‘Understanding fund exposure is the first step to understanding risk. However, contrary to popular belief, exposure does not equal risk. Risk is only introduced through exposure to risky or volatile assets. As indicated in the graphic, exposures can vary significantly over time, so single point references often do not show the complete picture. Investors will want to know the portfolio’s exposure over the period in which performance is being presented. While averages are useful, presenting the information in time series is preferred as it allows investors to view intra-month exposures and to check for style drift (Catalano et al, January 2013)’.

Exposure analysis allows the user to answer the following questions to form a vital component of investment due diligence for both Asset Selection and Portfolio Construction.

Who are we exposed to..? (E.g. Which funds/managers)
What are we exposed to..? (E.g. Instruments, Sectors, Strategies, Categories)
Where are we over/under-exposed to..? (E.g. Geographies, Sectors)
When were we exposed to..? (E.g. How have exposures evolved over time?)
Why were we exposed to…? (E.g. Does my investment thought process coincide with my actual exposures?)

Please see the following brief presentation to understand more:

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