% Net Long calc for fund
Can someone explain how the net long % of an equity fund works?
i.e.
1) Say your portfolio consists of $100mm long of Stock A & $40mm short of Stock B. What % net long is your fund?
2) If Stock A doesn't change but your Stock B actually doubled in price (thus you lost money), what is your net long exposure now?
And any general thoughts that I'm missing here? (obviously the lower your net long %, the better your risk profile, etc.)
Thanks!
My understanding is that you quote both your long exposure and your short exposure as a percentage of the equity base, and your net long is long%-short. Ex: $100mm of equity $100mm of long positions $40mm of short positions 100% long/40% short exposure Net long exposure 60% In this case your fund started with $100, received $40 from its shorting (less whatever margin collateral was needed), and invested $100 in long positions. The remaining $40mm is in cash or margin collateral and doesn't get counted as long or short exposure.
Note that if you had $75 of equity instead of $100 all these numbers would be different-equity base is the denominator.
2) Probably not a good scenario to use because if your short doubles in price you'd have blown through your collateral and needed to sell long positions/use cash to cover. In general though all exposure is calculated on a market value basis, so you care about the market value of shares you are liable for, regardless of whether your trade has moved in your favor or not. A successful short actually DECREASES your short exposure.
Not necessarily...the effect of shorting and net exposure on your risk profile depends on a lot of factors such as portfolio correlation etc.Thanks Kenny. Assuming starting pt of the $100 equity base & no leverage /etc, to clarify 1) How would scenario 2 blow through your collateral? 2) Let's say the short doesn't get crushed that badly. So initially $40mm short was 2m shares at $20. Now the stock is at say $25, so you've lost $10mm there MTM. Long is still at $100mm.
So is net long exposure ($100 long - $25x2m shares short) / ($100 init equity - $10 mm lost of short) = $50/$90 as your net long %? Is that right?
Thanks.
One thing to note is that short selling is in effect a form of leverage (Assuming you reinvest some or all of the proceeds, which almost all funds do).
1) When you use a prime brokerage account to short a security you have to maintain a certain amount of collateral in the account. This can usually take the form of your own long positions assuming you use the same PB for everything. Your positions are MTMed every day, and if the value of the collateral shrinks or your loss on the short gets too high you'll be forced to cover or put up more collateral.
In your example, you have $100mm of long positions, $40mm of short positions, and $40mm of cash (proceeds from your short sale). If the stock you are shorting rises to $80 from $40, you have now basically "used up" your cash position and have started eating into your equity base: $100mm=MV of Long $40mm=cash (proceeds from short sale) $80mm=MV of Short Net Equity=$60mm
2) That's correct; in this scenario you have a MTM"loss" of equity because your short went against you. MV of Long=$100mm Cash=$40mm (proceeds from short sale) MV of Short=$50mm Net Equity=$90mm Long=100/90= 111.1% Long Short=50/90=55.5% Short Net Long=55.5%
Thanks Kenny.
Beta-adjusted net market value is also another relevant concept. Pick an index and compute each stocks beta to that index. Multiply each stock's market values by its beta and then do your netting to arrive at a market- or beta-adjusted exposure. The bond world does this too in the form of 10-year treasury equivalents
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