Explaining Investment Exposure (400% or 200%) on an investment in an index

adast027

Newbie
Messages
3
Likes
0
Hi

Let me preface this by saying that I am completely new to margin trading, managed futures etc, so apologies if my question may seem dumb or straightforward or ambiguous.

Someone has shown me an investment rolled out by one of the investment banks that provides either 400% or 200% investment exposure to an index of hedge fund managers that are managed futures managers. It has been explained to me that the 200% and 400% exposure is made possible by the fact that these managers trade exchange traded instruments using margin. What I would like to know is how this is possible?

The explanation for 400% investment exposure in the marketing docs is as follows:

So i.e. if the manager needs to invest 15 cents of a dollar to have a 1 dollar exposure in the market (with the rest, 85 cents, staying in cash to earn interest and serve as collateral), he could also use 60 cents to get a 4 dollar exposure in the market. This is what we describe a 400% investment exposure.

This confuses me. My understanding is that the less money you invest, the greater the exposure. So if you are investing 15c rather than 60c your investment returns will be greater because you are investing less to get the same exposure.

Can anyone explain this to me? Does their explanation make sense? If it does, then can you take me through it and make things a little easier for me to understand?

Their explanation for 200% exposure is as follows:

So i.e. if the manager needs to invest 25 cents of a dollar to have a 1 dollar exposure in the market (with the rest, 75 cents, staying in cash to earn interest and serve as collateral), he could also use 50 cents to get a 2 dollar exposure in the market. This is what we describe a 200% investment exposure.

The explanations they have given is completely different to explanations of notional funding that I have found on sites like investopedia etc.

Please help!
 
Top