Volatility target

Also seen as: volatility targeting, vol targeting, volatility scaling, risk targeting, dynamic leverage

How does a volatility target set the exposure?

At each rebalance a scaling factor compares the target with the volatility the Combined has actually shown, and the invested portion is multiplied by it:

where $\sigma^{*}$ is the Target volatility (annual), $\hat{\sigma}$ is the annualised volatility of the Combined's own invested holdings — the assets it actually holds, per unit invested, measured over the Measurement window — whatever share of the Combined sits in cash beside them, $L_{\max}$ is the Maximum leverage, $p$ is the invested portion, $k$ is the scaling factor and $e$ is the effective exposure — the share of capital actually invested until the next rebalance. Because $\hat{\sigma}$ reads the holdings' own volatility rather than the scaled account, it does not move just because $k$ moved it the rebalance before: when $\hat{\sigma}$ lands back at the target, $k = 1$ and exposure returns to exactly $p$, the invested portion you set. In words: if the holdings have been twice as volatile as the target the Combined invests half as much; if they have been half as volatile it invests twice as much, but never more than the maximum leverage allows, and never more than 300% of its capital.

How is a volatility target different from leverage?

Leverage and a volatility target both let exposure differ from capital, and they differ in what stays fixed. Leverage is set once on a strategy's allocation profile and holds the same multiple of capital through calm and storm, so the strategy's risk rises and falls with the market. A volatility target sits on a Combined and moves the exposure so the risk stays roughly level, investing more in quiet markets and less in turbulent ones. The two can be combined: a strategy inside a Combined keeps its own leverage, and the Combined's volatility target then scales how much of the Combined's capital reaches its strategies.

How does Fincanva handle it?

• Where it sits. The Volatility target switch is inside the invested-portion block of a Combined's allocation profile, with the help "Raises or lowers the invested portion to keep the portfolio's volatility close to the target." It belongs to the profile, so the Risk-On and Risk-Off profiles can each have their own.
• Target volatility (annual) runs from 2% to 40%, default 10%.
• Maximum leverage runs from 1× to 3×, default 1×, and never above your plan's leverage ceiling. Its help reads "How far the invested portion may rise when volatility is low. At 1× the target can only reduce it."
• Measurement window runs from 20 to 250 trading days, default 60 ("The trading days over which the portfolio's volatility is measured.").
• Recalculated at every rebalance. Between rebalances the factor stays as the last rebalance set it. Until the window holds enough history to measure the Combined's volatility, the factor is 1 and the invested portion runs unscaled.
• Effective exposure. Under the fields the editor shows the range the setting can produce — from 0% to the invested portion times the maximum leverage — with a sentence such as "100% × a factor from 0 to 2×, recalculated at every rebalance."
• The 300% ceiling. When the invested portion times the maximum leverage would exceed 300%, the editor warns "Part of the leverage will never be used" and offers a button, such as "Set 2×", that lowers the maximum leverage to the largest value that still has an effect.
• Above 100% the Combined borrows. Exposure above the capital is financed exactly like an invested portion above 100% — see there for the borrowing and its cost.
• The summary chip under the allocation method reads, for example, "Vol target 10% (max 2×)".
• The volatility target is included from the Advanced plan, the first plan level that includes a Combined; Free and Starter do not offer it. See what each plan includes.

What does it look like in practice?

A Combined is 50% invested with a volatility target of 10%, a maximum leverage of 3× and the default 60-day window. At three rebalances the measured volatility of its holdings is different:

In the turbulent period the Combined halves its exposure, to 25%. Once the holdings' volatility lands exactly back on the 10% target, $k = 1$ and exposure returns to exactly 50% — the invested portion you set, not 100%: the factor rescales your own invested portion, not the whole account. In the calm period it doubles that same 50% to 100%.

Now raise the invested portion to 150% with the same maximum leverage of 3×: that asks for up to 450%, above the 300% ceiling, so the editor warns that part of the leverage will never be used — at 150% the useful maximum is 2×. The numbers are illustrative, not a suggested setting.