Suppose your mandate is to track S&P500. Suppose the mandate size is $ 1,352,500. The contract size of the future is 50, today's index price is 2705. If I buy 10 contracts my exposure will be exactly similar as the fund's size.
(to simplify imagine you don't have to post margins for counterparty risk).
Apparently doing this would still result in a high tracking error because of the cash position, I don't understand this, can someone explain?