Net Exposure

What is 'Net Exposure '

Net exposure is 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.

BREAKING DOWN '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. Gross Exposure

    The absolute level of a fund's investments.
  2. Exposure Netting

    A method of hedging currency risk by offsetting exposure in one ...
  3. Market Exposure

    The amount of funds invested in a particular type of security ...
  4. Economic Exposure

    A type of foreign exchange exposure caused by the effect of unexpected ...
  5. Net Long

    A condition in which an investor has more long positions than ...
  6. Financial Exposure

    The amount that one stands to lose in an investment. For example, ...
Related Articles
  1. Professionals

    Analysis and Evaluation of Risk Exposure

    Analysis and Evaluation of Risk Exposure
  2. Mutual Funds & ETFs

    Hedge Funds: Strategies

    By Dan BarufaldiHedge funds use a variety of different strategies, and each fund manager will argue that he or she is unique and should not be compared to other managers. However, we can group ...
  3. Mutual Funds & ETFs

    Hedge Funds: Why Choose Hedge Funds?

    By Dan BarufaldiThere are a variety of reasons to include hedge funds in a portfolio of otherwise traditional investments. The most cited reason to include them in any portfolio is their ability ...
  4. Mutual Funds & ETFs

    Hedge Funds: Funds Of Funds

    By Dan BarufaldiFunds of hedge funds are an alternative to investing directly into individual funds. There are advantages and disadvantages to funds of funds, and the benefits to an investor ...
  5. Mutual Funds & ETFs

    Getting Positive Results With Market-Neutral Funds

    Find out how these mutual funds can add some flavor to your bland portfolio.
  6. Mutual Funds & ETFs

    Risks

    Risks
  7. Professionals

    Fund of Funds Investing

    CFA Level 1 - Fund of Funds Investing. Learn the characteristics of the fund of funds investing style. Discusses the benefits and drawbacks of this type of fund
  8. 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.
  9. Mutual Funds & ETFs

    4 Ways to Get International Exposure in Your Portfolio

    International investing provides diversification, which is needed these days. When it comes to investing in foreign stocks, there are lots of options.
  10. Mutual Funds & ETFs

    Evaluating Hedge Fund Performance

    Most investors are aware of hedge funds, but many don't know the dirty details of this unique investment type.
RELATED FAQS
  1. What's the difference between a long and short position in the market?

    Understand long and short positions for stocks and option contracts; combine long and short positions for added leverage ... Read Answer >>
  2. When short selling, how long should you hold on to a short?

    Explore the reasons for short selling and the various factors that influence how long an investor may wish to maintain a ... Read Answer >>
  3. Are there publicly traded hedge funds?

    See why a privately arranged hedge fund may decide to take its fund public, and how the investing public at large can gain ... Read Answer >>
  4. Can mutual funds invest in hedge funds?

    Learn about mutual fund portfolio management techniques and mutual funds' ability to invest in hedge funds, as well as new ... Read Answer >>
  5. What is the purpose of a hedge fund?

    Find out what a hedge fund is, how it is set up and why it is different than other forms of investment partnerships like ... Read Answer >>
  6. What is the difference between a hedge fund and a private equity fund?

    Learn the primary differences between hedge funds and private equity funds, both of which are utilized by high net worth ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center