is concentrated by:
Private funds often exhibit high concentration by design. A handful of portfolio companies — or a small group of assets — can dominate outcomes.
Assessing concentration risk is not an exercise in returns; it is an exercise in exposure.
Focus on:
Investors must understand how fragile, or resilient, a concentrated portfolio could be under stress.
3. Governance and control risk
Risk is not only about exposure — it's about control.
Governance risk reflects how much influence investors have over:
Strong governance controls — independent advisory committees, transparent reporting, clear dispute mechanisms — reduce execution risk.
Weak governance structures embed risk into everyday decisions, often without explicit disclosure.
4. Incentive and fee risk
Fees and incentives shape behaviour.
Structural risk emerges when:
Understanding fee structures — management fees, performance fees, hurdle rates, clawbacks — is not administrative exercise, it is risk analysis.
High fees may not be fatal if aligned with superior execution; misaligned fees often transfer risk from manager to investor.
5. Regulation and statutory constraints
Regulatory risk should be understood as:
Regulation does not reduce investment risk by itself. It alters the terms and constraints under which capital is deployed.
Eligibility thresholds, minimum holding periods, and reporting requirements are structural constraints that shape realized outcomes.
Integrating risk into capital allocation
Evaluating risk is not a separate activity from the core investment decision; it *is* the core.
For internationally mobile investors, risk assessment must be comparative across vehicles and jurisdictions. Points to consider include:
Consistency of risk measurement
Different vehicles use different metrics. A "volatility-based" risk measure in a liquid mutual fund is not comparable to structural risk in a closed-end private fund.
Opportunity cost of illiquidity
Capital committed to illiquid vehicles may forego other opportunities. Risk is opportunity cost.
Cross-jurisdictional risk
Legal, tax, and regulatory frameworks vary. Structural risk must include compliance complexity, jurisdictional friction, and enforcement dynamics.
Scenario stress testing
Modeling simple scenarios (outcome paths, cash flow timing, drawdown events) reveals structural risk more effectively than back-tested return data.
Why structural risk matters
Risk framed as volatility is partly a measurement artefact. Structural risk is real.
Structural risk affects:
A focus on structure — rather than performance charts alone — brings risk into the realm where it becomes actionable.
Conclusion
Across asset classes and jurisdictions, risk has many faces. For liquid public markets, volatility is a useful proxy. For structured vehicles, it is insufficient.
Structural risk — liquidity, concentration, governance, incentives, and regulation — determines how capital behaves, not just how it moved in the past.
Investors who begin risk analysis with structure rather than returns are better positioned to:
At Nomera Capital, evaluating risk is not an add-on to analysis — it is the foundation of it.