HHI (Herfindahl-Hirschman Index)

HHI (Herfindahl-Hirschman Index)

The Herfindahl-Hirschman Index is a measure of concentration, calculated by summing the squares of each component's percentage share of a whole. In credit portfolios, it's used to quantify how concentrated exposure is across originators, deal types, geographies, or individual positions. A portfolio spread evenly across many independent positions scores low; one dominated by a few large positions scores high, approaching 10,000 for a fully concentrated single-position portfolio.

The squaring is what gives the index its usefulness. Because each share is squared, large positions contribute disproportionately to the total: a single 40% position adds 1,600 to the index on its own, while forty 1% positions add only 40 combined. This makes HHI sensitive to exactly the thing concentration risk is about, whether any single exposure is large enough to be dangerous, rather than just counting how many positions exist.

HHI was originally developed to measure market concentration in antitrust analysis, and regulators still use it to assess whether mergers create excessive market power. Credit portfolio managers borrow the same math to monitor whether diversification is genuine or illusory: a book can hold many positions yet still be dangerously concentrated by originator or deal type, and a rising HHI on any dimension flags that a single failure is becoming disproportionately consequential.

Related: Portfolio correlation, concentration, and the HHI index.