Managed futures investments have the key structural feature that they do not use leverage in the sense of borrowing money to increase notional positions relative to cash. In most cases, margin requirements are a small fraction of the capital invested in a program or fund. A managed futures fund may only use less than 20 cents on the dollar for margin while 80 cents or more may be held in a custody account at close to zero interest rate. Nevertheless, some managers are more aggressive and may hold funds in an enhanced money fund or short-term bond fund to add to return. Of course, some investor will use a separate account and only provide funds for margin with a cushion. This cuts the excess cash held by the manager.
Generally, capital is not used efficiently with this hedge fund strategy. By efficiency we mean that returns can be enhanced by deploying more of the money in the fund in investments that have a return higher than cash. This will have an impact on overall volatility, but this can be managed to still target a specific volatility level for the fund.
A simple way of more efficiently using the capital is to employ managed futures as a overlay program so that all of a portfolio's capital is used to generated the highest returns possible. The notional trading size of the overall portfolio will be higher, but the volatility of the overall portfolio can still be managed to specific volatility target.
The choice set of how to employ managed futures and efficiently use capital is fairly broad but can help widen the return opportunities for both manager and investor. Holding cash may be the best alternative but that decision should be made after looking at all of the choices for excess collateral.