Leverage Factor & Margin-to-Equity Ratios for Macro Funds

Discussion in 'Strategy Building' started by CPTrader, Aug 13, 2005.

  1. Hello Friends,

    What are your views on the use of leverage factor an/or Margin-to-Equity ratio for Macro funds trading in futures, forex, and FX/

    Is one preferred to the other? Is one more accurate than the other?

    Is there a consistent way to calculate leverage?

    For example in calculating notional value for bond futures or 10-Y futures, what's the correct way? Multiplying position size by the bond’s US$100,000 face value?? And since all the interest rate contracts have 100,000 face value, isn’t this a somewhat misleading way of calculating interest rate contract notional value. Is there a precise /accurate way of calculating notional value of interest rate contracts/

    Also in calculating total portfolio notional value in order to get a leverage factor, do you raw position values or absolute position values?

    For example if you are short 2 NQU and long 1 ESU, would this for leverage purposes be roughly a flat position [(-2*1600*20) +( 1*50*1230) ] or do you use the absolute notional value for each individual component i.e. [(2*1600*20) +( 1*50*1230) ]?

    I would love to hear peoples views/comments/answers to the above and genral comments on assessing risk exposure in a portfolio.

    Many thanks in advance!
  2. Anyone???!!!!
  3. bolter



    Leverage based on notional portfolio value is not a useful measure of "risk". The only people I know who pay any regard to this number is auditors.

    Margin-to-Equity ratio is the generally accepted proxy for leverage with futures It is used extensively by CTA's and Managed Futures funds, and gives a good read on likely volatility. 10% will be low vol, 20% average vol, 30%+ high vol. With Macro managers it is a more difficult proposition - their portfolio will generally contain a variety of different types of securities/instruments, and they may actually employ real leverage, not just margin.

    CTA's tend to maintain a constatnt exposure to markets although M/E may be varied according to their view on trading conditions. Macro managers however can vary their exposure and their leverage dramatically. They can have no positions on at all at various times. CTA's will generally publish a M/E number. Macro managers will generally not report any measure of leverage.

    Portfolio volatility is the most common means of measuring a hedge fund's risk. Alot of managers also publish a VaR number these days as well.

    Calculating the notional value of a bond future can be tricky as they all tend to be slightly different. You need to read the contract spec carefully. The exchange will help you if you need it.

    Hope some of these ramblings help out.

  4. Many Thanks, Bolter for sharing.

    Your thoughts echoe many of my private musings.

    I have ntociedthat leverage i srarley ued by Macromaagers an drobaly is somewhat menaingless.

    The dillemma though is that while MER is useful for CTAs, as you point out a Macro manager that trades equities in addition to the CTA style future instruments, probably would not use MER, as this ma not adequately encompass the risk coming from the equity instruments.

    So what to do...jettison MER completely in favor of say VaR alone?

    Thanks again and any more insights you or others have on this and the geeneral topic of risk will be most appreciated.

    Moderators, should probably create a sub-forum focused solely on with risk mgmt /money mgmt
  5. One more thing, while many Macro managers do not use any knd of leverage measure, a few do, simply because investors (used to the concept of leverage in equities) ask for leverage measures.
  6. bolter


    For a manager VaR is an excellent tool for understanding and analysing your risk down to a position level. And you can use it for reporting externally - although I wouldn't drill down to position level obviously.

    Now how you go about actually calculating VaR is an epic in itself. However, there are plenty of reasonable platform/service providers that can crunch the numbers for you these days.

    Good luck.
  7. Any more thoughts.........?