Net Exposure

AAA

DEFINITION of 'Net Exposure '

The percentage difference between a hedge fund’s long and short exposure. Net exposure is a measure of the extent to which a fund’s trading book is exposed to market fluctuations. The hedge fund manager will adjust the net exposure in accordance with his or her investment outlook – bullish, bearish or neutral.  A fund has a net long exposure if the percentage amount invested in long positions exceeds the percentage amount invested in short positions, and has a net short position if short positions exceed long positions. If the percentage invested in long positions equals investment in short positions, this is called a market neutral strategy as net exposure is zero.

INVESTOPEDIA EXPLAINS 'Net Exposure '

A low net exposure does not necessarily indicate a low level of risk, since the fund may have a significant deal of leverage. For this reason, gross exposure (long exposure + short exposure) should also be considered, as the two measures together provide a better indication of a fund’s overall exposure.

For example, a fund with a net long exposure of 20% could refer to any combination of long and short positions – 30% long and 10% short, 60% long and 40% short, or even 80% long and 60% short. Gross exposure indicates the percentage of the fund’s assets that have been deployed and whether leverage is being used. A fund with a net long exposure of 20% and gross exposure of 100% is fully invested. Such a fund would have a lower level of risk than a fund with a net long exposure of 20% and gross exposure of 180% (i.e. long exposure 100% less short exposure 80%), since the latter has a substantial degree of leverage.

While a lower level of net exposure does decrease the risk of the fund’s portfolio being affected by market fluctuations, this risk also depends on the sectors and markets that constitute the fund’s long and short positions.

Ideally, a fund’s long positions should appreciate while its short positions should decline in value (enabling the short positions to be closed at a profit). Even if both the long and short positions move up or down together – in case of a broad market advance or decline respectively – the fund may still make a profit on its overall portfolio, depending on the degree of its net exposure. However, if the long positions decline in value while the short positions increase in value, the fund may find itself making a loss, the magnitude of which will again depend on its net exposure.

RELATED TERMS
  1. Economic Exposure

    A type of foreign exchange exposure caused by the effect of unexpected ...
  2. Market Exposure

    The amount of funds invested in a particular type of security ...
  3. Financial Exposure

    The amount that one stands to lose in an investment. For example, ...
  4. Credit Exposure

    The total amount of credit extended to a borrower by a lender. ...
  5. Exposure Draft

    A document released by the Financial Accounting Standards Board ...
  6. Transaction Exposure

    The risk, faced by companies involved in international trade, ...
Related Articles
  1. Investing Basics

    Investing in Leveraged Buyouts (LBOs): Know the Risks

    Leveraged buyouts allow investors to make large acquisitions without committing a lot of capital. But LBOs carry big risks and can result in huge returns or huge losses.
  2. Investing Basics

    The Optimal Use Of Financial Leverage In A Corporate Capital Structure

    The amount of debt and equity that makes up a company's capital structure has many risk and return implications.
  3. Mutual Funds & ETFs

    The Multiple Strategies Of Hedge Funds

    Hedge fund investors or potential investors need to understand how much risk hedge funds take in making money.
  4. Mutual Funds & ETFs

    What Are Hedge Funds?

    Hedge funds may be similar to mutual funds in some ways, but they differ in other ways like fee structure. Is a hedge fund for you?
  5. Investing Basics

    Leverage: What It Is And How It Works

    Leverage is an investment strategy of using borrowed money to generate outsized investment returns. Before getting into greater detail on how leverage works in an investment context, it is useful ...
  6. Forex Education

    Managing Currency Exposure In Your Portfolio

    The value of your investments is impacted by changes in global currency exchange rates. Find out how.
  7. Mutual Funds & ETFs

    Taking A Look Behind Hedge Funds

    Hedge funds can draw returns well above the market average even in a weak economy. Learn about the risks.
  8. Forex Education

    Forex Minis Shrink Risk Exposure

    Trading less than a standard lot means getting in for less - and having less to lose.
  9. Options & Futures

    Hedge Funds Hunt For Upside, Regardless Of The Market

    Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen.
  10. Stock Analysis

    What is the Price-to-Sales Ratio?

    The price-to-sales ratio is an indicator of the value placed on each dollar of a company’s sales or revenues.

You May Also Like

Hot Definitions
  1. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  2. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  3. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  4. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  5. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
  6. Currency Carry Trade

    A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase ...
Trading Center