Gross notional or gross error? A misleading metric in credit derivatives risk assessment

Allocators would benefit from updating their approach to these products to gain clear insights into the associated risks, avoiding misinterpretations driven by inappropriate and flawed numbers.

Guest whitepaper by Sashank Narasimhadevara, Macro Credit Fund Manager & Alexei Tchernitser, Director, Product Management, Quantifi.

This paper aims to uncover the misleading and often counter-productive nature of using gross notionals or gross market value in a credit derivatives book. It further proposes alternative approaches that provide a much more appropriate representation of the risk, exposure and leverage of a fund that utilises these products. These approaches are intuitive and easily accessible with the right analytical tools.

Gross notionals are a popular and superficially tractable way for allocators to measure a fund’s leverage, particularly in the long/short equity and the long/short credit space. The genesis of the measure stems from the perspective of a long-short equity fund. Grossing up long and short notionals provides a measure of the potential loss the fund is exposed to (assuming a short position doubles in price).

As a result, allocators have seemingly extended this approach to long/short credit and further to credit derivative-based products. This paper goes to show why this is not only inappropriate, but a misleading measure of a credit derivative book’s risk.


  • Risk and leverage in hedge fund strategies
  • Exploring credit derivative books
  • Towards a comprehensive risk assessment

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