Citadel volatility metrics

Had a friend at Citadel run my portfolio and the vol was 4 according to their metrics. The standard deviation was 13’ish. Gross is 3x NAV. Why is vol so much lower than std deviation? I’m assuming it’s because it’s vol on GMV, which is much higher than NAV.

Is the right way to think about vol (as they define it) as standard deviation divided (gross/NAV)? So 13 / (3/1) =4.333

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Based on the most helpful WSO content, here's what you need to know:

Volatility and standard deviation are both measures of risk, but they can be calculated differently depending on the context and the specific metrics used by a firm like Citadel.

Volatility vs. Standard Deviation:
- Volatility: Often refers to the annualized standard deviation of returns. It can be adjusted based on the gross market value (GMV) of the portfolio.
- Standard Deviation: A statistical measure of the dispersion of returns for a given security or market index. It shows how much variation or dispersion there is from the average (mean).
Gross Market Value (GMV) vs. Net Asset Value (NAV):
- GMV: The total market value of all positions in the portfolio, including both long and short positions.
- NAV: The value of the portfolio's assets minus its liabilities.
Calculating Volatility:
- If Citadel's volatility metric is based on GMV, it means they are considering the total exposure of the portfolio rather than just the net exposure (NAV).
- The formula you mentioned, standard deviation divided by (gross/NAV), aligns with the idea that volatility is adjusted for the leverage in the portfolio.
Example Calculation:
- Given: Standard Deviation = 13, Gross = 3x NAV.
- Volatility = Standard Deviation / (Gross / NAV) = 13 / (3/1) = 4.33.

This calculation suggests that the volatility metric used by Citadel accounts for the leverage in the portfolio, which is why it appears lower than the standard deviation when adjusted for gross exposure.

I hope this clarifies the relationship between volatility and standard deviation in the context of your portfolio metrics at Citadel.

Sources: Is the common view of financial risk completely wrong?, Volatility -- good for S&T bonuses?, Performance of the best PM’s at MM’s?, Diminutive Nature of Net Returns, https://www.wallstreetoasis.com/forum/trading/converts-trading?customgpt=1

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Citadel volatility metrics

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