About: Volatility tax

The volatility tax is a mathematical finance term, formalized by hedge fund manager Mark Spitznagel, describing the effect of large investment losses (or volatility) on compound returns. It has also been called volatility drag, volatility decay or variance drain. This is not literally a tax in the sense of a levy imposed by a government, but the mathematical difference between geometric averages compared to arithmetic averages. This difference resembles a tax due to the mathematics which impose a lower compound return when returns vary over time, compared to a simple sum of returns. This diminishment of returns is in increasing proportion to volatility, such that volatility itself appears to be the basis of a progressive tax. Conversely, fixed-return investments (which have no return volat