Gross & Net Exposure

Gross exposure is calculated as the sum of all long positions plus the absolute value of all short positions, expressed as a percentage of the fund's NAV. A fund with $100M NAV that holds $120M in longs and $60M in shorts has 180% gross exposure. Gross exposure above 100% indicates the fund is using leverage. The higher the gross exposure, the more sensitive the portfolio is to stock-specific moves in either direction. Risk managers use gross exposure to monitor overall portfolio leverage and set risk limits.

Net exposure equals long positions minus short positions as a percentage of NAV. Using the same example ($120M longs, $60M shorts, $100M NAV), net exposure is 60%. A positive net exposure means the fund has a bullish tilt and will generally profit when markets rise. A net exposure near zero indicates a market-neutral posture, while negative net exposure reflects a bearish positioning. Fund managers actively adjust net exposure based on their market outlook, reducing it during periods of expected volatility.

Managers communicate risk through these metrics in monthly investor letters. A typical long/short equity fund might maintain 140-180% gross exposure and 30-70% net exposure. During market stress, a manager might reduce both — cutting gross to lower overall risk and cutting net to reduce directional market exposure. Some strategies, like market-neutral or statistical arbitrage, target near-zero net exposure with high gross exposure, seeking to profit from stock selection while eliminating market beta.

Gross exposure directly indicates the fund's leverage level. A 200% gross fund has $2 of market exposure for every $1 of capital. While high gross exposure amplifies returns from successful stock picks, it also magnifies losses. Importantly, a fund can have high gross exposure but low net exposure — meaning it has significant capital deployed but limited directional risk. This distinction is critical: a 200% gross / 0% net fund is very different from a 200% gross / 100% net fund. The former is a levered market-neutral strategy; the latter is a levered directional bet.