How to Answer “What’s the difference between gross exposure and net exposure?” in Hedge Funds Interviews
In a gross exposure vs net exposure hedge fund interview, you’re expected to define both metrics cleanly and explain what each says about portfolio risk. The question “What’s the difference between gross exposure and net exposure?” comes up a lot because it tests whether you understand how a long/short book is actually positioned.
A strong analyst-level answer gives (1) crisp definitions, (2) the intuition for why each matters, and (3) a quick numerical example that shows you can compute and interpret both without getting lost in signs.
What Hedge Funds Look For in Exposure Explanations
Interviewers use this as one of the core hedge fund technical questions because it sits at the intersection of portfolio construction and risk. They’re checking that you can translate a list of positions into exposure metrics and then into economic meaning (directional vs leverage/risk budget).
They’re also assessing communication: can you state the answer in two sentences, then expand only as needed? In day-to-day investment analysis interview questions, being able to explain “what the portfolio is doing” to a PM or risk team matters as much as doing the maths.
Finally, they’re looking for judgment and caveats: acknowledging that gross/net are not the same as beta-, factor-, or liquidity-adjusted risk, and that derivatives, shorts, and financing can change how you interpret “exposure” depending on the fund’s convention.
Gross Exposure vs Net Exposure: A Hedge Fund Interview Framework
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Step 1: Define both exposures and give the one-line difference
Start with definitions that are consistent and sign-correct.
- Gross exposure = total absolute exposure: (|Longs| + |Shorts|) as a % of NAV (or equity).
- Net exposure = directional exposure: (Longs − Shorts) as a % of NAV.
Then give the interpretation in one line: gross tells you how much capital is deployed/levered across the book (how “busy” or levered the portfolio is), while net tells you the portfolio’s directional tilt to the market (long-biased, short-biased, or market-neutral). If relevant, state the convention: exposure is typically measured on current market value of positions relative to NAV.
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Step 2: Explain what each metric implies for risk and P&L
Connect each metric to what a PM cares about.
- Net exposure drives directional P&L in a simple sense: if you’re +20% net and the market rallies broadly, you tend to benefit (before idiosyncratic alpha, factor tilts, and hedges).
- Gross exposure relates to leverage, turnover of risk, and sensitivity to dispersion: a 100/100 long/short book (200% gross, 0% net) may be “market-neutral” on net, but still has significant exposure to stock-specific moves, factor mismatches, crowding, and financing/borrow dynamics.
Mention that gross/net are position measures, not full risk measures: beta-adjusted net (or factor net), VaR, and stress tests are often needed to understand true market sensitivity—this is a useful nuance in hedge fund interview prep without overcomplicating.
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Step 3: Use a quick numeric example (and sanity checks)
Provide a simple example that you can do verbally.
Example: NAV = $100. Longs = $120 notional, Shorts = $80 notional.
- Gross exposure = (120 + 80) / 100 = 200%.
- Net exposure = (120 − 80) / 100 = +40%.
Sanity checks to say out loud:
- Net must sit between (-Gross) and (+Gross).
- A perfectly market-neutral book has net near 0%, but gross can be high.
- If longs and shorts are both zero, gross and net are zero.
If the interviewer pushes, you can add: “If those shorts are index futures rather than single names, the economic hedge might be closer to beta-neutral than the raw net number suggests.”
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Step 4: Close with how funds actually use gross vs net day-to-day
Wrap by tying the metrics to controls and mandates.
- Net exposure is often constrained by mandate (e.g., long-biased equity L/S might run +20% to +60% net; a market-neutral strategy targets ~0% net).
- Gross exposure is often constrained by leverage/risk budget (e.g., caps on total gross, sector gross, single-name gross, or “gross per sleeve”).
A clean closing line for answering hedge fund interview questions on exposure: “Net tells you direction; gross tells you how much risk you’re running in aggregate—so you can be low-net but still taking a lot of relative-value risk if gross is high.”
Sample Answer for Hedge Fund Technical Questions (Analyst)
Gross exposure is the sum of the absolute long and short exposures, while net exposure is longs minus shorts—so gross measures total deployed risk/leverage and net measures directional market bias.
In a long/short Hedge Fund portfolio, I’d calculate gross as ((|Longs| + |Shorts|) / NAV) and net as ((Longs − Shorts) / NAV). Net exposure tells you whether the book is structurally long or short the market, which is why it’s often discussed as the “directional” number. Gross exposure, on the other hand, tells you how large the book is relative to equity—how much capital is effectively at work on both sides—so it’s more connected to leverage, position sizing, and how much idiosyncratic and relative-value risk you can take even if the portfolio is market-neutral on net.
For example, if NAV is $100, longs are $120 and shorts are $80, gross is ((120+80)/100)=200% and net is ((120−80)/100)=+40%. That means the portfolio is meaningfully net long, but also running a fairly large two-sided book. And even if net were 0%—say $100 long and $100 short—gross would still be 200%, so you could have substantial stock-specific and factor risk despite being directionally neutral.
If needed, I’d add that gross and net are position-based measures; for true market sensitivity you often also look at beta- or factor-adjusted net exposure and stress tests.
- Open with definitions + interpretation in two sentences; then expand.
- Use absolute values for gross and keep sign discipline for net.
- Include one numeric example to prove you can compute it quickly.
- Add a controlled caveat: gross/net aren’t the same as beta- or factor-adjusted risk.
Common Pitfalls in Gross vs Net Exposure Calculations
- Mixing up the formulas (e.g., calling longs minus shorts “gross” or forgetting absolute values on the short book).
- Speaking only in intuition (“gross is bigger”) without stating the actual calculation as % of NAV/equity.
- Claiming net exposure fully represents risk; ignoring that high gross can mean meaningful factor/idiosyncratic risk even at ~0 net.
- Using an example that doesn’t reconcile (net larger than gross, or not scaling by NAV).
- Overcomplicating with derivatives and Greeks before you’ve demonstrated the basic long/short mechanics.
- Not clarifying the measurement convention (market value/notional and denominator), especially if asked to compute quickly.
Follow-Ups You’ll Hear in Investment Analysis Interview Questions
Can a portfolio be market-neutral with high gross exposure?
Yes—if longs and shorts are balanced so net is near 0%, gross can still be large (e.g., 100% long / 100% short = 200% gross, ~0% net), implying significant relative-value risk.
How do gross and net exposure relate to leverage?
Gross exposure is a direct proxy for leverage in many long/short books because it reflects total positions relative to NAV; net exposure is directional and doesn’t tell you how large the two-sided book is.
What’s the difference between net exposure and beta-adjusted net exposure?
Net exposure is based on position sizes; beta-adjusted net scales exposures by market beta (or factors), aiming to reflect true market sensitivity rather than raw dollars.
If a fund is 130/30, what are gross and net exposure?
Gross is 160% (130 + 30) and net is +100% (130 − 30), assuming exposures are measured relative to NAV.
Why might a PM target a specific gross exposure range?
To manage overall risk capacity and concentration—higher gross can increase exposure to idiosyncratic moves, factor mismatches, financing/borrow constraints, and drawdowns even if net is controlled.
Hedge Fund Interview Prep: How to Practise Exposure Questions
- Practise a 20-second version (definitions + one-line intuition) and a 60–90 second version (add example + nuance). This is a common spot-check in hedge fund interview prep.
- Drill three examples until they’re automatic: 120/80, 100/100, and 130/30—compute gross and net as % of NAV without writing.
- Record yourself and listen for sign errors (“shorts are negative” vs “absolute shorts for gross”). Tighten wording until it sounds like a clean risk readout.
- Add one controlled caveat for senior interviewers: mention beta/factor-adjusted net, but only after the core gross vs net exposure explained for finance interviews is correct.
- Use AceTheRound to simulate rapid-fire investment analysis interview questions where follow-ups change the numbers or introduce an index hedge.
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