Why Futures Returns Depend on the Margin Convention

Summary

The document explains why futures and other derivatives do not have a single standard return calculation. Unlike owning an asset such as a share or an ounce of gold, a derivative position requires cash allocation to cover potential losses, while the chosen margin amount depends on how much loss the trader can tolerate before closing the position.

Because that capital base is discretionary, the return measure—and therefore a Sharpe ratio built from it—depends on the convention used. The discussion points readers to a treatment of returns for leveraged securities and portfolios for more detail. It does not prescribe a specific futures return formula or provide empirical comparisons, so the appropriate measure must be stated in context, particularly when comparing strategies or reporting performance.

Key ideas

• Derivative returns depend on the amount of capital allocated to support the position.
• Margin allocation is discretionary and may reflect the trader’s loss tolerance.
• Sharpe ratios for futures inherit the assumptions of the underlying return calculation.
• The document identifies the lack of a universal convention but does not recommend a specific formula.

Tags

# How to calculate returns and sharpe ratio for futures?


# How to calculate returns and sharpe ratio for futures?












What is the industry standard way to calculate returns, which will be used to calculate sharpe ratio for e-mini S&P500?

## Answer by Thomas Maloney (score 2, accepted)

https://quant.stackexchange.com/a/20787

There's no industry standard for calculating returns on derivative contracts. The reason is that derivative contract assets are different from what I'll call real assets. Examples of real assets are an ounce of gold, or an equity. Derivatives require you to invest, or allocate some amount of cash (i.e. margin), to accommodate losses. But this allocation is basically arbitrary, and depends on what amount of loss you can withstand before you unwind your contract. For more discussion on this topic, read Meucci's Return Calculations for Leveraged Securities and Portfolios.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.