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When calculating a portfolios total exposure, should the value of the cash accounts be included?

My high level view on exposure is that it should be related to the possibility of loss, usually as a result of exposure to financial markets.

This doesn't match with bank accounts as I see it, and so I would not want to include the value of bank accounts in looking at a portfolios current exposure.

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I assume you are referring to the calculation of Gross Exposure and Net Exposure, which are commonly used by Hedge Funds.

These funds typically have long and/or short positions in stocks (hence they are called Long Short Funds); these positions vary over time (and can also be quite different among different funds). The exposure refer to stock exposure and the cash does not count in this calculation. A HF which only has cash is said to have zero exposure.

Of course every asset is subject to some risk factors, but Cash is defined as those assets (such as US T-bills or domestic bank deposits) sufficiently low risk that they can be considered safe. Cash is whatever it is that you think has no risk (and therefore no exposure) in the context of your operation.

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  • $\begingroup$ Ah good, yours and @amdopts answer helps clarify. $\endgroup$ – Furnak Jun 5 at 8:35
  • $\begingroup$ Sorry pressed too fast. A further question is should be any considerations given to FX Spot transactions in terms of exposure? Let's say I'm a L/S equity fund with USD as my base and I short 1m EUR of Vodaphone. I have a -1m EUR payment to plug. If I had two Bank Accounts, USD and EUR. I might just settle against the EUR account and draw funds from that account, if I settle against the USD account, I would need to create an FX transactions. However I don't see any reason to include settling this FX balance in an exposure calculation? $\endgroup$ – Furnak Jun 5 at 8:47
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I am adding on to @noob2 answer -- which, is correct if expressing exposures as a value of the fund's base currency. E.g., Fund XYZ has $1M of short equity exposure.

When calculating a portfolios total exposure, should the value of the cash accounts be included?

For exposures expressed as a percentage of assets, the denominator of that calculation does indeed include cash and cash equivalents. Exposure's expressed as a percentage of assets are more informative when understanding a fund's risk.

For example, a fund with $1M of short equity exposure and no other risky positions is said to be 1M short. This information alone doesn't tell you much about the fund's risk appetite except that they have 1M at risk. On the other hand, saying a fund is 1% short is much more informative about the risks that the fund is taking.

This doesn't match with bank accounts as I see it, and so I would not want to include the value of bank accounts in looking at a portfolios current exposure.

Just because a 100M fund has 1M of short equity exposure in a brokerage account and the other 99M sitting in a bank in cash or cash equivalents doesn't mean it's not AUM. It's all AUM and all of it needs to be considered to express exposures as a percentage of AUM.

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  • $\begingroup$ Thanks for the additional information, much appreciated. Essentially there's a disagreement on whether cash should be included in Exposure calculations. I'm of the opinion it shouldn't be. The second question as put to noob2 above relates to FX considerations, e.g. I short EUR -1m VOD as a USD based fund. Does that EUR -1m amount factor into the exposure? I would assume not unless it was yet to be settled, in which case I'm short -1m EUR that needs to be covered quickly. $\endgroup$ – Furnak Jun 5 at 8:52
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Greatly depends on what your firm uses as a proxy for cash. Some firms deposit the cash reserve in fixed deposits or commerical papers. But some trade cash using the overnight libor market. Then your exposure would be affected by the overnight rates( OIS rates).

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Cash it tipically included in portfolio total exposures.

In fact, holding cash in form of a cash instrument exposes to short term rates fluctuations, such as LIBOR. If you are speaking of a bank account, then you should probabily consider the opportunity cost of holding a zero-yield instrument with respect to the market.

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