Net exposure
Net exposure is the percentage difference between long and short exposures. Net exposure is an approximate reflection of the directional view on the markets: bullish when positive, bearish when negative. Net exposure has a direct impact on:
- Liquidity is one of the most overlooked and critical components. Long and short positions have opposite dynamics. To keep net exposure low, the short book needs to be constantly replenished. Meanwhile, the supply of borrow is finite. This leads to an increase in borrowing costs. Always keep an eye on borrow utilization. Do not let it go past around 66%.
- Correlation: The lower the net exposure, the lower the correlation. Mutual funds have a correlation of 1, for instance, meaning they mirror the market gyrations. Markets go up, so do mutual funds, and vice versa on the way down.
- Volatility: Net exposure has the largest impact on volatility. The lower the net, the lower the volatility. Targeting zero net exposure...
