Glossary
Credit and risk
What is concentration?
Too much of the book in one sector or one name.
Diversification is the only free protection in finance. A book that is 60% one sector is a single bet with extra paperwork.
A worked example
Put $100m of a $400m book into one loan and a default with 50% recovery costs $50m, or 12.5% of everything you manage. Split the same $100m across ten $10m loans and one default costs $5m.
Where it catches you in the game
- The debrief calls out sector concentration when it drove the outcome.
It comes up most on the private credit desk, the hedge fund desk and the quantitative investing desk.
Related terms
Learn it by using it
Definitions stick once they've cost you money. Take a seat, make three calls a year and watch what concentration does to your returns.