Consider an example Return Stacked® strategy consisting of:

• 75% U.S. Equities (directly held)
• 25% Cash Collateral (to support futures positions)
• 25% S&P 500 E-Mini Futures (to synthetically achieve 100% total equity exposure)
• 100% Managed Futures Exposure (trading approximately 30 futures contracts across equity indices, bonds, currencies, and commodities).

Futures contracts require margin—a good-faith deposit to ensure solvency in the event of adverse price movements. Futures margin is typically split into two categories:

• Initial Margin: The amount required to open a position.
• Maintenance Margin: The minimum level that must be maintained to avoid a margin call.

An S&P 500 E-mini contract typically requires an initial margin of 6-8% of the notional exposure with a maintenance margin of 5-7%. Interest rate and currency futures usually have lower initial margins (0.5-5%), while the more volatile contracts found in some commodities markets can reach 8-15%+. As a result, managed futures programs trading across multiple asset classes generally require an average margin of 10-15% of total notional exposure.

It is important to note that margin requirements are time-varying and usually increase during periods of market stress. This dynamic can further amplify liquidity needs during volatile market conditions.

Diversification across equities, bonds, commodities, and currencies can help stabilize margin requirements by reducing overall portfolio volatility. Because different asset classes react differently to market shocks, a well-diversified managed futures program may experience lower peak margin demands compared to a more concentrated leveraged strategy.

While diversification does not eliminate the risk of extreme, correlated losses that could lead to margin calls, a well-diversified managed futures program may experience lower peak margin demands compared to a more concentrated leveraged strategy. For example, during an equity market selloff, bonds or certain commodities may rally, offsetting losses and mitigating margin stress.

Given our portfolio’s structure, the estimated margin required to maintain these positions would be:

• S&P 500 E-mini: 1.5% of total portfolio value (6% initial margin x 25% of the portfolio’s notional value)
• Managed Futures: 12% of total portfolio value (12% initial margin x 100% notional exposure)

Total estimated margin requirement: ~13.5% of total portfolio value

A margin call occurs when the account’s margin balance falls below the required maintenance margin level, prompting the broker to demand additional funds or liquidation of positions to meet the requirement. Margin pressure in a return-stacked portfolio can arise from two distinct sources — and in the worst cases, both can occur simultaneously.

Source 1: Portfolio Losses

The most intuitive source of margin stress is simply losing money. As the portfolio’s net asset value declines, the cash collateral available to support futures positions shrinks. Key scenarios
include:

• Large and Sudden Drawdowns in Managed Futures: If multiple managed futures positions experience correlated losses, available cash collateral can be depleted rapidly. A 15–20% drawdown in
  managed futures might consume much of the cash buffer and trigger a call.
• Simultaneous Losses in Both Equities and Managed Futures: If equities decline sharply while managed futures also face losses — for example, during a rapid shift in market regimes that
  wrong-foots trend-following models — the portfolio faces margin stress from multiple directions at once.
• Limit-Up / Limit-Down Market Moves: Futures markets impose daily price limits to curb extreme volatility. If multiple positions hit limit-down (or limit-up for shorts), the portfolio manager may be unable to close positions, increasing potential margin exposure. While the probability of all managed futures positions being simultaneously locked is low due to their diversified nature, it remains a tail-risk scenario.

Source 2: Rising Margin Requirements

Even when a portfolio has not lost money, margin stress can arise from exchanges raising per-contract margin requirements. Futures exchanges set margin rates based on expected price volatility, and these rates are not static. When markets become turbulent, exchanges increase margin requirements to ensure all participants can cover potential losses.

During the COVID-19 crash in March 2020, for example, CME nearly doubled E-mini S&P 500 margin requirements in roughly three weeks, while gold margins rose approximately 86% and crude oil margins increased over 115%. For a return-stacked portfolio, this means the cash collateral supporting futures positions can come under pressure even if the underlying positions haven’t moved against you — the exchange is simply demanding a larger good-faith deposit.

Importantly, managed futures strategies that employ volatility targeting can partially mitigate this effect. Because these strategies scale down their notional exposure as volatility rises, the increase in per-contract margin requirements can be offset by a reduction in the number of contracts held. The offset is imperfect — volatility estimates rely on trailing lookback windows and de-levering doesn’t happen instantaneously — but the net effect can be a meaningful dampening of margin rate pressure during stress events.

In practice, these two sources often compound: a period of extreme volatility may produce both portfolio losses and margin rate increases at the same time. Understanding each mechanism independently helps clarify the tools available to manage them.

To illustrate how rising margin rates affect the margin cushion — and how volatility targeting can dampen the impact — the interactive gauge below models this second source of margin pressure in isolation, holding portfolio value constant.

One of the strengths of managed futures is their diversified exposure across asset classes. The probability of every futures position experiencing simultaneous, extreme losses is low, making a full-scale margin crisis less likely.

Stress Testing and Scenario Planning

To mitigate risks, managers of ETFs and mutual funds implementing return stacking should:

• Stress-test portfolios against historical and hypothetical drawdowns.
• Maintain an emergency liquidity buffer beyond minimum margin needs.
• Ensure flexible funding sources for potential margin obligations.

Counterparty Risk in Margin Events

In addition to market volatility, counterparty risk plays a role in systemic margin stress. If a broker or clearinghouse faces liquidity issues or defaults, margin requirements may suddenly increase, and access to funds may become restricted. However, to help manage this risk for investors, exchange-traded futures are centrally cleared, meaning that the exchange itself acts as the counterparty to both sides of a trade. This central clearing mechanism significantly reduces counterparty risk, as the exchange guarantees the fulfillment of the contract even if one of the trading participants defaults. This structure enhances market stability and ensures the integrity of futures contracts, making them less susceptible to counterparty-related disruptions.

From a legal perspective, structures like the Investment Company Act of 1940 in the U.S. provide protections ensuring that investor liability is limited to their shares in the fund. This structure shields investors from the risk of margin calls affecting their personal assets, as any required liquidity management happens within the fund and is handled by the fund manager.

Additionally, funds operating under the ’40 Act have strict regulations regarding leverage and liquidity management, reducing the probability of extreme margin stress events. The SEC Rule 18f-4, which governs the use of derivatives within mutual funds and ETFs, imposes limits on leverage and requires funds to maintain risk management programs. This regulation helps mitigate the potential for excessive margin exposure within these vehicles, ensuring that Return-Stacked® strategies operate within a controlled risk framework while avoiding the operational complexity and personal liability associated with managing futures contracts directly.

By proactively managing these risks, fund advisors can help clients confidently harness the benefits of return stacking while minimizing the dangers of excessive leverage.