A manager may be permitted to use leverage as part of a trade or trading strategy. Leverage means that funds are borrowed to purchase some of the securities involved in the strategy.

EXHIBIT 12 Performance Attribution Example

Source: G.A.T. Integrative Bond System

So, we begin this section with a discussion of the advantages and disadvantages of leverage, and then we discuss the use of repurchase agreements as a source of borrowed funds. Scenario analysis, discussed in Section IV, can then be used to assess a trade or a portfolio strategy that uses leverage.

Leveraging is the investment approach of borrowing funds with the expectation of earning a return in excess of the cost of funds. The attractive feature of leveraging is that it magnifies the return realized from investment in a security for a given change in the price of that security. That’s the good news. The bad news is that leveraging also magnifies losses.