When an investor looks at the performance of a trading system or Commodity Trading Advisor, one of the most significant statistics is what the needed minimum account size is. It tends to make no sense thinking of Trading systems or managed futures that have $100,000 minimums if the investor only has $50,000 to invest.Even so, it is beneficial to know that regularly the investor can start with less than the minimum via notional funding. For instance, an investor could notionally fund a managed futures or trading systems account at the $50,000 level but tell the manager to trade at a nominal $100,000 level. In other words, the account will trade as although there had been $100,000 in it even although there is not. The investor is just creating use of added leverage.In the prior instance this indicates that the account will be trading at two-to-1 leverage. Meaning the investors will have gains and losses at twice the level. Had the investor only place up a third of the nominal quantity minimum then he would see gains and losses at three instances the level and so on.Why those employing Trading Systems or Managed Futures Might possibly Want to Look into Notional FundingNotional funding can be an effective use of capital, as a result of regularly a trading system or managed futures account will not come anywhere close to employing all the income in the account. For instance, in Hoffman Asset Management's situation we have a margin-to-equity ratio of generally less than 10%. What this indicates is that for every $100,000 invested, generally speaking, we will be employing less than $10,000 at any given time for margin. The remaining $90,000 sits on the sidelines stagnant. Though it is true that interest on those unused funds can be earned, most investor's really feel they could do improved investing those funds elsewhere. Sometimes time's high net worth folks or institutions will even place Absolutely nothing in their accounts and trade 100% notionally. The query for investors must be "how can I calculate a reasonable notional level to invest at".We really feel the answer to that query is one that can be computed based on quite a few statistics. Especially, what is the maximum drawdown expected and what is the maximum margin that could possibly be needed. For instance, Hoffman Asset Management (as of this writing) has had a maximum drawdown of about 17% on a $125,000 nominal account size. This indicates a $21,250 drawdown in money terms. The maximum margin usage is about 15% on $125,000 or, about $18,750 in money terms.To compute a notional investment quantity, we suggest that an investor add the maximum expected drawdown and the maximum expected margin usage. This figure would give the investor the absolute minimum they could invest in the account with out possessing a margin call.In the prior instance, if an investor had began on the worst conceivable day, and had a $21,250 drawdown, and simultaneously had the maximum margin usage of $18,750, he would have needed a $40,000 of money in the account to fund that $125,000 nominal account size. As soon as again, some institutions and folks who are not worried about margin calls could possibly even make a decision to fund the account with less than that (or zero).Rewards to the Trading Systems or Managed Futures InvestorThis allows for the smaller, but far more aggressive investor to participate in the program with out needing to tie up the whole quantity in money. This will amplify their gains and losses at the added leverage level they are employing. If, for instance, the manager made a 30% return with a 17% drawdown, then the investor at two-to-1 leverage would have experienced 60% gains with a 34% drawdown.As soon as again, this is a far more aggressive approach, and we advocate this only for investors who completely comprehend the positive aspects and risks of notional funding. Even so, for the right investor, this can be a beneficial tool to have in his or her arsenal.Dean Hoffman
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