Thread by @AttainCap2

Ok, quick thread on futures "leverage" in response to some replies out there in regards to 'stacking paper' and Fed presidents slinging "$1mm futures trades".

https://twitter.com/max_arbitrage/status/1438178483063205894

1. Let's use S&P 500 as example, and assume the futures price is around 4,500.

The futures are worth $50*the price, so at price of 4,500 - you get $225,000 in exposure.

2. Here's the fun part and where the leverage comes in.

To "own" that $225,000 in exposure - all you need to technically have in a futures account is $12,650 (and $11.5k after putting it on) cmegroup.com/markets/equiti…

3. Now, if you're a journalist reporting on a Fed President's trading, I guess you call this $225,000 in emini trading, even if you had just $12k in your account. (confusing things a bit further)

https://twitter.com/AttainCap2/status/1436309688044380161

4. But if you do fund with just $12k, and the price goes down a bit, you'll be on a margin call, so few fund it with just this minimum requirement.

5. And margins are not forever static. They go up and down with price and volatility. Here's how margins spiked in Q1 2020 per @FIAconnect

6. But the point remains, you can control via the embedded leverage in futures $225k in exposure with just $12.5k (5.5%).

That's 18 to 1 "leverage" without credit forms or counter-party exposure at the same (embedded) rates the largest institutional firms in world pay

7. What's more. The exchanges allow you to hold Tbills as collateral, so that $12.5 k can not only be used to gain the $225k exposure, but also to own $12.5k in T-Bills.

Here's an old post on how that works: rcmalternatives.com/2015/07/is-man…

8. Now - say the local ETF shop has $225k in assets & puts $112k into a futures account to buy 1 emini S&P futures contract

They didn't borrow money. They didn't take out a loan to get the $225k exposure, and you the ETF buyer don't have to make any payments for the leverage

9. Per the 'stacking' paper and portable alpha & Cockroach & the rest, they can then use that extra $112.5k for other investments.

Say they buy $225k in bond exposure in a similar manner, for 200% total exposure (2 to 1 leverage)

10. Now the ETF has $450k in total asset "exposure" with just $225k in assets under management.

And you the ETF investor who just bought it with cash... don't have a margin balance at your broker, so no 'margin calls' for you.

11. The "leverage" is embedded in the futures, which are in turn embedded in the ETF/mutual funds.

Which is about when we call it 'capital efficiency' vs 'leverage'

12. Now, being efficient isn't the same thing as not being risky. A chainsaw is very efficient as well.

But the leverage and process of VaR/margins/etc is at the ETF (or mutual fund or private fund for that matter) level.

So you have someone else doing the chainsaw work.

13. Here's what the S&P futures total return index (which includes earning essentially t-bill rate on collateral) looks like versus the total return (including dividends) of SPY ETF, for those wondering how close the performance of 'replicating' with futures lines up.

disclaimer: past performance is not necessarily indicative of future results

14/14. Note that ETFs and mutual funds do have Var based limits on how much total exposure they can have over the asset base.

sec.gov/news/press-rel…