What is Gross Exposure?
Gross exposure refers to absolutely the level of a fund’s investments. It takes under consideration the worth of both a fund’s long positions and short positions and may be expressed either in dollar or percentage terms. Gross exposure may be a measure that indicates total exposure to financial markets, thus providing an insight into the quantity in danger that investors are taking over . the upper the gross exposure, the larger the potential loss (or gain).
Understanding Gross Exposure
Gross exposure is an especially relevant metric within the context of hedge funds, institutional investors, and other traders, who can short and long assets and use leverage to amplify returns. These sorts of investors are sometimes more sophisticated and have greater resources than regular, long-only investors.
As an example, hedge fund A has $200 million in capital. It deploys $150 million in long positions and $50 million briefly positions. The fund’s gross exposure is thus: $150 million + $50 million = $200 million.
Since gross exposure equals capital during this case, gross exposure as a percentage of capital is 100%. If gross exposure exceeds 100%, it means the fund is using leverage — in other words, it’s borrowing money to amplify returns. Alternatively, gross exposure below 100% indicates some of the portfolio is invested in cash.
Gross exposure measures an investment fund’s total exposure to financial markets, including long and short positions and use of leverage.
A higher gross exposure means the fund features a greater amount at stake within the markets.
Gross exposure is an especially relevant metric within the context of hedge funds, institutional investors, and other traders, who can short and long assets and use leverage to amplify returns.
Gross Exposure Vs. Net Exposure
The exposure of an investment fund also can be measured in net terms. Net exposure equals the worth of long positions, minus the worth of short positions.
For example, internet exposure of hedge fund A is $100 million. this is often calculated by subtracting $50 million, the quantity of capital engaged briefly positions, from the $150 million of long holdings.
If net exposure is that the same as gross exposure, it means the fund only has long positions. On the opposite hand, if net exposure is zero, it means the share invested in long positions equals investment briefly positions, also referred to as a market neutral strategy.
A fund features a net long exposure if the share amount invested in long positions exceeds the share amount invested briefly position. Likewise, it’s a net short position if short positions exceed long positions.
Assume hedge fund B also has $200 million in capital but uses a big amount of leverage. As a result, it’s $350 million in long positions and $150 million briefly positions. The gross exposure during this case is thus $500 million (i.e. $350 million + $150 million), while internet exposure is $200 million (i.e. $350 – $150 million).
Gross exposure as a percentage of capital for hedge fund B = $500 million ÷ $200 million = 250%. Fund B’s higher gross exposure means it’s a greater amount at stake within the markets than A. Fund B’s use of leverage will magnify losses, also as profits.
Gross exposure is usually used because the basis for calculating a fund’s management fees, since it takes under consideration total exposure of investment decisions on both the long and short side. Portfolio managers combined decisions will have direct consequences on the performance of a fund and thus distributions to its investors.
An additional method of calculating exposure may be a beta-adjusted exposure, also used for investment or portfolios. this is often computed by taking the weighted average exposure of a portfolio of investments, where the load is defined because the beta of every individual security.