If you enable this policy then VHD files are dynamically allocated. If you disable this policy then VHD files are fully allocated. Full Allocation means that the VHD file is immediately sized to the full specified size of the disk. Dynamic Allocation means that the file is resized as new space is required. Full Allocation is slower at creation time, but has better performance when writes happen since all space is already allocated. Dynamic is faster at creation time but may experience some slowness as the file is resized to accommodate more data.