Notional funding is the term used for funding an account below its nominal value. For example, assume a CTA requires a minimum investment of $1,000,000 (the “Nominal Value”) and the margin requirement is $50,000.
The investor can either deposit $1,000,000 to “fully fund” that minimum investment requirement or she can invest only a portion of the $1,000,000, as long as she meets the $50,000 margin requirement. Now assume that the investor decides to fund the $1,000,000 account with $100,000 (the “Funding Level”). This means that the investor is using leverage of 10X—ten times $100,000 equals the $1,000,000 minimum investment. The difference between the Nominal Value ($1,000,000) and the Funding Level ($100,000) is $900,000. The $900,000 is referred to as “Notional Funding”. Please see below a notional funding matrix that shows the impact on returns and losses based on the notionally funded amount: