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

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

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.