Commodity trading advisors' leverage and reported margin-to-equity ratios

We investigate the effect of leverage on Commodity Trading Advisors' (CTAs) performance measurement. We find that leverage has important effects on the cross section of CTA returns, volatility, and survival experience. On average, a 100-basis points increase in leverage is associated with a 27-basis points increase in returns. After performance is adjusted for leverage, volatility, and survival experience, CTAs' style variables have no significant effect on performance. The amount of leverage used by a CTA is found to reduce the likelihood of survival. However, the total effect of leverage on survival is much smaller than its partial effect. Contrary to common beliefs, we find that CTA diversification leads to higher levels of leverage and volatility. This apparent contradiction is related to how the diversification process affects the use of leverage. The findings in this study have implications for measuring and comparing managers' performance track records.