Reading this random article that says:
"If a fund makes a 10% return on the stocks they hold long, and the stocks they hold short decline by 2% in the same period then the manager has a long-short spread of 12%. Hence, they have made a 12% return on their gross exposure, before expenses."
But look at Brett's math: His long short spread is 5.0%, but return on GMV is 2.5%?
Who is right?
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500MM gross exposure.
250MM long—increases 10% -> 25MM
250MM short—decrease 2% -> 5MM
30MM/500MM = 6% made on gross.
Brett Caughran is right in the spreadsheet (he probably spent plenty of sleepless nights worrying about this stuff so would trust him regardless). The person who wrote that random article prob trying to inflate #. Could also be saying return on nav which is obvs a different thing
tks. Is return on gross ALWAYS half of long short spread?
like ya i guess. assuming 50-50 long short (so longs equal shorts). In practice even if running mkt neutral longs could outweigh shorts or vice versa depending on dollar volatility
If half your gross is up 2.5% and the other half is also up 2.5% (5ppt spread), obviously the sum (gmv) is up 2.5%…
In mkt neutral yes spread = return on gmv * 2
What stands out to me is apparently he can't even calculate net exposure correctly?
First mistake of his I’ve seen, great content. But yeah, that’s an important error and will confuse some people
Many other mistakes on his twitter
Sorry if these are very basic questions but would appreciate if anyone could clear up some confusion I have:
1. Is the term GMV the same as the term “gross exposure” ?
2. What’s the difference between GMV and AUM ?
3. If a fund allocates a PM a $500m book, if he decides to only be say 80% deployed, does that mean that his GMV is running at 0.8*$500m=$400m ?
Thanks.
ChatGPT can actually help with these questions tbh
Easy way to think about it: gross exposure ~ how levered you are relative to equity (or original AUM)
GMV: value of your gross book. So they’re different
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