Managed Futures Investor Education: Capital Efficiency, Margin, and Notional Funding
How margin, nominal account size, and notional funding work in a separately managed futures account, and what leverage adds to risk.
Futures trading involves substantial risk of loss and is not suitable for all investors. Increasing leverage increases risk. You can lose more than the funds you deposit.
This page is part of J.D. Turner Capital’s managed futures investor education. It explains capital efficiency in plain terms for sophisticated retail traders and retirement-focused investors evaluating CTA services. Whether you are comparing CTAs, investment education firms, or other alternative investment education resources, the concepts and questions below apply.
Why Futures Are Considered Capital Efficient
Futures contracts trade on margins that typically range from 5% to 15% of the contract’s value, so an investor might need only $5,000 in cash to secure a $100,000 position. That margin is not a loan. CTAs do not use leverage in the traditional sense of borrowing money; posting margin provides notional exposure at a fraction of the position’s value. StoneX describes this as cash efficiency: gaining exposure while preserving liquidity and avoiding borrowing costs.
Many systematic futures trading strategies build on this structure. In trend following, because futures require relatively little margin, leverage is often used to scale the overall portfolio to a target level of risk.
The same feature that creates capital efficiency creates leverage risk. The high degree of leverage available in commodity interest trading can work against you as well as for you, and it can lead to large losses as well as gains.
Margin Is a Deposit, Not a Loss Limit
CME Group describes margin as a performance bond: a good-faith deposit to guarantee performance against potential future losses on open positions. CME calculates the worst loss a portfolio might reasonably incur over a set time, usually one trading day for futures, and its methodologies are designed to cover 99% of price moves. By design, moves larger than the deposit can occur.
The CFTC’s required risk disclosure states that you may lose all funds deposited to establish or maintain a position, and may incur losses beyond those amounts. If the market moves against a position or margin levels are increased, you may be called on to deposit substantial additional funds on short notice.
Nominal Account Size, Actual Funds, and Notional Funds
These three terms define how a partially funded managed futures account works:
- Nominal account size: the amount agreed to by the client that sets the level of trading the CTA engages in.
- Actual funds: the equity in the client’s trading account, plus any funds that can be transferred to it without the client’s consent to each transfer.
- Notional funds: the difference between nominal account size and actual funds.
Put simply, nominal investment equals notional funds plus cash investment.
NFA requires the CTA to document the nominal account size, and how cash additions, withdrawals, and net performance affect it, in a written confirmation before placing the first trade. Without that confirmation, performance returns must be based on actual funds. Notional funding is permitted only with a written agreement, and it does not permit an account to trade undermargined.
Funds held outside the trading account can count as actual funds only if four conditions are met: ownership of the accounts is identical, the funds are available for transfer, the client agrees in writing that the FCM may transfer them at the CTA’s request, and the CTA can verify the amount.
What Leveraged Managed Futures Exposure Changes
Partial funding is how many investors pursue capital efficiency. It is also how they add leverage. NFA requires CTAs to give non-QEP clients with partially funded accounts three disclosures:
- Partial funding increases leverage and may result in more frequent and larger margin calls.
- Partial funding increases fees and commissions as a percentage of actual funds, although it does not change their dollar amount.
- A description, example, or formula showing how partial funding affects rate of return and drawdown percentages.
The conversion formula NFA provides is: (nominal account size ÷ actual funds) × n = a, where n is the return based on nominal account size and a is the return based on actual funds.
Illustration only. The table below is arithmetic based on NFA’s example matrix and formula. It is not the performance of any account or program.
| Return on nominal account size | 100% funded | 75% funded | 50% funded |
|---|---|---|---|
| -20% | -20% | -26.67% | -40% |
| -10% | -10% | -13.33% | -20% |
| +10% | +10% | +13.33% | +20% |
| +20% | +20% | +26.67% | +40% |
| 2% annual fee | 2% | 2.67% | 4% |
Losses and drawdowns scale by the same factor as gains. NFA’s own guidance notes that a 2% fee equals 4% of actual funds in a 50% funded account.
Two reporting points to understand:
- CTA monthly rates of return are always calculated on beginning nominal account size, not on the cash you deposited.
- A CTA may include interest earned on actual funds when calculating net performance, but may not impute interest on other funds.
Where Your Capital Is Held
A CTA that is not also a registered FCM is prohibited by law from accepting client trading funds in its own name. All funds are placed directly with a futures commission merchant (FCM). The Commodity Exchange Act requires the FCM to keep customer funds in segregated accounts, separate from the firm’s own money. That protection does not include account insurance of the type SIPC provides for securities accounts.
On capital efficiency within the account itself: CME Clearing accepts U.S. Treasuries, including bills, as performance bond collateral at the clearinghouse level. Whether your FCM accepts Treasury bills from you as margin, and how it handles interest on cash balances, is a question to ask the FCM directly.
Notional Funding Inside an IRA
Retirement-focused investors can hold managed futures through a self-directed IRA. The IRA opens an account with a CFTC and NFA regulated broker, and the account is titled in the name of the IRA. One self-directed IRA custodian advises keeping enough liquid assets in the IRA to cover potential margin calls, because personal assets cannot be used to fund a shortfall.
If you partially fund an IRA account, confirm with your custodian where additional margin would come from and how quickly funds can move to the trading account.
How DTFS Accounts Are Structured
J.D. Turner Capital, LLC is a CFTC-registered Commodity Trading Advisor and NFA member. Its Diversified Trend Following Strategy (DTFS) is a systematic program trading 17 global futures markets through separately managed accounts, with a live track record since January 2020.
- Minimum nominal account size: 100k
- Partial funding: Accepted; minimum funding level 50%
- Fees: 1% management and 15% incentive fee
- FCM: Clients may choose
- Retirement accounts: Self-directed IRA capital accepted
Complete fee, risk, and performance information, including required drawdown disclosures, is in the J.D. Turner Capital Disclosure Document.
Questions to Ask Any CTA About Capital Efficiency
- What is the nominal account size, and what minimum funding level do you accept?
- At my funding level, what are fees as a percentage of actual funds?
- How would a margin call be handled, and how quickly must I respond?
- Which FCM carries the account, and what does it accept as margin collateral?
- For an IRA, where would additional margin come from?
- Is the CTA registered? NFA’s BASIC is a free service for researching the registration and disciplinary backgrounds of current and former CFTC registrants.
Frequently Asked Questions
Is notional funding the same as borrowing?
No. Futures margin does not involve borrowing. Partial funding does increase leverage, and with it the risk of larger losses and margin calls relative to the cash you deposit.
Can a partially funded account lose more than the cash deposited?
Yes. Losses can exceed the funds deposited, and you are liable for any resulting deficit if positions are liquidated at a loss.
Are returns reported on the cash I deposit?
No. CTA returns are calculated on nominal account size. Your return as a percentage of cash deposited is higher or lower by the funding factor shown above.
Are managed futures appropriate for every investor?
No. Trading futures is not appropriate or suitable for every investor. Factors to weigh include your financial circumstances, risk tolerance, and, for IRA investors, the number of years until retirement.
Futures trading involves substantial risk of loss and is not suitable for all investors. Increasing leverage increases risk. Past performance is not necessarily indicative of future results. This page is educational and is not an offer or solicitation to invest in any trading program. Any offer is made only through the J.D. Turner Capital Disclosure Document, which describes the principal risk factors and each fee charged. Consult your own tax and legal advisors regarding retirement account investments.