What is 'Gross Exposure'

Gross exposure refers to the absolute level of a fund's investments. Gross exposure equals the value of both a fund’s long positions and short positions and can be expressed either in dollar terms or percentage terms. It is a measure that indicates total exposure to financial markets, thus providing an insight into the investment amount at risk. The higher the gross exposure, the bigger the potential loss (or gain).

BREAKING DOWN 'Gross Exposure'

Gross exposure is an especially relevant metric in the context of hedge funds, institutional investors, and other traders, who can hold short positions, in addition to long positions. These types of investors are sometimes more sophisticated and have greater resources than long-only investors.

As an example, consider hedge fund A with $200 million in capital. It deploys $150 million in long positions and $50 million in short positions. The fund's gross exposure is thus: $150 million + $50 million = $200 million.

Since gross exposure equals capital in this case, gross exposure as a percentage of capital is 100%.

The net exposure, which is the difference between long and short positions = $150 million - $50 million = $100 million.

Assume hedge fund B also has $200 million in capital but uses a significant amount of leverage. As a result, it has $350 million in long positions and $150 million in short positions. The gross exposure in this case is thus $500 million (i.e. $350 million + $150 million), while the net 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 that it has a greater amount at stake in the markets than A. Fund B's use of leverage will magnify losses, as well as profits.

Gross Exposure and The Calculation of Management Fees

Gross exposure is generally used as the basis for calculating a fund's management fees, since it takes into account 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 is a beta-adjusted exposure, also used for investment funds or portfolios. This is computed by taking the weighted average exposure of a portfolio of investments, where the weight is defined as the beta of each individual security.

RELATED TERMS
  1. Net Exposure

    Net exposure is the difference between a hedge fund's short positions ...
  2. Economic Exposure

    Economic exposure is a type of foreign exchange exposure caused ...
  3. Gross Income

    Gross income is the total income from all sources before deductions ...
  4. Capital Gains Exposure - CGE

    Capital gains exposure is an assessment of the extent to which ...
  5. Gross Margin

    A company's total sales revenue minus its cost of goods sold, ...
  6. Gross Earnings

    1. For individuals, the total income earned in a year, as calculated ...
Related Articles
  1. Trading

    Exchange rate risk: Economic exposure

    Changes in exchange rates have a substantial influence on companies’ operations and profitability. Here are ways they can deal with the risk.
  2. Investing

    Dissecting Leveraged ETF Returns

    These funds are a relatively new product to most investors, but they could be what you need for increased returns.
  3. Tech

    Global Technology: Exploring Revenue Trends and Fundamentals

    Analyze geographical revenue exposure data in the technology sector and determine which economic factors are driving revenue sales and forecasts.
  4. Trading

    Introduction To Counterparty Risk

    Unlike a funded loan, the exposure from a credit derivative is complicated. Find out everything you need to know about counterparty risk.
  5. Investing

    Getting Positive Results With Market-Neutral Funds

    Find out how market-neutral mutual funds can add some flavor to your bland portfolio.
  6. Investing

    Global Communications: Exploring Revenue Trends and Fundamentals

    Explore geographical communications sector revenue data to determine which countries have the highest exposure and what factors are driving trends.
  7. Investing

    The multiple strategies of hedge funds

    Current and potential hedge fund investors need to understand how much risk hedge funds take on in order to make money.
  8. Financial Advisor

    Grading Bill Gross at Janus

    Learn about how Bill Gross, once the head of the largest mutual fund in the market, has had poor investment results at his new fund.
RELATED FAQS
  1. What's the difference between gross profit margin and net profit margin?

    Gross profit margin and net profit margin are two separate profitability ratios used to assess a company's financial stability ... Read Answer >>
  2. What costs are not counted in gross profit margin?

    Gross profit margin is the percentage of revenue that exceeds the cost of goods sold for a company. However, not all expenses ... Read Answer >>
  3. How can a company have a negative gross profit margin?

    There are several reasons why a company might experience a loss in gross margins, including poor marketing, ineffective pricing ... Read Answer >>
  4. How does gross profit and net income differ?

    Net income and gross profit are metrics that measure the profitability of a company and have different characteristics that ... Read Answer >>
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center