Gross Exposure

What is Gross Exposure?

Gross exposure alludes to the absolute level of a fund's investments. It considers the value of both a fund's long positions and short positions and can be communicated either in dollar or percentage terms. Gross exposure is a measure that demonstrates total exposure to financial markets, in this manner giving an understanding into the amount at risk that investors are taking on. The higher the gross exposure, the greater the likely loss (or gain).

Grasping Gross Exposure

Gross exposure is an especially pertinent measurement with regards to hedge funds, institutional investors, and other traders, who can short and long assets and use leverage to intensify returns. These types of investors are in some cases more sophisticated and have greater resources than standard, long-just investors.

For instance, hedge fund A has $200 million in capital. It conveys $150 million in long positions and $50 million in short positions. The fund's gross exposure is hence: $150 million + $50 million = $200 million.

Since gross exposure equals capital in this case, gross exposure as a percentage of capital is 100%. Assuming gross exposure surpasses 100%, it means the fund is utilizing leverage — at the end of the day, it is borrowing money to intensify returns. On the other hand, gross exposure below 100% shows a portion of the portfolio is invested in cash.

Gross Exposure Vs. Net Exposure

The exposure of an investment fund can likewise be measured in net terms. Net exposure equals the value of long positions, minus the value of short positions.

For instance, the net exposure of hedge fund An is $100 million. This is calculated by taking away $50 million, the amount of capital tied up in short positions, from the $150 million of long holdings.

In the event that net exposure is equivalent to gross exposure, it means the fund just has long positions. Then again, on the off chance that net exposure is zero, it means the percentage invested in long positions equals investment in short positions, otherwise called a market neutral strategy.

A fund has a net long exposure on the off chance that the percentage amount invested in long positions surpasses the percentage amount invested in short position. In like manner, it has a net short position in the event that short positions surpass long positions.

Expect hedge fund B likewise has $200 million in capital however utilizes a lot of leverage. Subsequently, it has $350 million in long positions and $150 million in short positions. The gross exposure in this case is hence $500 million (for example $350 million + $150 million), while the net exposure is $200 million (for example $350 - $150 million).

Gross exposure as a percentage of capital for hedge fund B = $500 million \u00f7 $200 million = 250%. Fund B's higher gross exposure means that it has a greater amount in question in the markets than A. Fund B's utilization of leverage will amplify losses, as well as profits.

Special Considerations

Gross exposure is generally utilized as the basis for working out a fund's management fees, since it considers total exposure of investment choices on both the long and short side. Portfolio managers combined choices will have direct results on the performance of a fund and in this manner distributions to its investors.

An extra method of working out exposure is a beta- changed exposure, likewise utilized for investment funds or portfolios. This is registered by taking the weighted average exposure of a portfolio of investments, where the weight is defined as the beta of every individual security.

Features

Gross exposure measures an investment fund's total exposure to financial markets, including long and short positions and utilization of leverage.
A higher gross exposure means that the fund has a greater amount in question in the markets.
Gross exposure is an especially important measurement with regards to hedge funds, institutional investors, and different traders, who can short and long assets and use leverage to enhance returns.