Attached files
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EX-4.S - EXHIBIT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LP | dwssex3202.htm |
EX-1.S - EXHIBIT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LP | dwssex3101.htm |
EX-2.S - EXHIBIT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LP | dwssex3102.htm |
EX-3.S - EXHIBIT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LP | dwssex3201.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended September 30, 2009 or
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from __________________to__________________
Commission
File Number: 0-26280
MORGAN
STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
|
||
(Exact
name of registrant as specified in its charter)
|
Delaware
|
13-3782225
|
|||
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|||
Demeter
Management LLC
|
||||
522
Fifth Avenue, 13th Floor
|
||||
New
York, NY
|
10036
|
|||
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code
|
(212)
296-1999
|
Morgan
Stanley Spectrum Strategic L.P.
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes 0 No
T
MORGAN
STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
INDEX TO QUARTERLY REPORT ON
FORM 10-Q
September 30,
2009
PART I. FINANCIAL
INFORMATION
|
||
Item
1.
|
Financial
Statements (Unaudited)
|
|
Statements
of Financial Condition as of September 30, 2009 and December 31, 2008
|
2
|
|
Statements
of Operations for the Three and Nine Months Ended September 30, 2009 and
2008
|
3
|
|
Statements
of Changes in Partners’ Capital for the Nine Months Ended September 30,
2009 and 2008
|
4
|
|
Statements
of Cash Flows for the Nine Months Ended September 30, 2009 and 2008
|
5
|
|
Condensed
Schedules of Investments as of September 30, 2009 and December 31,
2008
|
6
|
|
Notes
to Financial Statements
|
7-23
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
24-35
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
35-46
|
Item
4.
|
Controls
and Procedures
|
46-47
|
Item
4T.
|
Controls
and Procedures
|
47
|
PART II. OTHER INFORMATION
|
||
Item
1A.
|
Risk
Factors
|
48
|
Item
6.
|
Exhibits
|
48
|
PART I. FINANCIAL
INFORMATION
Item
1. Financial
Statements
MORGAN
STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
STATEMENTS
OF FINANCIAL CONDITION
(Unaudited)
September
30,
|
December
31,
|
||
2009
|
2008
|
||
ASSETS
|
$
|
$
|
|
Investment
in BHM I, LLC (cost $64,091,613 and $75,551,419,
respectively)
|
102,411,032
|
90,392,390
|
|
Trading
Equity:
|
|||
Unrestricted
cash
|
74,551,556
|
113,863,847
|
|
Restricted
cash
|
1,959,892
|
2,175,923
|
|
Total
cash
|
76,511,448
|
116,039,770
|
|
Net
unrealized gain on open contracts (MS&Co.)
|
326,545
|
391,494
|
|
Net
unrealized gain on open contracts (MSIP)
|
299,445
|
1,613,170
|
|
Total
net unrealized gain on open contracts
|
625,990
|
2,004,664
|
|
Options
purchased (premiums paid $4,182,749 and $1,144,180,
respectively)
|
3,960,529
|
790,178
|
|
Total
Trading Equity
|
183,508,999
|
209,227,002
|
|
Receivable
from Investment in BHM, LLC
|
1,802,598
|
15,894,480
|
|
Interest
receivable (MS&Co.)
|
7,202
|
1,470
|
|
Total
Assets
|
185,318,799
|
225,122,952
|
|
LIABILITIES
AND PARTNERS’ CAPITAL
|
|||
Liabilities
|
|||
Options
written (premiums received $3,609,808 and $344,612,
respectively)
|
3,387,871
|
201,784
|
|
Redemptions
payable
|
1,815,681
|
8,467,774
|
|
Accrued
brokerage fees (MS&Co.)
|
889,371
|
1,087,473
|
|
Accrued
management fees
|
424,920
|
508,977
|
|
Accrued
incentive fee
|
130,348
|
–
|
|
Total
Liabilities
|
6,648,191
|
10,266,008
|
|
Partners’
Capital
|
|||
Limited
Partners (9,558,085.995 and 11,299,103.992 Units,
respectively)
|
176,840,265
|
212,696,497
|
|
General
Partner (98,928.692 and 114,769.692 Units, respectively)
|
1,830,343
|
2,160,447
|
|
Total
Partners’ Capital
|
178,670,608
|
214,856,944
|
|
Total
Liabilities and Partners’ Capital
|
185,318,799
|
225,122,952
|
|
NET
ASSET VALUE PER UNIT
|
18.50
|
18.82
|
The
accompanying notes are an integral part of these financial
statements.
- 2
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
STATEMENTS
OF OPERATIONS
(Unaudited)
For
the Three Months
Ended September 30,
|
For
the Nine Months
Ended September 30,
|
||||||
2009
|
2008
|
2009
|
2008
|
||||
$
|
$
|
$
|
$
|
||||
INVESTMENT
INCOME
|
|||||||
Interest
income (MS&Co.)
|
42,128
|
614,145
|
135,571
|
2,231,740
|
|||
EXPENSES
|
|||||||
Brokerage
fees (MS&Co.)
|
2,671,173
|
3,217,676
|
8,513,456
|
9,774,752
|
|||
Management
fees
|
1,272,791
|
1,503,355
|
4,049,844
|
4,431,197
|
|||
Incentive
fees
|
130,348
|
–
|
130,348
|
3,578,609
|
|||
Total
Expenses
|
4,074,312
|
4,721,031
|
12,693,648
|
17,784,558
|
|||
NET
INVESTMENT LOSS
|
(4,032,184)
|
(4,106,886)
|
(12,558,077)
|
(15,552,818)
|
|||
TRADING
RESULTS
|
|||||||
Trading
profit (loss):
|
|||||||
Realized
|
(1,023,185)
|
(1,149,030)
|
(14,487,617)
|
(9,448,097)
|
|||
Net
change in unrealized
|
1,405,149
|
(1,804,717)
|
(1,167,782)
|
1,028,378
|
|||
Realized
gain on Investment in BHM I, LLC
|
228,928
|
–
|
568,471
|
–
|
|||
Net
change in unrealized appreciation (depreciation) on Investment in BHM I,
LLC
|
9,176,791
|
(14,627,572)
|
23,478,449
|
13,982,909
|
|||
Total
Trading Results
|
9,787,683
|
(17,581,319)
|
8,391,521
|
5,563,190
|
|||
NET
INCOME (LOSS)
|
5,755,499
|
(21,688,205)
|
(4,166,556)
|
(9,989,628)
|
|||
NET
INCOME (LOSS) ALLOCATION
|
|||||||
Limited
Partners
|
5,697,207
|
(21,458,028)
|
(4,126,632)
|
(9,888,126)
|
|||
General
Partner
|
58,292
|
(230,177)
|
(39,924)
|
(101,502)
|
|||
NET
INCOME (LOSS) PER UNIT
|
|||||||
Limited
Partners
|
0.59
|
(1.85)
|
(0.40)
|
(0.87)
|
|||
General
Partner
|
0.59
|
(1.85)
|
(0.40)
|
(0.87)
|
|||
Units
|
Units
|
Units
|
Units
|
||||
WEIGHTED
AVERAGE NUMBER
|
|||||||
OF
UNITS OUTSTANDING
|
9,799,959.413
|
11,779,720.130
|
10,296,209.910
|
11,799,963.297
|
The
accompanying notes are an integral part of these financial
statements.
– 3
–
MORGAN
STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
STATEMENTS
OF CHANGES IN PARTNERS’ CAPITAL
For the
Nine Months Ended September 30, 2009 and 2008
(Unaudited)
Units
of
|
|||||||
Partnership
|
Limited
|
General
|
|||||
Interest
|
Partners
|
Partner
|
Total
|
||||
$
|
$
|
$
|
|||||
Partners’
Capital,
|
|||||||
December
31, 2007
|
11,969,437.368
|
213,167,590
|
2,360,471
|
215,528,061
|
|||
Offering
of Units
|
1,542,340.714
|
28,152,799
|
–
|
28,152,799
|
|||
Net
Loss
|
–
|
(9,888,126)
|
(101,502)
|
(9,989,628)
|
|||
Redemptions
|
(1,629,701.486)
|
(29,922,766)
|
(125,866)
|
(30,048,632)
|
|||
Partners’
Capital,
|
|||||||
September
30, 2008
|
11,882,076.596
|
201,509,497
|
2,133,103
|
203,642,600
|
|||
Partners’
Capital,
|
|||||||
December
31, 2008
|
11,413,873.684
|
212,696,497
|
2,160,447
|
214,856,944
|
|||
Net
Loss
|
–
|
(4,126,632)
|
(39,924)
|
(4,166,556)
|
|||
Redemptions
|
(1,756,858.997)
|
(31,729,600)
|
(290,180)
|
(32,019,780)
|
|||
Partners’
Capital,
|
|||||||
September
30, 2009
|
9,657,014.687
|
176,840,265
|
1,830,343
|
178,670,608
|
The
accompanying notes are an integral part of these financial
statements.
- 4
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
STATEMENTS
OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September
30,
|
|||
2009
|
2008
|
||
$
|
$
|
||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||
Net
loss
|
(4,166,556)
|
(9,989,628)
|
|
Purchase
of investment in BHM I, LLC
|
(17,036,081)
|
(87,782,099)
|
|
Proceeds
from sale of investments in BHM I, LLC
|
29,064,360
|
7,477,645
|
|
Noncash
item included in net loss:
|
|||
Net
change in unrealized
|
1,167,782
|
(1,028,378)
|
|
Realized
gain on investment in BHM I, LLC
|
(568,471)
|
–
|
|
Net
change in unrealized appreciation on investment in BHM I,
LLC
|
(23,478,449)
|
(13,982,909)
|
|
(Increase)
decrease in operating assets:
|
|||
Restricted
cash
|
216,031
|
25,331,471
|
|
Net
premiums paid for options purchased
|
(3,038,569)
|
113,492
|
|
Receivable
from investment in BHM I, LLC
|
14,091,882
|
(591,276)
|
|
Interest
receivable (MS&Co.)
|
(5,732)
|
296,080
|
|
Increase
(decrease) in operating liabilities:
|
|||
Net
premium received from options written
|
3,265,196
|
147,571
|
|
Accrued
brokerage fees (MS&Co.)
|
(198,102)
|
6,423
|
|
Accrued
management fees
|
(84,057)
|
73,439
|
|
Accrued
incentive fees
|
130,348
|
(102,353)
|
|
Net
cash used for operating activities
|
(640,418)
|
(80,030,522)
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||
Cash
received from offering of Units
|
–
|
28,616,445
|
|
Cash
paid for redemptions of Units
|
(38,671,873)
|
(30,415,221)
|
|
Net
cash used for financing activities
|
(38,671,873)
|
(1,798,776)
|
|
Net
decrease in unrestricted cash
|
(39,312,291)
|
(81,829,298)
|
|
Unrestricted
cash at beginning of period
|
113,863,847
|
178,248,988
|
|
Unrestricted
cash at end of period
|
74,551,556
|
96,419,690
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH OPERATING ACTIVITY:
|
|||
Non-cash
investment transfer to BHM I, LLC
|
$ –
|
$11,850,500
|
The
accompanying notes are an integral part of these financial
statements.
- 5
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
CONDENSED
SCHEDULES OF INVESTMENTS
September
30, 2009 and December 31, 2008 (Unaudited)
Futures and
Forward Contracts
|
Long
Unrealized
Gain
|
Percentage
of
Net Assets
|
Short Unrealized
Loss
|
Percentage
of
Net Assets
|
Net
Unrealized
Gain/(Loss)
|
$
|
%
|
$
|
%
|
$
|
|
September 30, 2009, Partnership Net Assets:
$178,670,608
|
|||||
Commodity
|
449,559
|
0.25
|
(106,982)
|
(0.06)
|
342,577
|
Equity
|
13,710
|
0.01
|
(2,343)
|
–
|
11,367
|
Foreign
currency
|
1,794,888
|
1.00
|
(813,082)
|
(0.45)
|
981,806
|
Interest
rate
|
32,832
|
0.02
|
–
|
–
|
32,832
|
Grand
Total:
|
2,290,989
|
1.28
|
(922,407)
|
(0.51)
|
1,368,582
|
Unrealized
Currency Loss
|
(0.42)
|
(742,592)
|
|||
Total
Net Unrealized Gain on Open Contracts
|
625,990
|
||||
Option Contracts
|
Fair Value
|
Percentage
of
Net Assets
|
|||
$
|
%
|
||||
Options
purchased on Futures Contracts
|
–
|
–
|
|||
Options
purchased on Forward Contracts
|
3,960,529
|
2.22
|
|||
Options
written on Futures Contracts
|
–
|
–
|
|||
Options
written on Forward Contracts
|
(3,387,871)
|
(1.90)
|
|||
Futures and Forward
Contracts
|
Long
Unrealized
Gain
|
Percentage
of
Net Assets
|
Short Unrealized
Loss
|
Percentage
of
Net Assets
|
Net
Unrealized
Gain/(Loss)
|
$
|
%
|
$
|
%
|
$
|
|
December
31, 2008, Partnership Net Assets: $214,856,944
|
|||||
Commodity
|
1,854,894
|
0.86
|
(124,468)
|
(0.06)
|
1,730,426
|
Equity
|
20,337
|
0.01
|
(16,805)
|
(0.01)
|
3,532
|
Foreign
currency
|
1,089,344
|
0.51
|
(453,017)
|
(0.21)
|
636,327
|
Interest
rate
|
426,800
|
0.20
|
–
|
–
|
426,800
|
Grand
Total:
|
3,391,375
|
1.58
|
(594,290)
|
(0.28)
|
2,797,085
|
Unrealized
Currency Loss
|
(0.37)
|
(792,421)
|
|||
Total
Net Unrealized Gain on Open Contracts
|
2,004,664
|
||||
Option Contracts
|
Fair Value
|
Percentage
of
Net Assets
|
|||
$
|
%
|
||||
Options
purchased on Futures Contracts
|
–
|
–
|
|||
Options
purchased on Forward Contracts
|
790,178
|
0.37
|
|||
Options
written on Futures Contracts
|
–
|
–
|
|||
Options
written on Forward Contracts
|
(201,784)
|
(0.09)
|
The
accompanying notes are an integral part of these financial
statements.
- 6
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS
September
30, 2009
(Unaudited)
The
unaudited financial statements contained herein include, in the opinion of
management, all adjustments necessary for a fair presentation of the financial
condition and results of operations of Morgan Stanley Smith Barney Spectrum
Strategic L.P. (formerly, Morgan Stanley Spectrum Strategic L.P.) (the
"Partnership"). The financial statements and condensed notes herein
should be read in conjunction with the Partnership’s Annual Report on Form 10-K
for the fiscal year ending December 31, 2008.
1. Organization
Morgan
Stanley Smith Barney Spectrum Strategic L.P. (formerly, Morgan Stanley Spectrum
Strategic L.P.) is a Delaware limited partnership organized in 1994 to engage
primarily in the speculative trading of futures contracts, options on futures
and forward contracts, and forward contracts on physical commodities and other
commodity interests, including, but not limited to, foreign currencies,
financial instruments, metals, energy, and agricultural products (collectively,
"Futures Interests") (refer to Note 4. Financial
Instruments). The Partnership is one of the Morgan Stanley
Smith Barney Spectrum series of funds, comprised of the Partnership, Morgan
Stanley Smith Barney Spectrum Currency L.P., Morgan Stanley Smith Barney
Spectrum Global Balanced L.P., Morgan Stanley Smith Barney Spectrum Select L.P.,
and Morgan Stanley Smith Barney Spectrum Technical L.P. (collectively, the
"Spectrum Series").
- 7
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
Effective
September 29, 2009, Demeter Management LLC (“Demeter”), the general partner of
the Partnership, changed the name of Morgan Stanley Spectrum Strategic L.P. to
Morgan Stanley Smith Barney Spectrum Strategic L.P.
The
Partnership may buy or write put and call options through listed exchanges and
the over-the-counter market. The buyer of an option has the right to
purchase (in the case of a call option) or sell (in the case of a put option) a
specified quantity of a specific Futures Interest or underlying asset at a
specified price prior to or on a specified expiration date. The
writer of an option is exposed to the risk of loss if the market price of the
Futures Interest on the underlying asset declines (in the case of a put option)
or increases (in the case of a call option). The writer of an option
can never profit by more than the premium paid by the buyer but can lose an
unlimited amount.
Premiums
received/premiums paid from writing/purchasing options are recorded as
liabilities/assets on the Statements of Financial Condition and are subsequently
adjusted to fair values. The difference between the fair value of the
option and the premiums received/premiums paid is treated as an unrealized gain
or loss.
The
Partnership’s general partner is Demeter. The commodity brokers are Morgan
Stanley & Co. Incorporated ("MS&Co.") and Morgan Stanley & Co.
International plc ("MSIP"). MS&Co. also acts as the counterparty
on all trading of foreign currency forward contracts. Morgan Stanley Capital
Group Inc. ("MSCG") acts as the counterparty on all trading of options on
foreign currency forward contracts. MSIP serves as the commodity broker for
trades on the London Metal Exchange (“LME”). Demeter is a wholly-owned
subsidiary of Morgan
- 8
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
Stanley
Smith Barney Holdings LLC (“MSSB”). MSSB is majority-owned indirectly
by Morgan Stanley and minority-owned indirectly by Citigroup
Inc. MS&Co., MSIP, and MSCG are wholly-owned subsidiaries
of Morgan Stanley. The trading advisors to the Partnership are Blenheim Capital
Management, L.L.C. ("Blenheim"), Eclipse Capital Management, Inc., and FX
Concepts Trading Advisor, Inc. (each individually, a "Trading Advisor", or
collectively, the "Trading Advisors").
On
January 1, 2008, the portion of the Partnership’s assets which is managed by
Blenheim was initially invested as capital in Morgan Stanley Smith Barney BHM I,
LLC (formerly, Morgan Stanley Managed Futures BHM I, LLC) ("BHM I, LLC" or the
"Trading Company"). BHM I, LLC was formed in order to permit
commodity pools operated by Demeter and managed by Blenheim to invest together
in one trading vehicle and promote efficiency and economy in the trading
process. Demeter is the trading manager of BHM I, LLC. The
Partnership’s allocation to Blenheim is effected by investing substantially all
of the capital that is allocated to Blenheim in the Trading
Company. There is no material change to the investors as a result of
the investment in BHM I, LLC.
Effective
October 1, 2009, Demeter changed the name of Morgan Stanley Managed Futures BHM
I, LLC to Morgan Stanley Smith Barney BHM I, LLC.
On July
1, 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally
- 9
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
Accepted Accounting Principles
(“GAAP”), also known as FASB Accounting Standards Codification (“ASC”)
105-10, Generally Accepted
Accounting Principles (“ASC 105-10” or the
“Codification”). ASC 105-10 established the exclusive authoritative
reference for U.S. GAAP for use in financial statements except for Securities
and Exchange Commission (“SEC”) rules and interpretive releases, which are also
authoritative GAAP for SEC registrants. The Codification supersedes
all existing non-SEC accounting and reporting standards. The
Codification became the single source of authoritative accounting principles
generally accepted in the United States and is effective
for financial statements issued for interim and annual periods ending
after September 15, 2009.
2. Related Party
Transactions
The
Partnership’s cash is on deposit with MS&Co. and MSIP in futures, forward
and options trading accounts to meet margin requirements as
needed. MS&Co. pays the Partnership at each month end interest
income on 80% of the funds on deposit with the commodity brokers at a rate equal
to the monthly average of the 4-week U.S. Treasury bill discount rate during
such month. The Partnership pays brokerage fees to
MS&Co. MSCG acts as the counterparty on all trading of options on
foreign currency forward contracts.
3. Income
Taxes
No
provision for income taxes has been made in the accompanying financial
statements, as partners are individually responsible for reporting income or
loss based upon their respective share of the Partnership’s revenues or expenses
for income tax purposes. The Partnership files U.S. federal and state tax
returns.
- 10
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
ASC
740-10, Income Taxes
(which incorporated former FASB No. 109 and FASB Interpretation No. 48, Income Taxes), clarifies the
accounting for uncertainty in income taxes recognized in a Partnership's
financial statements, and prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position
taken or expected to be taken. The 2005 through 2008 tax
years generally remain subject to examination by U.S. federal and most state tax
authorities.
4. Financial
Instruments
The
Partnership trades Futures Interests. Futures and forwards represent
contracts for delayed delivery of an instrument at a specified date and
price. Futures Interests are open commitments until settlement date,
at which time they are realized. They are valued at fair value,
generally on a daily basis, and the unrealized gains and losses on open
contracts (the difference between contract trade price and market price) are
reported in the Statements of Financial Condition as net unrealized gains or
losses on open contracts. The resulting net change in unrealized
gains and losses is reflected in the change in unrealized trading profit (loss)
on open contracts from one period to the next on the Statements of
Operations. The fair value of exchange-traded futures, options and
forwards contracts is determined by the various futures exchanges, and reflects
the settlement price for each contract as of the close of business on the last
business day of the reporting period. The fair value of foreign
currency forward contracts is extrapolated on a forward basis from the spot
prices quoted as of approximately 3:00 P.M. (E.T.) of the last business day of
the reporting period. The fair value of non-exchange-traded foreign
currency option contracts is calculated by applying an industry standard model
application for options valuation of foreign currency options, using as input,
the spot prices, interest rates, and option implied volatilities quoted as of
approximately 3:00 P.M.
- 11
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
(E.T.) on
the last business day of the reporting period. Risk arises from
changes in the value of these contracts and the potential inability of
counterparties to perform under the terms of the contracts. There are
numerous factors which may significantly influence the fair value of these
contracts, including interest rate volatility.
The fair
value of exchange-traded contracts is based on the settlement price quoted by
the exchange on the day with respect to which fair value is being
determined. If an exchange-traded contract could not have been
liquidated on such day due to the operation of daily limits or other rules of
the exchange, the settlement price shall be the settlement price on the first
subsequent day on which the contract could be liquidated. The fair
value of off-exchange-traded contracts is based on the fair value quoted by the
counterparty.
The
Partnership’s contracts are accounted for on a trade-date basis and marked to
market on a daily basis. The Partnership accounts for its derivative
investments as required by ASC 815-10-15, Derivative and Hedging
(formerly, SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities). A derivative is defined
as a financial instrument or other contract that has all three of the following
characteristics:
1)
|
One
or more underlying notional amounts or payment
provisions;
|
2)
|
Requires
no initial net investment or a smaller initial net investment than would
be required relative to changes in market
factors;
|
3)
|
Terms
require or permit net settlement.
|
Generally,
derivatives include futures, forward, swap or options contracts, and other
financial instruments with similar characteristics such as caps, floors, and
collars.
- 12
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
The net
unrealized gains on open contracts, reported as a component of "Trading Equity"
on the Statements of Financial Condition, and their longest contract maturities
were as follows:
Net Unrealized Gains on Open
Contracts
|
Longest Maturities
|
||||
Date
|
Exchange-Traded
|
Off-Exchange-Traded
|
Total
|
Exchange-Traded
|
Off-Exchange-Traded
|
$
|
$
|
$
|
|||
Sep.
30, 2009
|
254,230
|
371,760
|
625,990
|
Sep.
2010
|
Mar.
2010
|
Dec.
31, 2008
|
1,271,965
|
732,699
|
2,004,664
|
Jun.
2009
|
Mar.
2009
|
The
Partnership has credit risk associated with counterparty
non-performance. As of the date of the financial statements, the
credit risk associated with the instruments in which the Partnership trades is
limited to the unrealized gain amounts reflected in the Partnership’s Statements
of Financial Condition.
The
Partnership also has credit risk because MS&Co., MSIP, and/or MSCG act as
the futures commission merchants or the counterparties, with respect to most of
the Partnership’s assets. Exchange-traded futures, exchange-traded forward, and
exchange-traded futures-styled options contracts are marked to market on a daily
basis, with variations in value settled on a daily basis. MS&Co. and MSIP,
each acting as a commodity broker for the Partnership’s exchange-traded futures,
exchange-traded forward, and exchange-traded futures-styled options contracts,
are required, pursuant to regulations of the Commodity Futures Trading
Commission ("CFTC"), to segregate from their own assets, and for the sole
benefit of their commodity customers, all funds held by them with
respect
to exchange-traded futures, exchange-traded forward, and exchange-traded
futures-styled options contracts,
- 13
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly,
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
including
an amount equal to the net unrealized gains (losses) on all open exchange-traded
futures, exchange-traded forward, and exchange-traded futures-styled options
contracts, which funds, in the aggregate, totaled $76,765,678 and $117,311,735
at September 30, 2009, and December 31, 2008, respectively. With
respect to the Partnership’s off-exchange-traded forward currency contracts and
forward currency options contracts, there are no daily settlements of variation
in value, nor is there any requirement that an amount equal to the net
unrealized gains (losses) on such contracts be segregated. However,
the Partnership is required to meet margin requirements equal to the net
unrealized loss on open forward currency contracts in the Partnership accounts
with the counterparty, which is accomplished by daily maintenance of the cash
balance in a custody account held at MS&Co. With respect to those
off-exchange-traded forward currency contracts, the Partnership is at risk to
the ability of MS&Co., the sole counterparty on all such contracts, to
perform. With respect to those off-exchange-traded forward currency options
contracts, the Partnership is at risk to the ability of MSCG, the sole
counterparty on all such contracts, to perform. The Partnership has a
netting agreement with each counterparty. These agreements, which
seek to reduce both the Partnership’s and the counterparties’ exposure on
off-exchange-traded forward currency contracts, including options on such
contracts, should materially decrease the Partnership’s credit risk in the event
of MS&Co.’s or MSCG’s bankruptcy or insolvency.
The
futures, forwards and options on such contracts traded by the Partnership
involve varying degrees of related market risk. Market risk is often
dependent upon changes in the level or volatility of interest rates, exchange
rates, and prices of financial instruments and commodities, factors that result
in frequent changes in the fair value of the Partnership’s open positions, and
consequently in its earnings, whether realized or unrealized, and cash
flow.
- 14
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
Gains and
losses on open positions of exchange-traded futures, exchange-traded forward,
and exchange-traded futures-styled options contracts are settled daily through
variation margin. Gains and losses on
off-exchange-traded
forward
currency contracts and forward currency options contracts are settled upon
termination of the contract. However, the Partnership is required to
meet margin requirements equal to the net unrealized loss on open forward
currency contracts in the Partnership accounts with the counterparty, which is
accomplished by daily maintenance of the cash balance in a custody account held
at MS&Co.
5. Derivative and
Hedging
ASC
815-10-65, Derivative and
Hedging (formerly, SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of SFAS No. 133),
issued in March 2008, is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand how those instruments and activities
are accounted for; how and why they are used; and their effects on a
Partnership’s financial position, financial performance, and cash
flows. ASC 815-10-65 is effective as of January 1, 2009, for the
Partnership.
The
Partnership’s objective is to profit from speculative trading in Futures
Interests. Therefore, the Trading Advisors for the Partnership will
take speculative positions in Futures Interests where they feel the best profit
opportunities exist for their trading strategy. As such, the absolute
quantity (the total of the open long and open short positions) has been
presented as a part of the volume disclosure, as position direction is not an
indicative factor in such volume disclosures. In regards to foreign currency
forward trades, each notional quantity amount has been converted to an
equivalent contract based upon an industry convention.
- 15
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
The
following table summarizes the valuation of the Partnership’s investments as
required by ASC 815-10-65 as of September 30, 2009, and reflects the contracts
outstanding at such time.
The
Effect of Trading Activities on the Statements of Financial Condition as of
September 30, 2009:
Futures and Forward
Contracts
|
Long
Unrealized
Gain
|
Long
Unrealized
Loss
|
Short
Unrealized
Gain
|
Short
Unrealized
Loss
|
Net Unrealized
Gain/(Loss)
|
Total
number of outstanding
contracts
(absolute quantity)
|
$
|
$
|
$
|
$
|
$
|
||
Commodity
|
800,264
|
(350,705)
|
–
|
(106,982)
|
342,577
|
58
|
Equity
|
26,160
|
(12,450)
|
–
|
(2,343)
|
11,367
|
112
|
Foreign
currency
|
3,965,170
|
(2,170,282)
|
1,795,134
|
(2,608,216)
|
981,806
|
2,576
|
Interest
rate
|
41,657
|
(8,825)
|
–
|
–
|
32,832
|
428
|
Total
|
4,833,251
|
(2,542,262)
|
1,795,134
|
(2,717,541)
|
1,368,582
|
|
Unrealized
currency loss
|
(742,592)
|
|||||
Total
net unrealized gain on open contracts
|
625,990
|
Option
Contracts at Fair Value
|
||||||
Options
purchased
|
$3,960,529
|
|||||
Options
written
|
$(3,387,871)
|
The
following tables summarize the net trading results of the Partnership during the
three and nine month periods as required by the disclosures about Derivative and
Hedging Topics of ASC 815-10-65.
The
Effect of Trading Activities on the Statements of Operations for the Three and
Nine Months Ended September 30, 2009, included in Total Trading
Results:
For
the Three Months
|
For
the Nine Months
|
|
Ended September 30,
2009
|
Ended September 30,
2009
|
|
Type of Instrument
|
$
|
$
|
Commodity
|
11,639,149
|
13,537,405
|
Equity
|
(1,573,168)
|
(3,547,275)
|
Foreign
currency
|
(122,207)
|
(7,409,738)
|
Interest
rate
|
(129,025)
|
5,761,300
|
Unrealized
currency gain/(loss)
|
(27,066)
|
49,829
|
Total
|
9,787,683
|
8,391,521
|
- 16
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
Line Item
on the Statements of Operations for the Three and Nine Months Ended September
30, 2009:
For
the Three Months
|
For
the Nine Months
|
||
Ended September 30, 2009
|
Ended September 30, 2009
|
||
Trading Results
|
$
|
$
|
|
Realized
|
(1,023,185)
|
(14,487,617)
|
|
Net
change in unrealized
|
1,405,149
|
(1,167,782)
|
|
Realized
gain on investment in BHM I, LLC
|
228,928
|
568,471
|
|
Net
change in unrealized appreciation on investment in BHM I,
LLC
|
9,176,791
|
23,478,449
|
|
Total
Trading Results
|
9,787,683
|
8,391,521
|
6. Fair Value Measurements and
Disclosures
As
defined by ASC 820-10-55, Fair
Value Measurements and Disclosures (formerly, SFAS No. 157, Fair Value Measurements),
fair value is the amount that would be recovered when an asset is sold or an
amount paid to transfer a liability, in an ordinary transaction, between market
participants at the measurement date (exit price). Market price
observability is impacted by a number of factors, including the types of
investments, the characteristics specific to the investment, and the state of
the market (including the existence and the transparency of transactions between
market participants). Investments with readily available actively
quoted prices in an ordinary market will generally have a higher degree of
market price observability and a lesser degree of judgment used in measuring
fair value.
ASC
820-10-55 requires use of a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three levels: Level 1 -
unadjusted quoted market prices in active markets for identical assets and
liabilities; Level 2 - inputs other than unadjusted quoted market prices that
are observable for the asset or liability, either directly or indirectly
(including quoted prices for similar investments, interest rates, credit risk);
and Level 3 - unobservable inputs for the asset or liability (including the
Partnership’s own assumptions used in determining the fair value of
investments).
- 17
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
In
certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, an investment’s
level within the fair value hierarchy is based on the lowest level of input that
is significant to the fair value measurement. The Partnership’s
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to
the investment.
The
following tables summarize the valuation of the Partnership’s investments by the
above ASC 820-10-55 fair value hierarchy as of September 30, 2009 and December
31, 2008:
September 30,
2009
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
Significant
Other Observable Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
Total
|
||
$
|
$
|
$
|
|||
Assets
|
|||||
Investment
in BHM I, LLC
|
–
|
102,411,032
|
n/a
|
102,411,032
|
|
Net
unrealized gain on open contracts
|
254,230
|
371,760
|
n/a
|
625,990
|
|
Options
purchased
|
–
|
3,960,529
|
n/a
|
3,960,529
|
|
Liabilities
|
|||||
Options
written
|
–
|
3,387,871
|
n/a
|
3,387,871
|
|
December 31,
2008
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
Significant
Other Observable Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
Total
|
||
$
|
$
|
$
|
|||
Assets
|
|||||
Investment
in BHM I, LLC
|
–
|
90,392,390
|
n/a
|
90,392,390
|
|
Net
unrealized gain on open contracts
|
1,271,965
|
732,699
|
n/a
|
2,004,664
|
|
Options
purchased
|
–
|
790,178
|
n/a
|
790,178
|
|
Liabilities
|
|||||
Options
written
|
–
|
201,784
|
n/a
|
201,784
|
- 18
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
Investment in BHM I,
LLC
Effective
January 1, 2008, the Partnership invested a portion of its assets in the Trading
Company. The Partnership’s investment in the Trading Company
represents approximately 57% of the net asset value of the Partnership at
September 30, 2009.
Summarized
information for the Partnership’s investment in the Trading Company as of
September 30, 2009, is as follows:
Investment
|
%
of Partnership
Net Assets
|
Fair Value
|
Total
Income
|
Management
Fees
|
Incentive
Fees
|
Administrative
Fees
|
%
|
$
|
$
|
$
|
$
|
$
|
|
BHM
I, LLC
|
57.32
|
102,411,032
|
24,046,920
|
n/a
|
n/a
|
n/a
|
The
Partnership’s investment into the Trading Company does not pay any management,
incentive, or administrative fee. Those fees are paid by the
Partnership.
For the
Trading Company, Contributions and Withdrawals are permitted on a monthly
basis.
The
tables below represents summarized Income Statement information for the
Partnership’s Investment in the Trading Companies for the nine months ended
September 30, 2009 and 2008, respectively, to meet the requirements of
Regulation S-X rule 3-09, as follows:
September 30, 2009
|
Investment Income
|
Net
Investment Loss
|
Total Trading Results
|
Net
Income
|
$
|
$
|
$
|
$
|
|
BHM
I, LLC
|
24,887
|
(1,315,565)
|
31,067,772
|
29,752,207
|
September 30, 2008
|
Investment Income
|
Net
Investment Loss
|
Total Trading Results
|
Net
Income
|
$
|
$
|
$
|
$
|
|
BHM
I, LLC
|
182,322
|
(798,575)
|
14,512,576
|
13,714,001
|
- 19
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
7. Recent Accounting
Pronouncement
(a) Fair Value
Measurements
ASC
820-10-65, Fair Value
Measurements (formerly, FASB Staff Position (“FSP”) SFAS No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly), was issued
in April 2009. ASC 820-10-65
provides additional guidance for determining fair value and requires new
disclosures regarding the categories of fair value instruments, as well as the
inputs and valuation techniques utilized to determine fair value and any changes
to the inputs and valuation techniques during the period. ASC
820-10-65 is effective for the interim and annual periods ending after June 15,
2009. The adoption of ASC 820-10-65 did not have a material impact on
the Partnership’s financial statements.
(b) Financial
Instruments
ASC
825-10-65, Financial
Instruments (formerly, FSP SFAS No. 107-1 and Accounting Principals Board
No. 28-1, Interim Disclosures
About Fair Value of Financial Instruments), was issued in April
2009. ASC 825-10-65 requires fair value disclosures of financial
instruments on a quarterly basis, as well as new disclosures regarding the
methodology and significant assumptions underlying the fair value measures and
any changes to the methodology and assumptions during the reporting
period. ASC 825-10-65 is effective for the interim and annual periods
ending after June 15, 2009. The adoption of ASC 825-10-65 did not
have a material impact on the Partnership’s financial statements.
- 20
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
(c) Subsequent
Events
The
Partnership adopted ASC 855-10, Subsequent Events (formerly,
SFAS No. 165, Subsequent
Events), which was issued in May 2009. ASC 855-10 establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date; that is, whether that date represents the date the financial statements
were issued or were available to be issued. ASC 855-10 is effective
for the interim and annual periods ending after June 15,
2009. Management has performed its evaluation of subsequent events
through November 13, 2009, the date these financial statements were issued, and
has determined that there were no subsequent events requiring adjustment or
disclosure in the financial statements.
(d) Investment in Certain
Entities That Calculate Net Asset Value per Share (or Its
Equivalent)
In
September 2009, the FASB issued Accounting Standards Update No. 2009-12
(“Update”) addressing Fair
Value Measurement and Disclosures Topic, ASC 820. This Update
amended Subtopic 820-10, Fair Value Measurement and Disclosures-Overall, for the
fair value measurement of investments in certain entities that calculate net
asset value per share or its equivalent. The amendments in the Update
permit, as a practical expedient, a reporting entity to measure the fair value
of an investment that is within the scope of the amendments in this Update on
the basis of the net asset value per share of the investment or its
equivalent. Additionally, this Update require disclosures by major
category of investment about the attributes of the
- 21
-
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
investments
within the scope of the amendments, such as the nature of any restrictions on
redemptions, any unfunded commitments and the investment strategies of the
investees. The amendments in this Update are effective for interim and
annual periods ending after December 15, 2009. Management is currently
evaluating if the adoption of this Update will have an impact on the
financial statements of the Partnership.
(e) Consolidation
In June
2009, the FASB issued ASC 810-10, Consolidation of Variable Interest
Entities (formerly SFAS 167, Amendments to FASB Interpretation
No. 46(R), Consolidation of Variable Interest Entities, ASC 810-10
eliminates Interpretation 46(R)’s exception to consolidating qualifying
special-purpose entities, contains new criteria for determining the primary
beneficiary, and increases the frequency of required reassessments to determine
whether a company is the primary beneficiary of a variable interest
entity. ASC 810-10 also contains a new requirement that any term,
transaction, or arrangement that does not have a substantive effect on an
entity’s status as a variable interest entity, a company’s power over a variable
interest entity, or a company’s obligation to absorb losses or its right to
receive benefits of an entity must be disregarded in applying Interpretation
46(R)’s provisions. ASC 810-10 is applicable for annual periods after
November 15, 2009, and interim periods thereafter. The Partnership is
currently evaluating the impact of the adoption of ASC 810-10 on the
Partnership’s financial statements.
– 22
–
MORGAN
STANLEY SMITH BARNEY SPECTRUM STATEGIC L.P.
(formerly
Morgan Stanley Spectrum Strategic L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONCLUDED)
8. Restricted and Unrestricted
Cash
As
reflected on the Partnership’s Statements of Financial Condition, restricted
cash equals the cash portion of assets on deposit to meet margin requirements
plus the cash required to offset unrealized losses on foreign currency forwards
and options and offset losses on offset LME positions. All of these amounts are
maintained separately. Cash that is not classified as restricted cash
is therefore classified as unrestricted cash.
– 23
–
Item
2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
Liquidity. The
Partnership deposits its assets with MS&Co. and MSIP as commodity brokers in
separate futures, forward and options trading accounts established for each
Trading Advisor. Such assets are used as margin to engage in trading
and may be used as margin solely for the Partnership’s trading. The assets are
held in either non-interest bearing bank accounts or in securities and
instruments permitted by the CFTC for investment of customer segregated or
secured funds. Since the Partnership’s sole purpose is to trade in
futures, forwards and options, it is expected that the Partnership will continue
to own such liquid assets for margin purposes.
The
Partnership’s investment in futures, forwards and options may, from time to
time, be illiquid. Most U.S. futures exchanges limit fluctuations in
prices during a single day by regulations referred to as "daily price
fluctuations limits" or "daily limits". Trades may not be executed at
prices beyond the daily limit. If the price for a particular futures
or options contract has increased or decreased by an amount equal to the daily
limit, positions in that futures or options contract can neither be taken nor
liquidated unless traders are willing to effect trades at or within the limit.
Futures prices have occasionally moved the daily limit for several consecutive
days with little or no trading. These market conditions could prevent
the Partnership from promptly liquidating its futures or options contracts and
result in restrictions on redemptions.
There is
no limitation on daily price movements in trading forward contracts on foreign
currencies. The markets for some world currencies have low trading
volume and are illiquid, which may prevent the Partnership from trading in
potentially profitable markets or prevent the Partnership from promptly
liquidating unfavorable positions in such markets, subjecting it to substantial
losses. Either of these market conditions could result in
restrictions on redemptions. For the periods covered by this report,
illiquidity has not materially affected the Partnership’s assets.
- 24
-
There are
no known material trends, demands, commitments, events, or uncertainties at the
present time that are reasonably likely to result in the Partnership’s liquidity
increasing or decreasing in any material way.
Capital
Resources. The Partnership does not have, nor does it expect
to have, any capital assets. Redemptions of units of limited
partnership interest ("Unit(s)") in the future will affect the amount of funds
available for investments in futures, forwards and options in subsequent
periods. It is not possible to estimate the amount, and therefore the
impact, of future outflows of Units.
There are
no known material trends, favorable or unfavorable, that would affect, nor any
expected material changes to, the Partnership’s capital resource arrangements at
the present time.
Off-Balance Sheet
Arrangements and Contractual Obligations. The Partnership does
not have any off-balance sheet arrangements, nor does it have contractual
obligations or commercial commitments to make future payments that would affect
its liquidity or capital resources.
Results of
Operations
General. The
Partnership’s results depend on the Trading Advisors and the ability of each
Trading Advisor’s trading program to take advantage of price movements in the
futures, forward and options markets. The following presents a
summary of the Partnership’s operations for the three and nine month periods
ended September 30, 2009 and 2008, and a general discussion of its trading
activities during each period. It is important to note, however, that
the Trading Advisors trade in various markets at different times and that prior
activity in a particular market does not mean that such market will be actively
traded by the Trading Advisors or will be profitable in the future.
- 25
-
Consequently,
the results of operations of the Partnership are difficult to discuss other than
in the context of the
Trading
Advisors’ trading activities on behalf of the Partnership during the period in
question. Past performance is no guarantee of future
results.
The
Partnership’s results of operations set forth in the Financial Statements on
pages 2 through 22 of this report are prepared in accordance with U.S. GAAP,
which require the use of certain accounting policies that affect the amounts
reported in these Financial Statements, including the following: the contracts
the Partnership trades are accounted for on a trade-date basis and marked to
market on a daily basis. The difference between their original
contract value and market value is recorded on the Statements of Operations as
"Net change in unrealized trading profit (loss)" for open (unrealized)
contracts, and recorded as "Realized trading profit (loss)" when open positions
are closed out. The sum of these amounts constitutes the
Partnership’s trading results. The market value of a futures contract
is the settlement price on the exchange on which that futures contract is traded
on a particular day. The value of a foreign currency forward contract
is based on the spot rate as of the close of business. Interest
income, as well as management fees, incentive fees, and brokerage fees of the
Partnership are recorded on an accrual basis.
- 26
-
For the Three and Nine
Months Ended September 30, 2009
The
Partnership recorded total trading results including interest income totaling
$9,829,811 and expenses totaling $4,074,312, resulting in net income of
$5,755,499 for the three months ended September 30, 2009. The
Partnership’s net asset value per Unit increased from $17.92 at June 30, 2009,
to $18.50 at September 30, 2009.
The most
significant trading gains of approximately 5.3% were experienced in the
agricultural complex, primarily during July and September, from long positions
in cocoa futures as prices moved higher on supply concerns due to news of a
smaller-than-average crop this year and after reports showed inventories reached
a seven-month low. Elsewhere, gains were achieved throughout a
majority of the quarter from long futures positions in sugar as prices moved
sharply higher amid speculation that a global production deficit may continue
for two consecutive years, triggered by increasing demand from India, the
world’s largest consumer. Sugar prices continued to climb throughout
August, reaching a 28-year high, on deepening concerns that unfavorable weather
in producing countries and rising import demand might worsen the global supply
shortfall. Within the metals complex, gains of approximately 1.5%
were experienced, primarily during July and August, from long futures positions
in zinc and copper as prices rose following news of an economic expansion in
China during the second quarter of 2009, thereby spurring speculation that
China’s demand for base metals may rise. Lastly, gains were
experienced from long positions in gold futures as prices rose during September
amid a decline in the value of the U.S. dollar. A portion of the
Partnership’s gains for the quarter was offset by losses of approximately 0.9%
in the global stock index sector, primarily in July and August, from short
positions in U.S., European, and Pacific Rim equity index futures as prices
increased due to positive economic data and increased merger and acquisition
activity in the technology sector. Within the energy complex, losses
of
- 27
-
approximately
0.3% were incurred during July from short futures positions in crude oil and its
related products as prices moved higher during the latter half of the month amid
better-than-expected quarterly earnings reports and positive economic data,
which spurred optimism that energy demand might rebound. During
August, newly established long futures positions in crude oil and its related
products recorded additional losses as prices reversed lower due to
above-average U.S. stockpiles. Additional losses of approximately
0.2% were recorded in the currency sector, primarily during July and August,
from short positions in the Swedish krona, Mexican peso, Canadian dollar, and
Korean won versus the U.S. dollar as the value of the U.S. dollar moved lower
against these currencies on speculation that the U.S. Federal Reserve might keep
borrowing rates low after the U.S. central bank indicated that it remained
committed to its quantitative easing program. Meanwhile, both long
and short positions in the euro versus the Japanese yen resulted in losses as
the value of the euro moved without consistent direction in August and September
amid conflicting economic data out of the Euro-Zone. Smaller losses of
approximately 0.1% were experienced in the global interest rate sector
throughout a majority of the quarter from short positions in U.S. fixed-income
futures as prices moved higher on investor sentiment that the slow pace of the
global economic recovery and signs of moderate inflation might lead central
banks in these regions to maintain low interest rates in the near
term.
The
Partnership recorded total trading results including interest income totaling
$8,527,092 and expenses totaling $12,693,648, resulting in a net loss of
$4,166,556 for the nine months ended September 30, 2009. The
Partnership’s net asset value per Unit decreased from $18.82 at December 31,
2008, to $18.50 at September 30, 2009.
- 28
-
The most
significant trading losses of approximately 4.6% were incurred in the currency
sector primarily during February, March, April, and May, from long positions in
the Japanese yen versus the U.S. dollar and euro as the value of the Japanese
yen reversed lower against most of its rivals amid speculation that the Bank of
Japan might intervene to weaken the currency, as well as on news that Japan’s
trade deficit substantially increased. Meanwhile, additional losses
were recorded, primarily during January, March, April, and June, from short
positions in the Canadian dollar versus the U.S. dollar as the value of the U.S.
dollar decreased relative to most of its rivals following the U.S. Federal
Reserve’s surprise plans to begin a more aggressive phase of quantitative easing
and economic stimulus spending. Elsewhere, losses were recorded,
primarily during July and August, from short positions in the Swedish krona,
Mexican peso, Canadian dollar, and Korean won versus the U.S. dollar as the
value of the U.S. dollar moved lower against these currencies on speculation
that the U.S. Federal Reserve might keep borrowing rates low after the U.S.
central bank indicated that it remained committed to its quantitative easing
program. Within the global stock index sector, losses of
approximately 2.0% were recorded primarily during March and April from short
positions in U.S., European, and Pacific Rim equity index futures as prices
reversed higher after G-20 leaders indicated that participating governments and
central banks would “take whatever further actions are necessary to stabilize
the financial system”. Prices continued to move higher during July
and August due to positive economic data and increased merger and acquisition
activity in the technology sector, resulting in further losses for short
positions in U.S., European, and Pacific Rim equity index
futures. Smaller losses of approximately 0.9% were incurred in the
energy sector primarily during January from long futures positions in crude oil
and its related products as prices moved lower amid speculation that the ongoing
global economic recession might further erode energy demand. Newly
established short futures positions in crude oil and its related products
resulted in losses during March, May, and July as prices rose on
- 29
-
hopes
that the decision by the U.S. Federal Reserve to buy government bonds might
boost energy demand. During August, newly established long futures
positions in crude oil and its related products recorded additional losses as
prices reversed lower due to above-average U.S. stockpiles. A portion
of the Partnership’s losses for the first nine months of the year was offset by
gains of approximately 5.3% experienced in the agricultural complex throughout a
majority of the second quarter from long positions in sugar futures as prices
moved higher on expectations for a drop in global
production. Furthermore, sugar prices continued to move higher
throughout the third quarter, reaching 28-year highs, amid speculation that the
global production deficit might continue for two consecutive years, triggered by
increasing demand from India, the world’s largest
consumer. Elsewhere, gains were achieved, primarily during July and
September, from long positions in cocoa futures as prices moved higher on supply
concerns due to news of a smaller-than-average crop this year and after reports
showed inventories reached a seven-month low. Within the metals
complex, gains of approximately 2.6% were experienced throughout the second
quarter, as well as July and August, from long positions in zinc, nickel, and
tin futures as prices moved higher due to sentiment that efforts by the Chinese
government to revive the nation’s economy might boost demand for base
metals. Meanwhile, long positions in palladium futures resulted in
gains as prices moved higher throughout a majority of the first nine months of
the year amid news of a possible strike at a South African
producer. Smaller gains of approximately 2.3% were experienced in the
global interest rate sector, primarily during January, April, August, and
September, from short positions in U.S. fixed-income futures as prices dropped
following news that debt sales might increase as governments around the world
boosted spending in an effort to ease the deepening economic
slump. Elsewhere, long positions in short-term European interest rate
futures resulted in gains as prices increased during January after a drop in
global equity markets and growing concerns about the global economic recession
fueled demand for the relative “safety” of
- 30
-
government
assets. Prices continued to move higher during March, May, July, and
September after the European Central Bank cut its benchmark interest rate to a
record 1.5% in an effort to further stimulate the European economy, thus
resulting in further gains from long positions.
For the Three and Nine
Months Ended September 30, 2008
The
Partnership recorded total trading results including interest income totaling
$(16,967,174) and expenses totaling $4,721,031, resulting in a net loss of
$21,688,205 for the three months ended September 30, 2008. The
Partnership’s net asset value per Unit decreased from $18.99 at June 30, 2008,
to $17.14 at September 30, 2008.
The most
significant trading losses of approximately 5.0% were incurred within the
agricultural markets, primarily during July and September, from long futures
positions in soybeans and corn as prices declined on news that favorable weather
might improve crop conditions in the U.S. Midwest and on speculation that a
slowing U.S. economy would reduce demand for alternative
biofuels. Elsewhere in the agricultural complex, long positions in
cocoa futures resulted in losses during July and September as prices decreased
following news of a rise in exports from the Ivory Coast, the world’s largest
cocoa producer. Within the energy markets, losses of approximately
2.9% were experienced from long positions in natural gas futures as prices
sharply decreased in July amid rising inventories and news that the Atlantic
hurricane season's first storm had avoided the gas-producing fields in the Gulf
of Mexico. Newly established short futures positions in natural gas
resulted in further losses during August as prices reversed higher during the
latter half of the month on concerns that Hurricane Gustav would threaten oil
production in the Gulf of Mexico. Meanwhile, long futures positions
in crude oil and its related products recorded losses as prices moved lower
throughout the majority of the quarter amid signs that the U.S. economic slump
might extend into 2009 and curb future energy demand. Within
the
- 31
-
metals
sector, losses of approximately 2.5% were incurred, throughout the majority of
the quarter, from long futures positions in aluminum, nickel, zinc, and copper
as prices dropped on concerns that slowing economic growth would erode demand
for base metals. Elsewhere, long positions in palladium futures
resulted in losses as prices decreased during July and August, due to a sharp
rise in the value of the U.S. dollar. Additional losses of
approximately 0.8% were experienced within the currency markets, primarily
during September, from long positions in the Polish zloty, Brazilian real, and
Australian dollar versus the U.S. dollar as the value of the U.S. dollar moved
sharply higher against these currencies in tandem with surging U.S. Treasury
prices amid a worldwide "flight-to-quality" due to fears of an intense credit
crunch and subsequent global recession. Smaller losses were incurred
from long positions in the Japanese yen versus the U.S. dollar as the value of
the Japanese yen decreased relative to the U.S. dollar during September
following news that the U.S. Federal Reserve, Bank of Japan, and European
Central Bank had joined with their counterparts around the world in an effort to
reverse the seizure in the global credit markets, which encouraged investors to
resume buying higher-yielding assets funded by loans in Japan. A
portion of the Partnership’s losses for the quarter was offset by gains of
approximately 2.4% recorded within the global stock index sector, primarily
during September, from short positions in U.S., European, and Pacific Rim equity
index futures as equity prices moved sharply lower amid unprecedented U.S.
financial market volatility and turmoil. Furthermore, global equity
prices plunged after the U.S. House of Representatives rejected the Economic
Stabilization Act of 2008, which would have allowed the U.S. Treasury to
purchase troubled mortgage-backed securities from U.S. financial
institutions. Smaller gains of approximately 0.9% were experienced,
primarily during August and September, from long positions in U.S. fixed-income
futures as prices increased amid a worldwide “flight-to-quality” due to the
aforementioned drop in the global equity markets and worries regarding the
fundamental health of the global financial system.
- 32
–
The
Partnership recorded total trading results including interest income totaling
$7,794,930 and expenses totaling $17,784,558, resulting in a net loss of
$9,989,628 for the nine months ended September 30, 2008. The
Partnership’s net asset value per Unit decreased from $18.01 at December 31,
2007, to $17.14 at September 30, 2008.
The most
significant trading losses of approximately 3.3% were incurred within the
currency markets, primarily during January, March, April, and May, from short
positions in the Japanese yen versus the U.S. dollar as the value of the
Japanese yen reversed higher against most of its major rivals after a decline in
global equity markets and weaker-than-expected U.S. economic data caused
investors to reduce existing “carry-trade” positions. Additional
losses were recorded during September from newly established long positions in
the Japanese yen versus the U.S. dollar as the value of the Japanese yen
decreased relative to the U.S. dollar following news that the U.S. Federal
Reserve, Bank of Japan, and European Central Bank had joined with their
counterparts around the world in an effort to reverse the seizure in the global
credit markets, which encouraged investors to resume buying higher-yielding
assets funded by loans in Japan. Meanwhile, long positions in
the Canadian dollar versus the U.S. dollar experienced losses primarily during
January, March, and June as the value of the Canadian dollar weakened against
the U.S. dollar amid continued weak economic data out of
Canada. Finally, long positions in the Polish zloty and Brazilian
real versus the U.S. dollar resulted in losses during September as the value of
the U.S. dollar moved sharply higher against these currencies in tandem with
surging U.S. Treasury prices amid a worldwide "flight-to-quality" due to fears
of an intense credit crunch and subsequent global recession. Within
the metals markets, losses of approximately 1.5% were recorded primarily during
March, April, May, July, and September from long futures positions in zinc and
nickel as prices declined
- 33
-
on
concerns that slowing economic growth would erode demand for base
metals. Meanwhile, long positions in palladium and platinum resulted
in additional losses as prices dropped during the third quarter due to a sharp
rise in the value of the U.S. dollar. Within the energy markets,
losses of approximately 0.8% were incurred primarily during the third quarter
from long futures positions in crude oil as prices moved lower amid signs that
the U.S. economic slump might extend into 2009 and curb future energy
demand. Elsewhere, further losses were experienced from long
positions in natural gas futures as prices decreased sharply in July amid rising
inventories and news that the Atlantic hurricane season's first storm had
avoided the gas-producing fields in the Gulf of Mexico. Finally,
newly established short futures positions in natural gas resulted in losses
during August as prices reversed higher during the latter half of the month on
concerns that Hurricane Gustav would threaten oil production in the Gulf of
Mexico. Additional losses of approximately 0.2% were recorded within
the global interest rate sector, primarily during April and May, from long
positions in European and Japanese fixed-income futures as prices moved lower on
speculation that the European Central Bank and Bank of Japan would not ease
borrowing costs as much as previously expected due to accelerating global
inflation. Further losses were incurred during June from both short
and long positions in European interest rate futures as prices moved without
consistent direction amid uncertainty regarding inflation and central bank
policy. Lastly, short positions in European fixed-income futures
resulted in losses during July as prices increased amid a worldwide
“flight-to-quality” due to the aforementioned drop in the global equity markets
and worries regarding the fundamental health of the global financial
system. A portion of the Partnership’s losses for the first nine
months of the year was offset by gains of approximately 7.4% recorded within the
agricultural markets, primarily during January, February, April, and June, from
long futures positions in the soybean complex and corn as prices increased amid
news that global production might drop, rising energy prices might boost
demand
- 34
-
for
alternative biofuels, and severe floods in the U.S. Midwest had damaged
crops. Elsewhere, long positions in cocoa futures resulted in gains
as prices rose throughout the first half of the year on speculation that crops
in the Ivory Coast, the world’s largest cocoa producer, were developing more
slowly than anticipated. Further gains were experienced from long
positions in sugar futures as prices moved higher throughout the first half of
the year due to ongoing supply concerns.
|
Item
3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Introduction
The
Partnership is a commodity pool engaged primarily in the speculative trading of
futures, forwards and options. The market-sensitive instruments held
by the Partnership are acquired for speculative trading purposes only and, as a
result, all or substantially all of the Partnership’s assets are at risk of
trading loss. Unlike an operating company, the risk of
market-sensitive instruments is inherent to the primary business activity of the
Partnership. Throughout this Item 3, references to the Partnership
include assets, positions and instruments also held by the Trading Company with
respect to the Partnership’s investment in the Trading Company.
The
futures, forwards and options on such contracts traded by the Partnership
involve varying degrees of related market risk. Market risk is often
dependent upon changes in the level or volatility of interest rates, exchange
rates, and prices of financial instruments and commodities, factors that result
in frequent changes in the fair value of the Partnership’s open positions, and
consequently in its earnings, whether realized or unrealized, and cash
flow. Gains and losses on open positions of exchange-traded futures,
exchange-traded forward, and exchange-traded futures-styled options contracts
are settled daily through variation margin. Gains and losses on
off-exchange-traded forward currency contracts and forward currency options
contracts are settled upon
- 35
-
termination
of the contract. However, the Partnership is required to meet margin
requirements equal to the net unrealized loss on open forward currency contracts
in the Partnership accounts with the counterparty, which is accomplished by
daily maintenance of the cash balance in a custody account held at
MS&Co.
The
Partnership’s total market risk may increase or decrease as it is influenced by
a wide variety of factors, including, but not limited to, the diversification
among the Partnership’s open positions, the volatility present within the
markets, and the liquidity of the markets.
The face
value of the market sector instruments held by the Partnership is typically many
times the applicable margin requirements. Margin requirements
generally range between 2% and 15% of contract face
value. Additionally, the use of leverage causes the face value of the
market sector instruments held by the Partnership typically to be many times the
total capitalization of the Partnership.
The
Partnership’s past performance is no guarantee of its future
results. Any attempt to numerically quantify the Partnership’s market
risk is limited by the uncertainty of its speculative trading. The
Partnership’s speculative trading and use of leverage may cause future losses
and volatility (i.e.,
"risk of ruin") that far exceed the Partnership’s experience to date under “the
Partnership’s Value at Risk in Different Market Sectors” section and
significantly exceed the Value at Risk (“VaR”) tables disclosed.
Limited
partners will not be liable for losses exceeding the current net asset value of
their investment.
- 36
-
Quantifying the
Partnership’s Trading Value at Risk
The
following quantitative disclosures regarding the Partnership’s market risk
exposures contain "forward-looking statements" within the meaning of the safe
harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934). All quantitative disclosures in this section are deemed to be
forward-looking statements for purposes of the safe harbor, except for
statements of historical fact.
The
Partnership accounts for open positions on the basis of mark to market
accounting principles. Any loss in the market value of the
Partnership’s open positions is directly reflected in the Partnership’s earnings
and cash flow.
The
Partnership’s risk exposure in the market sectors traded by the Trading Advisors
is estimated below in terms of VaR. The Partnership estimates VaR
using a model based upon historical simulation (with a confidence level of 99%)
which involves constructing a distribution of hypothetical daily changes in the
value of a trading portfolio. The VaR model takes into account linear
exposures to risk including equity and commodity prices, interest rates, foreign
exchange rates, and correlation among these variables. The hypothetical changes
in portfolio value are based on daily percentage changes observed in key market
indices or other market factors ("market risk factors") to which the portfolio
is sensitive. The one-day 99% confidence level of the Partnership’s
VaR corresponds to the negative change in portfolio value that, based on
observed market risk factors, would have been exceeded once in 100 trading days,
or one day in 100. VaR typically does not represent the worst case
outcome. Demeter uses approximately four years of daily market data
(1,000 observations) and re-values its portfolio (using delta-gamma
approximations) for each of the historical market
-
37-
moves
that occurred over this time period. This generates a probability
distribution of daily "simulated profit and loss” outcomes. The VaR
is the appropriate percent of this distribution. For example, the 99%
one-day VaR would represent the 10th worst outcome from Demeter’s simulated
profit and loss series.
The
Partnership’s VaR computations are based on the risk representation of the
underlying benchmark for each instrument or contract and do not distinguish
between exchange and non-exchange dealer-based instruments. They are
also not based on exchange and/or dealer-based maintenance margin
requirements.
VaR
models, including the Partnership’s are continually evolving as trading
portfolios become more diverse and modeling techniques and systems capabilities
improve. Please note that the VaR model is used to numerically
quantify market risk for historic reporting purposes only and is not utilized by
either Demeter or the Trading Advisors in their daily risk management
activities. Please further note that VaR as described above may not
be comparable to similarly-titled measures used by other entities.
The Partnership’s Value at
Risk in Different Market Sectors
The
following table indicates the VaR associated with the Partnership’s open
positions as a percentage of total net assets by primary market risk category at
September 30, 2009 and 2008. At September 30, 2009 and 2008, the
Partnership’s total capitalization was approximately $179 million and $204
million, respectively.
- 38
-
Primary
Market
|
September
30, 2009
|
September
30, 2008
|
Risk Category
|
Value at Risk
|
Value at Risk
|
Interest
Rate
|
(0.52)%
|
(0.03)%
|
Currency
|
(0.34)
|
(0.10)
|
Equity
|
(0.15)
|
(0.09)
|
Commodity
|
(2.14)
|
(0.09)
|
Aggregate
Value at Risk
|
(2.79)%
|
(0.18)%
|
The VaR
for a market category represents the one-day downside risk for the aggregate
exposures associated with this market category. The Aggregate Value
at Risk listed above represents the VaR of the Partnership’s open positions
across all the market categories, and is less than the sum of the VaRs for all
such market categories due to the diversification benefit across asset
classes.
Because
the business of the Partnership is the speculative trading of futures, forwards
and options on such contracts, the composition of its trading portfolio can
change significantly over any given time period, or even within a single trading
day. Such change could positively or negatively materially impact
market risk as measured by VaR.
The table
below supplements the quarter-end VaR set forth above by presenting the
Partnership’s high, low, and average VaR, as a percentage of total net assets
for the four quarter-end reporting periods from October 1, 2008 through
September 30, 2009.
- 39
-
Primary Market Risk
Category
|
High
|
Low
|
Average
|
Interest
Rate
|
(0.52)%
|
(0.30)%
|
(0.40)%
|
Currency
|
(0.34)
|
(0.11)
|
(0.23)
|
Equity
|
(0.56)
|
(0.02)
|
(0.22)
|
Commodity
|
(2.14)
|
(0.66)
|
(1.49)
|
Aggregate
Value at Risk
|
(2.79)%
|
(0.78)%
|
(1.49)%
|
Limitations on Value at Risk
as an Assessment of Market Risk
VaR
models permit estimation of a portfolio’s aggregate market risk exposure,
incorporating a range of varied market risks, reflect risk reduction due to
portfolio diversification or hedging activities, and can cover a wide range of
portfolio assets. However, VaR risk measures should be viewed in light of the
methodology’s limitations, which include, but may not be limited to the
following:
·
|
past
changes in market risk factors will not always result in accurate
predictions of the distributions and correlations of future market
movements;
|
·
|
changes
in portfolio value caused by market movements may differ from those of the
VaR model;
|
·
|
VaR
results reflect past market fluctuations applied to current trading
positions while future risk depends on future
positions;
|
·
|
VaR
using a one-day time horizon does not fully capture the market risk of
positions that cannot be liquidated or hedged within one day;
and
|
·
|
the
historical market risk factor data used for VaR estimation may provide
only limited insight into losses that could be incurred under certain
unusual market movements.
|
- 40
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In
addition, the VaR tables above, as well as the past performance of the
Partnership, give no indication of the Partnership’s potential "risk of
ruin".
The VaR
tables provided present the results of the Partnership’s VaR for each of the
Partnership’s market risk exposures and on an aggregate basis at September 30,
2009 and 2008, and for the four quarter-end reporting periods from October 1,
2008, through September 30, 2009. VaR is not necessarily
representative of the Partnership’s historic risk, nor should it be used to
predict the Partnership’s future financial performance or its ability to manage
or monitor risk. There can be no assurance that the Partnership’s
actual losses on a particular day will not exceed the VaR amounts indicated
above or that such losses will not occur more than once in 100 trading
days.
Non-Trading
Risk
The
Partnership has non-trading market risk on its foreign cash
balances. These balances and any market risk they may represent are
immaterial.
The
Partnership also maintains a substantial portion of its available assets in cash
at MS&Co.; as of September 30, 2009, such amount was equal to approximately
41% of the Partnership’s net asset value. A decline in short-term
interest rates would result in a decline in the Partnership’s cash management
income. This cash flow risk is not considered to be material.
- 41
-
Materiality,
as used throughout this section, is based on an assessment of reasonably
possible market movements and any associated potential losses, taking into
account the leverage, optionality, and multiplier features of the Partnership’s
market-sensitive instruments, in relation to the Partnership’s net
assets.
Qualitative Disclosures
Regarding Primary Trading Risk Exposures
The
following qualitative disclosures regarding the Partnership’s market risk
exposures - except for (A) those disclosures that are statements of historical
fact and (B) the descriptions of how the Partnership manages its primary market
risk exposures - constitute forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. The Partnership’s primary market risk exposures, as well as the strategies
used and to be used by Demeter and the Trading Advisors for managing such
exposures, are subject to numerous uncertainties, contingencies and risks, any
one of which could cause the actual results of the Partnership’s risk controls
to differ materially from the objectives of such
strategies. Government interventions, defaults and expropriations,
illiquid markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx of new market
participants, increased regulation, and many other factors could result in
material losses, as well as in material changes to the risk exposures and the
risk management strategies of the Partnership.
The
Trading Advisors, in general, tend
to utilize trading system(s) to take positions when market opportunities
develop, and Demeter anticipates that the Trading Advisors will continue to do
so.
Investors
must be prepared to lose all or substantially all of their investment in the
Partnership.
- 42
-
The
following were the primary trading risk exposures of the Partnership at
September 30, 2009, by market sector. It may be anticipated, however,
that these market exposures will vary materially over time.
Interest Rate. At
September 30, 2009, the Partnership had exposure to the global interest rate
sector. Exposure was primarily spread across the U.S., European, and
Japanese interest rate sectors. Interest rate movements directly
affect the price of the sovereign bond futures positions held by the Partnership
and indirectly affect the value of its stock index and currency
positions. Interest rate movements in one country, as well as
relative interest rate movements between countries, materially impact the
Partnership’s profitability. The Partnership’s interest rate exposure is
generally to interest rate fluctuations in the U.S. and the other G-7 countries’
interest rates. The G-7 countries consist of France, the U.S., the
United Kingdom, Germany, Japan, Italy, and Canada. Demeter
anticipates that G-7 countries’ interest rates will remain the primary interest
rate exposure of the Partnership for the foreseeable future. The
speculative futures positions held by the Partnership may range from short to
long-term instruments. Consequently, changes in short, medium, or long-term
interest rates may have an effect on the Partnership.
Currency. At
September 30, 2009, the Partnership had exposure to the currency
sector. The Partnership’s currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency
pairs. Interest rate changes, as well as political and general
economic conditions influence these fluctuations. The Partnership
trades a large number of currencies, including cross-rates - i.e., positions between two
currencies other than the U.S. dollar. At September 30,
2009,
- 43
-
the
Partnership’s major exposures were to the Swiss franc, Australian dollar,
British pound, Japanese yen, euro, Norwegian krone, Polish zloty, Canadian
dollar, and Swedish krona currency crosses, as well as to outright U.S. dollar
positions. Outright positions consist of the U.S. dollar vs. other
currencies. These other currencies include major and minor
currencies. Demeter does not anticipate that the risk associated with
the Partnership’s currency trades will change significantly in the
future.
Equity. At
September 30, 2009, the Partnership had exposure to the global stock index
sector, primarily equity price risk in the G-7 countries. The stock
index futures traded by the Partnership are by law limited to futures on
broadly–based indices. At September 30, 2009, the Partnership’s
primary exposures were to the S&P 500 (U.S.), FTSE 100 (U.K.), DAX
(Germany), and CAC 40 (France) stock indices. The Partnership
typically exposed to the risk of adverse price trends or static markets in the
U.S., European, and Asian stock indices. Static markets would not
cause major market changes, but would make it difficult for the Partnership to
avoid trendless price movements, resulting in numerous small
losses.
|
Commodity.
|
Soft Commodities and
Agriculturals. The largest market exposure of the Partnership
at September 30, 2009, was to the markets that comprise these
sectors. Most of the exposure was to the cocoa, sugar, corn,
soybeans, lumber, wheat, and lean hogs markets. Supply and demand
inequalities, severe weather disruptions, and market expectations affect price
movements in these markets.
- 44
-
Metals. The
second largest market exposure of the Partnership at September 30, 2009, was to
the metals sector. The Partnership’s metals exposure was to
fluctuations in the price of base metals, such as copper, zinc, tin, lead,
nickel, and aluminum, as well as precious metals, such as palladium, platinum,
and gold. Economic forces, supply and demand inequalities,
geopolitical factors and market expectations influence price movements in these
markets.
Energy. The
third largest market exposure of the Partnership at September 30, 2009, was to
the energy sector. The Partnership’s energy exposure was shared
primarily by futures contracts in crude oil and its related products, as well as
natural gas. Price movements in these markets result from
geopolitical developments, particularly in the Middle East, as well as weather
patterns, and other economic fundamentals. Significant profits and
losses, which have been experienced in the past, are expected to continue to be
experienced in the future. Natural gas has exhibited volatility in
prices resulting from weather patterns and supply and demand factors and will
likely continue in this choppy pattern.
Qualitative Disclosures
Regarding Non-Trading Risk Exposure
The
following was the only non-trading risk exposure of the Partnership at September
30, 2009:
Foreign Currency
Balances. The Partnership’s primary foreign currency balances at
September 30, 2009, were in British pounds, euros, Japanese yen, Canadian
dollars, New Zealand dollars, Australian dollars, Swedish kronor, Hong Kong
dollars, and Norwegian kroner. The Partnership controls the
non-trading risk of foreign currency balances by regularly converting them back
into U.S. dollars upon liquidation of their respective positions.
- 45
-
|
Qualitative
Disclosures Regarding Means of Managing Risk
Exposure
|
The
Partnership and the Trading Advisors, separately, attempt to manage the risk of
the Partnership’s open positions in essentially the same manner in all market
categories traded. Demeter attempts to manage market exposure by diversifying
the Partnership’s assets among different market sectors and trading approaches
through the selection of Commodity Trading Advisors and by daily monitoring
their performance. In addition, the Trading Advisors establish
diversification guidelines, often set in terms of the maximum margin to be
committed to positions in any one market sector or market-sensitive
instrument.
Demeter
monitors and controls the risk of the Partnership’s non-trading instrument,
cash. Cash is the only Partnership investment directed by Demeter, rather than
the Trading Advisors.
Item
4.
|
CONTROLS AND
PROCEDURES
|
As of the
end of the period covered by this quarterly report, the President and Chief
Financial Officer of Demeter have evaluated the effectiveness of the
Partnership’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act), and have judged
such controls and procedures to be effective.
Changes in Internal Control
over Financial Reporting
There
have been no material changes during the period covered by this quarterly report
in the Partnership’s internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected
or are reasonably likely to affect the Partnership’s internal control over
financial reporting.
- 46
-
Limitations on the
Effectiveness of Controls
Any
control system, no matter how well designed and operated, can provide reasonable
(not absolute) assurance that its objectives will be
met. Furthermore, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been
detected.
Item
4T. CONTROLS AND
PROCEDURES
Not
applicable.
- 47
-
PART
II. OTHER
INFORMATION
Item
1A.
|
RISK
FACTORS
|
There
have been no material changes from the risk factors previously referenced in the
Partnership’s Report on Form 10-K for the fiscal year ended December 31,
2008.
Item
6.
|
EXHIBITS
|
31.01
|
Certification
of President of Demeter Management LLC, the general partner of the
Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.02
|
Certification
of Chief Financial Officer of Demeter Management LLC, the general partner
of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.01
|
Certification
of President of Demeter Management LLC, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.02
|
Certification
of Chief Financial Officer of Demeter Management LLC, the general partner
of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
– 48
–
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Morgan
Stanley Smith Barney Spectrum Strategic L.P.
|
|||
(Registrant)
|
|||
By:
|
Demeter
Management LLC
|
||
(General
Partner)
|
|||
November
13, 2009
|
By:
|
/s/Christian
Angstadt
|
|
Christian
Angstadt
|
|||
Chief
Financial Officer
|
The
General Partner which signed the above is the only party authorized to act for
the registrant. The registrant has no principal executive officer,
principal financial officer, controller, or principal accounting officer and has
no Board of Directors.
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