Gross Exposure: Definition, How It Works, and Example Calculation What is gross exposure? Gross exposure is the total value of a fund’s positions, counting both long and short holdings. It can be expressed in dollars or as a percentage of a fund’s capital. Gross exposure indicates the total amount at risk in the market—higher gross exposure generally implies larger potential gains and losses. Formula:
* Gross exposure = Value of long positions + Value of short positions Explore More Resources
How gross exposure works
* Applies mainly to investors who can both buy (long) and sell short, such as hedge funds and some institutional investors.
* If gross exposure equals a fund’s capital, the fund is unlevered (no borrowing).
* Gross exposure above capital indicates leverage (fund borrowed money to increase positions).
* Gross exposure below capital suggests some assets are held in cash.
Examples Example 1 — No leverage:
- Capital: $200 million
- Long positions: $150 million
- Short positions: $50 million
- Gross exposure = $150M + $50M = $200M → 100% of capital Example 2 — With leverage:
- Capital: $200 million
- Long positions: $350 million
- Short positions: $150 million
- Gross exposure = $350M + $150M = $500M → 250% of capital
- Net exposure = $350M − $150M = $200M Explore More Resources
Gross exposure vs. net exposure
* Net exposure = Value of long positions − Value of short positions
* Net exposure measures market directionality (net long, net short, or market neutral).
* Net long: long > short
* Net short: short > long
* Market neutral: net exposure ≈ 0 (long ≈ short)
* Gross exposure measures total market risk, while net exposure measures directional risk.
Special considerations
* Leverage magnifies both gains and losses; two funds with the same net exposure can have very different risk profiles if their gross exposures differ.
* Gross exposure is often used in fee calculations because it reflects the total scale of investment activity (both long and short).
* Beta-adjusted exposure: a refinement that weights each position by its beta (sensitivity to the market). This gives a sense of market-risk exposure after accounting for differing volatilities and correlations across holdings.
Key takeaways
* Gross exposure = sum of long and short positions; it shows total market exposure and risk.
* Gross exposure as a percentage of capital indicates leverage: >100% = leveraged, =100% = no leverage, <100% = cash held.
* Compare both gross and net exposure to understand total risk and directional bias.
* Consider beta-adjusted exposure for a market-sensitive view of portfolio risk.