I have a question related to long short equity hedge funds.
1) What are some of the metrics used to perform risk analysis of long short equity funds on fund level? Volatility (standard deviation), sharpe ratio, sortino ratio, net exposure, gross exposure, and maximum drawdown are some metrics I could think of. Are there any other ones I should look into?
2) I am having some trouble differentiating b/w net exposure and gross exposure. From my understanding, net exposure is long position - short position and gross exposure if long position + short position. Also, only net exposure measures market risk, so the higher the net exposure, the higher the market risk. However, I also know that if gross exposure is over 100%, it means it is using leverage. Thus, it should have more risk too, right?
Could you please confirm if my understanding this correct? 1) The higher the net exposure, the higher the market risk is, assuming that funds have the same gross exposure.
Example: Fund A has 70% long, 20% short, so its net exposure is 50% and gross exposure is 90%. Fund B has 90% long, 0% short, so its net exposure if 90% and gross exposure is 90%.
In this case, Fund B has more risk than Fund A because of its higher net exposure (given same gross exposures).
2) The higher the gross exposure, the higher the market risk, assuming that funds have the same net exposure.
Example: Fund A has 70% long, 20% short, so its net exposure is 50% and gross exposure is 90%. Fund B has 115% long, 65% short, so its net exposure if 50% and gross exposure is 180%.
In this case, Fund B has more risk than Fund A because of its higher gross exposure (given same net exposures).