Attached files
MANAGED FUTURES
CHARTER GRAHAM L.P.
December 31, 2010
Annual Report
[LOGO]
TO THE LIMITED PARTNERS OF:
MANAGED FUTURES CHARTER GRAHAM L.P.
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By: /s/ Walter J. Davis
Walter Davis
President and Director
Ceres Managed Futures LLC,
General Partner of
Managed Futures Charter Graham L.P.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Ceres Managed Futures LLC ("Ceres"), the general partner of Managed Futures
Charter Graham L.P. (formerly, Morgan Stanley Smith Barney Charter Graham
L.P.), is responsible for the management of the Partnership.
Management of Ceres ("Management") is responsible for establishing and
maintaining adequate internal control over financial reporting. The internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles.
The Partnership's internal control over financial reporting includes those
policies and procedures that:
. Pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
Partnership;
. Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that the Partnership's transactions are
being made only in accordance with authorizations of Management and
directors of Ceres; and
. Provide reasonable assurance regarding prevention or timely detection and
correction of unauthorized acquisition, use or disposition of the
Partnership's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Partnership's internal control
over financial reporting as of December 31, 2010. In making this assessment,
Management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control--Integrated
Framework. Based on our assessment and those criteria, Management believes that
the Partnership maintained effective internal control over financial reporting
as of December 31, 2010.
/s/ Walter J. Davis
Walter Davis
President and Director
Ceres Managed Futures LLC
General Partner of Managed Futures Charter Graham L.P.
/s/ Jennifer Magro
Jennifer Magro
Chief Financial Officer
Ceres Managed Futures LLC
New York, New York
March 28, 2011
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Limited Partners and the General Partner of Managed Futures Charter
Graham L.P. (formerly, Morgan Stanley Smith Barney Charter Graham, L.P.):
We have audited the accompanying statements of financial condition of Managed
Futures Charter Graham L.P. (the "Partnership"), including the condensed
schedules of investments, as of December 31, 2010 and 2009, and the related
statements of operations and changes in partners' capital for each of the three
years in the period ended December 31, 2010. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Partnership is
not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Partnership's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Managed Futures Charter Graham L.P. as of
December 31, 2010 and 2009, and the results of its operations and changes in
its partners' capital for each of the three years in the period ended December
31, 2010, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
New York, New York
March 28, 2011
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-----------------------
2010 2009
----------- -----------
$ $
ASSETS
Trading Equity:
Unrestricted cash 332,055,996 371,818,291
Restricted cash 25,115,126 32,234,772
----------- -----------
Total Cash 357,171,122 404,053,063
----------- -----------
Net unrealized gain on open contracts (MS&Co.) 7,018,064 2,122,029
Net unrealized gain on open contracts (MSIP) 1,287,433 3,799,477
----------- -----------
Total net unrealized gain on open contracts 8,305,497 5,921,506
----------- -----------
Total Trading Equity 365,476,619 409,974,569
Subscriptions receivable 2,900,784 --
Interest receivable (MSSB & MS&Co.) 25,629 4,329
----------- -----------
Total Assets 368,403,032 409,978,898
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 4,638,344 7,234,689
Accrued brokerage fees (MS&Co.) 1,576,346 2,126,799
Accrued management fees 586,548 708,933
----------- -----------
Total Liabilities 6,801,238 10,070,421
----------- -----------
PARTNERS' CAPITAL
Limited Partners (12,395,917.141 and 13,699,445.230 Units, respectively) 357,913,170 395,815,421
General Partner (127,751.316 and 141,663.501 Units, respectively) 3,688,624 4,093,056
----------- -----------
Total Partners' Capital 361,601,794 399,908,477
----------- -----------
Total Liabilities and Partners' Capital 368,403,032 409,978,898
=========== ===========
NET ASSET VALUE PER UNIT 28.87 28.89
=========== ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
2010 2009 2008
-------------- -------------- --------------
$ $ $
INVESTMENT INCOME
Interest income (MSSB & MS&Co.) 344,887 382,568 6,692,461
-------------- -------------- --------------
EXPENSES
Brokerage fees (MS&Co.) 21,017,924 26,465,763 29,411,873
Management fees 7,189,540 8,821,923 9,803,959
Incentive fees -- 4,016,965 11,182,834
-------------- -------------- --------------
Total Expenses 28,207,464 39,304,651 50,398,666
-------------- -------------- --------------
NET INVESTMENT LOSS (27,862,577) (38,922,083) (43,706,205)
-------------- -------------- --------------
TRADING RESULTS
Trading profit:
Realized 22,922,027 28,733,723 182,983,623
Net change in unrealized 2,383,991 4,938,115 1,188,856
Proceeds from Litigation 20,678 -- --
-------------- -------------- --------------
Total Trading Results 25,326,696 33,671,838 184,172,479
-------------- -------------- --------------
NET INCOME (LOSS) (2,535,881) (5,250,245) 140,466,274
============== ============== ==============
NET INCOME (LOSS) ALLOCATION
Limited Partners (2,508,117) (5,197,538) 138,967,665
General Partner (27,764) (52,707) 1,498,609
NET INCOME (LOSS) PER UNIT*
Limited Partners (0.02) (0.24) 7.11
General Partner (0.02) (0.24) 7.11
UNITS UNITS UNITS
-------------- -------------- --------------
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 13,089,859.715 15,433,467.839 19,521,771.478
* Based on change in Net Asset Value per Unit.
The accompanying notes are an integral part of these financial statements.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
-------------- ------------ ---------- ------------
$ $ $
Partners' Capital, December 31, 2007 19,990,982.425 435,434,673 4,839,307 440,273,980
Offering of Units 4,209,433.764 108,216,510 -- 108,216,510
Net income -- 138,967,665 1,498,609 140,466,274
Redemptions (6,190,534.937) (163,357,200) (1,061,615) (164,418,815)
-------------- ------------ ---------- ------------
Partners' Capital, December 31, 2008 18,009,881.252 519,261,648 5,276,301 524,537,949
Net loss -- (5,197,538) (52,707) (5,250,245)
Redemptions (4,168,772.521) (118,248,689) (1,130,538) (119,379,227)
-------------- ------------ ---------- ------------
Partners' Capital, December 31, 2009 13,841,108.731 395,815,421 4,093,056 399,908,477
Offering of Units 595,887.019 16,833,555 25,000 16,858,555
Net loss -- (2,508,117) (27,764) (2,535,881)
Redemptions (1,913,327.293) (52,227,689) (401,668) (52,629,357)
-------------- ------------ ---------- ------------
Partners' Capital, December 31, 2010 12,523,668.457 357,913,170 3,688,624 361,601,794
============== ============ ========== ============
The accompanying notes are an integral part of these financial statements.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
CONDENSED SCHEDULES OF INVESTMENTS
DECEMBER 31, 2010 AND 2009
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS)
------------------------------ --------------- ------------- ---------------- ------------- --------------
2010 PARTNERSHIP PARTNERS' CAPITAL: $361,601,794 $ % $ % $
Commodity 5,713,726 1.58 (99,428) (0.03) 5,614,298
Equity (931,429) (0.26) 39,537 0.01 (891,892)
Foreign currency 4,076,718 1.13 559,940 0.16 4,636,658
Interest rate 323,407 0.09 (1,192,360) (0.33) (868,953)
---------- ----- ---------- ----- ----------
Grand Total: 9,182,422 2.54 (692,311) (0.19) 8,490,111
========== ===== ========== =====
Unrealized Currency Loss (0.05) (184,614)
===== ----------
Total Net Unrealized Gain on Open Contracts 8,305,497
==========
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN OF NET ASSETS GAIN/(LOSS)
------------------------------ --------------- ------------- ---------------- ------------- --------------
2009 PARTNERSHIP PARTNERS' CAPITAL: $399,908,477 $ % $ % $
Commodity 5,893,727 1.47 245,680 0.06 6,139,407
Equity 786,962 0.20 18,522 0.01 805,484
Foreign currency 616,300 0.15 438,549 0.11 1,054,849
Interest rate (2,169,237) (0.54) 130,659 0.03 (2,038,578)
---------- ----- ---------- ----- ----------
Grand Total: 5,127,752 1.28 833,410 0.21 5,961,162
========== ===== ========== =====
Unrealized Currency Loss (0.01) (39,656)
===== ----------
Total Net Unrealized Gain on Open Contracts 5,921,506
==========
The accompanying notes are an integral part of these financial statements.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
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1. ORGANIZATION
Managed Futures Charter Graham L.P. (formerly Morgan Stanley Smith Barney
Charter Graham L.P.) ("Charter Graham" or the "Partnership") is a limited
partnership organized 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 5. Financial
Instruments). Prior to August 23, 2010, the Partnership was one of the Morgan
Stanley Smith Barney Charter Series of funds, which was comprised of the
Partnership, Morgan Stanley Smith Barney Charter Campbell L.P., Morgan Stanley
Charter Aspect L.P., and Morgan Stanley Charter WNT L.P.
In 2009, Morgan Stanley and Citigroup Inc. combined certain assets of the
Global Wealth Management Group of Morgan Stanley & Co. Incorporated, including
Demeter Management LLC ("Demeter") and the Smith Barney division of Citigroup
Global Markets Inc., into a new joint venture, Morgan Stanley Smith Barney
Holdings LLC ("MSSBH"). As part of that transaction, Ceres Managed Futures LLC
("Ceres") and Demeter were contributed to MSSBH, and each became a wholly-owned
subsidiary of MSSBH.
Effective December 1, 2010, MSSBH, together with the unanimous support of the
respective Boards of Directors of Demeter and Ceres, combined the assets and
operations of Demeter and Ceres into a single commodity pool operator, Ceres.
Ceres will continue to be wholly-owned by MSSBH and replaced Demeter as the
general partner for the Partnership.
The non-clearing commodity broker is Morgan Stanley Smith Barney LLC ("MSSB")
as of May 1, 2010, the principal subsidiary of MSSBH. The clearing 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. MSIP serves as the commodity
broker for trades on the London Metal Exchange ("LME"). MS&Co. and MSIP are
wholly-owned subsidiaries of Morgan Stanley.
Effective September 29, 2009, Demeter changed the name of Morgan Stanley
Charter Graham L.P. to Morgan Stanley Smith Barney Charter Graham L.P.
Effective August 23, 2010, Demeter changed the name of Morgan Stanley Smith
Barney Charter Graham L.P. to Managed Futures Charter Graham L.P. and has made
the Partnership available to new investments on a private placement basis.
Neither name change had any impact on the operation of the Partnership or its
limited partners.
Ceres is required to maintain a 1% minimum interest in the equity of the
Partnership and income (losses) are shared by Ceres and the limited partners
based on their proportional ownership interests.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(continued)
Graham Capital Management, L.P. ("Graham" or the "Trading Advisor") is the
Partnership's trading advisor.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES. The financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP"), which require management to make estimates and assumptions that affect
the reported amounts in the financial statements and related disclosures.
Management believes that the estimates utilized in the preparation of the
financial statements are prudent and reasonable. Actual results could differ
from those estimates.
VALUATION. 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 a net unrealized gain or loss 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 from various exchanges.
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. (E.T.) on the last business day of the reporting period.
REVENUE RECOGNITION. Monthly, MSSB credits the Partnership with interest
income received from MS&Co. and MSIP. Such amount is based on 100% of its
average daily funds held at MS&Co. and MSIP to meet margin requirements at a
rate approximately equivalent to what the commodity brokers pay or charge other
similar customers on margin deposits. In addition, MSSB credits the Partnership
at each month end with interest income on 100% of Partnership's assets not
deposited as margin at a rate equal to the monthly average of the 4-week U.S.
Treasury bill discount rate during the month. MSSB retains any interest earned
in excess of the interest paid by MSSB to the Partnership. For purposes of such
interest payments, net assets do not include monies owed to the Partnership on
forward contracts and other Futures Interests.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS. The fair value of the Partnership's
assets and liabilities that qualify as financial instruments under the
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC" or the "Codification"), approximates the carrying amount presented in
the Statements of Financial Condition.
FOREIGN CURRENCY TRANSLATION. The Partnership's functional currency is the
U.S. dollar; however, the Partnership may transact business in currencies other
than the U.S. dollar. Assets and liabilities denominated in currencies other
than the U.S. dollar are translated into U.S. dollars at the rate in effect at
the date of the Statements of Financial Condition. Income and expense items
denominated in currencies other than the U.S. dollar are translated into U.S.
dollars at the rate in effect during the period. Gains and losses resulting
from the translation to U.S. dollars are reported in income currently.
NET INCOME (LOSS) PER UNIT. Net income (loss) per unit of limited partnership
interest ("Unit(s)") is computed in accordance with the specialized accounting
for Investment Companies as illustrated in the Financial Highlights Footnote
(See Note 8. Financial Highlights).
TRADING EQUITY. The Partnership's asset "Trading Equity," reflected on the
Statements of Financial Condition, consists of (A) cash on deposit with MSSB,
MS&Co., and MSIP to be used as margin for trading and (B) net unrealized gains
or losses on futures and forward contracts, which are valued at fair value and
calculated as the difference between original contract value and fair value.
The Partnership, in its normal course of business, enters into various
contracts with MSSB, MS&Co., and MSIP acting as its commodity brokers. Pursuant
to brokerage agreements with MSSB, MS&Co., and MSIP, to the extent that such
trading results in unrealized gains or losses, these amounts are offset and
reported on a net basis on the Partnership's Statements of Financial Condition.
The Partnership has offset the fair value amounts recognized for forward
contracts executed with the same counterparty as allowable under the terms of
its master netting agreement with MS&Co., as the counterparty on such
contracts. The Partnership has consistently applied its right to offset.
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
London Metal Exchange positions. All of these amounts are maintained
separately. Cash that is not classified as restricted cash is therefore
classified as unrestricted cash.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(continued)
BROKERAGE AND RELATED TRANSACTION FEES AND COSTS. The Partnership currently
pays MS&Co. a flat-rate monthly brokerage fee of 1/12 of 5.375% of the
Partnership's net assets as of the first day of each month (a 5.375% annual
rate), as defined in the Partnership's Private Placement Memorandum. Prior to
October 1, 2010, the Partnership paid a flat-rate brokerage fee of 1/12 of 6%
(a 6% annual rate) of the Partnership's net assets as of the first day of each
month. Such fees cover all brokerage fees, transaction fees and costs, ordinary
administrative and offering expenses, and placement agent fees.
OPERATING EXPENSES. The Partnership incurs a monthly management fee and may
incur an incentive fee. All common administrative and continuing offering
expenses, including legal, auditing, accounting, filing fees, and other related
expenses, are borne by MS&Co. through the brokerage fees paid by the
Partnership.
CONTINUING OFFERING. Units of the Partnership are offered at a price equal to
100% of the Unit as of the close of business on the last day of each month. The
minimum subscription amount in the Partnership is $25,000 ($10,000 for
ERISA/IRA investors), subject to the discretion of Ceres to accept a lower
amount. Additional subscriptions can be made in a minimum amount of $10,000,
subject to the discretion of Ceres to accept a lower amount. The request for
subscriptions must be delivered to a limited partner's local Morgan Stanley
Smith Barney Branch Office in time for it to be forwarded to and received by
Ceres, no later than 3:00 P.M., New York City time, on the third business day
before the end of the month.
No selling commissions or charges related to the continuing offering of Units
are paid by the limited partners or the Partnership. MS&Co. pays all such costs.
REDEMPTIONS. Limited partners may redeem some or all of their Units at 100% of
the per Unit as of the last business day of any month (a "Redemption Date").
The request for redemption must be delivered to a limited partner's local
Morgan Stanley Smith Barney Branch Office in time for it to be forwarded and
received by Ceres, no later than 3:00 P.M., New York City time, on the third
business day before the end of the month. A limited partner must maintain a
minimum investment of 300 Units in the Partnership unless such limited partner
is redeeming the entire interest in the Partnership. Ceres may cause a limited
partner to withdraw from the Partnership at any time and for any reason upon at
least five days' written notice. Ceres may also, in its sole discretion, permit
redemptions by limited partners in any amount at any time.
The aggregate amounts of redemption charges paid to MS&Co. for the years
ended December 31, 2010, 2009, and 2008 were as follows:
2010 2009 2008
------ ------ ------
$ $ $
53,278 340,662 362,110
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(continued)
EXCHANGES. Limited partners may redeem some or all of their Units at 100% of
the value per Unit in the Partnership on the Redemption Date and use the
proceeds to purchase units in any other commodity pool operated by Ceres that
is open to investment. Limited partners may also redeem units in any other
commodity pool operated by Ceres and use the proceeds to purchase Units in the
Partnership. The request for exchanges must be delivered to a limited partner's
local Morgan Stanley Smith Barney Branch Office in time for it to be forwarded
and received by Ceres, no later than 3:00 P.M., New York City time, on the
third business day before the end of the month.
DISTRIBUTIONS. Distributions, other than redemptions of Units, are made on a
pro-rata basis at the sole discretion of Ceres. No distributions have been made
to date. Ceres does not intend to make any distributions of the Partnerships'
profits.
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
and expenses for income tax purposes. The Partnership files U.S. federal and
state tax returns.
The guidance issued by the FASB on income taxes clarifies the accounting for
uncertainty in income taxes recognized in the 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 Partnership has concluded that there were no
significant uncertain tax positions that would require recognition in the
financial statements as of December 31, 2010 and 2009. If applicable, the
Partnership recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in other expenses in the Statements of
Operations. Generally, the 2007 through 2010 tax years remain subject to
examination by U.S. federal and most state tax authorities. No income tax
returns are currently under examination.
DISSOLUTION OF THE PARTNERSHIPS. The Partnership will terminate on December
31, 2035, or at an earlier date if certain conditions occur as defined in the
Partnership's Limited Partnership Agreement.
LITIGATION SETTLEMENT. On July 28, 2010, the Partnership received a settlement
award payment in the amount of $20,678 from the Natural Gas Litigation
Settlement Administrator. This settlement represents the Partnership's portion
of the 2006 Net Settlement Fund and the 2007 Net Settlement Fund. The proceeds
from settlement were accounted for in the period they were received for the
benefit of the partners in the Partnership.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(continued)
STATEMENT OF CASH FLOWS. The Partnership is not required to provide a
Statement of Cash Flows.
OTHER PRONOUNCEMENTS
ImprovingDisclosures about Fair Value Measurements
In January 2010, the FASB issued guidance, which, among other things, amends
fair value measurements and disclosures to require entities to separately
present purchases, sales, issuances, and settlements in their reconciliation of
Level 3 fair value measurements (i.e., to present such items on a gross basis
rather than on a net basis), and which clarifies existing disclosure
requirements regarding the level of disaggregation and the inputs and valuation
techniques used to measure fair value for measurements that fall within either
Level 2 or Level 3 of the fair value hierarchy. This guidance is effective for
interim and annual periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements which are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The adoption of this guidance did not have a material
impact on the Partnership's financial statements.
--------------------------------------------------------------------------------
3. RELATED PARTY TRANSACTIONS
The Partnership's cash is on deposit with MSSB, MS&Co., and MSIP in Futures
Interests trading accounts to meet margin requirements as needed. MSSB credits
the Partnership with interest income as described in Note 2. The Partnership
pays brokerage fees to MS&Co. as described in Note 2.
--------------------------------------------------------------------------------
4. TRADING ADVISORS
Ceres, on behalf of the Partnership, retains Graham to make all trading
decisions for the Partnership.
Compensation to the Trading Advisor by the Partnership consists of a
management fee and an incentive fee as follows:
MANAGEMENT FEE. The Partnership pays its Trading Advisor a flat-rate monthly
fee equal to 1/6 of 1% (a 2% annual rate) of the Partnership's net assets
under management as of the first day of each month.
INCENTIVE FEE. The Partnership pays the Trading Advisor an incentive fee equal
to 20% of trading profits experienced by the Partnership as of the end of each
calendar month.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(continued)
Trading profits represent the amount by which profits from futures, forward,
and options trading exceed losses after brokerage and management fees are
deducted. When a Trading Advisor experiences losses with respect to net assets
as of the end of a calendar month, the Trading Advisor must recover such losses
before that Trading Advisor is eligible for an incentive fee in the future.
Cumulative trading losses are adjusted on a pro-rated basis for the amount of
each month's net contributions for the Trading Advisor.
--------------------------------------------------------------------------------
5. FINANCIAL INSTRUMENTS
The Partnership trades Futures Interests. Futures and forwards represent
contracts for delayed delivery of an instrument at a specified date and price.
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 will be equal to 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. A derivative is defined as a financial
instrument or other contract that has all three of the following
characteristics:
(1)a) One or more "underlyings", and b) one or more "notional amounts" or
payment provisions or both;
(2)Requires no initial net investment or smaller initial net investment than
would be required for other types of contracts that would be expected to
have a similar response relative to changes in market factors; and
(3)Terms that 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.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(continued)
The net unrealized gains on open contracts at December 31, 2010, 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
----------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- --------- --------- --------- --------- ---------
$ $ $
2010 4,257,692 4,047,805 8,305,497 Mar. 2015 Mar. 2011
2009 4,878,451 1,043,055 5,921,506 Jun. 2011 Feb. 2010
The Partnership has credit risk associated with counterparty nonperformance.
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. and MSIP 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, 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, including an amount equal to the net
unrealized gains on all open exchange-traded futures, exchange-traded forward,
and exchange-traded futures-styled options contracts, which funds, in the
aggregate, totaled $361,428,814 and $408,931,514 at December 31, 2010 and 2009,
respectively. With respect to each Partnership's off-exchange-traded forward
currency 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, each 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 MSSB for the benefit of 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. The
Partnership has a netting agreement with MS&Co. This agreement, which seeks to
reduce both the Partnership's and MS&Co.'s exposure on off-exchange-traded
forward currency contracts, should materially decrease the Partnership's credit
risk in the event of MS&Co.'s bankruptcy or insolvency.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(continued)
The futures, forwards and options 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 are settled upon termination of the contract. Gains and losses on
off-exchange-traded forward currency options contracts are settled on an
agreed-upon settlement date. However, the Partnership is required to meet
margin requirements equal to the net unrealized loss on open forward currency
contracts in the Partnership's accounts with the counterparty, which is
accomplished by daily maintenance of the cash balance in a custody account held
at MSSB for the benefit of MS&Co.
--------------------------------------------------------------------------------
6. DERIVATIVES AND HEDGING
The Partnership's objective is to profit from speculative trading in Futures
Interests. Therefore, the Trading Advisor for the Partnership will take
speculative positions in Futures Interests where it feels the best profit
opportunities exist for its trading strategy. As such, the average number of
contracts outstanding in 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. With
regard to foreign currency forward trades, each notional quantity amount has
been converted to an equivalent contract based upon an industry convention.
The following tables summarize the valuation of each Partnership's
investments as required by the disclosures about Derivatives and Hedging under
the FASB ASC as of December 31, 2010 and 2009, respectively.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(continued)
The Effect of Trading Activities on the Statements of Financial Condition as
of December 31, 2010 and 2009:
AVERAGE NUMBER
DECEMBER 31, 2010 OF CONTRACTS
----------------- OUTSTANDING
LONG LONG SHORT SHORT NET FOR THE YEAR
FUTURES AND FORWARD UNREALIZED UNREALIZED UNREALIZED UNREALIZED UNREALIZED (ABSOLUTE
CONTRACTS GAIN LOSS GAIN LOSS GAIN/(LOSS) QUANTITY)
--------- ---------- ---------- ---------- ---------- ----------- ---------------
$ $ $ $ $
Commodity 5,781,673 (67,947) 5,710 (105,138) 5,614,298 4,640
Equity 244,826 (1,176,255) 39,537 -- (891,892) 2,866
Foreign currency 4,755,171 (678,453) 854,409 (294,469) 4,636,658 17,648
Interest rate 392,619 (69,212) 72,075 (1,264,435) (868,953) 8,548
---------- ---------- --------- ---------- ----------
Total 11,174,289 (1,991,867) 971,731 (1,664,042) 8,490,111
========== ========== ========= ==========
Unrealized currency loss (184,614)
----------
Total net unrealized
gain on open
contracts 8,305,497
==========
*AVERAGE NUMBER
DECEMBER 31, 2009 OF CONTRACTS
----------------- OUTSTANDING
LONG LONG SHORT SHORT NET FOR THE YEAR
FUTURES AND FORWARD UNREALIZED UNREALIZED UNREALIZED UNREALIZED UNREALIZED (ABSOLUTE
CONTRACTS GAIN LOSS GAIN LOSS GAIN/(LOSS) QUANTITY)
--------- ---------- ---------- ---------- ---------- ----------- ---------------
$ $ $ $ $
Commodity 7,291,580 (1,397,853) 499,089 (253,409) 6,139,407 4,941
Equity 1,413,940 (626,978) 18,522 -- 805,484 3,384
Foreign currency 1,718,378 (1,102,078) 1,070,003 (631,454) 1,054,849 41,153
Interest rate 154,564 (2,323,801) 227,907 (97,248) (2,038,578) 10,824
---------- ---------- --------- ---------- ----------
Total 10,578,462 (5,450,710) 1,815,521 (982,111) 5,961,162
========== ========== ========= ==========
Unrealized currency loss (39,656)
----------
Total net unrealized
gain on open
contracts 5,921,506
==========
* These amounts have been reclassified from December 31, 2009 prior year
financial statement to confirm to the current year presentation.
The following tables summarize the net trading results of the Partnership for
the years ended December 31, 2010 and 2009, respectively, as required by the
disclosures about Derivatives and Hedging.
The Effect of Trading Activities on the Statements of Operations for the year
ended December 31, 2010 included in Total Trading Results:
TYPE OF INSTRUMENT
------------------
$
Commodity (2,284,314)
Equity (11,812,474)
Foreign currency 10,670,505
Interest rate 28,877,259
Unrealized currency loss (144,958)
Proceeds from Litigation 20,678
-----------
Total 25,326,696
===========
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(continued)
Line Items on the Statements of Operations for the year ended December 31,
2010:
TRADING RESULTS
---------------
$
Realized 22,922,027
Net change in unrealized 2,383,991
Proceeds from Litigation 20,678
----------
Total Trading Results 25,326,696
==========
The Effect of Trading Activities on the Statements of Operations for the year
ended December 31, 2009, included in Total Trading Results:
TYPE OF INSTRUMENT
------------------
$
Commodity 1,660,953
Equity 45,253,372
Foreign currency 13,138,360
Interest rate (25,166,393)
Unrealized currency loss (1,214,454)
-----------
Total 33,671,838
===========
Line Items on the Statements of Operations for the year ended December 31,
2009:
TRADING RESULTS
---------------
$
Realized 28,733,723
Net change in unrealized 4,938,115
----------
Total Trading Results 33,671,838
==========
--------------------------------------------------------------------------------
7. FAIR VALUE MEASUREMENTS AND DISCLOSURES
Financial instruments are carried at fair value, which is the price that
would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. Assets and liabilities carried
at fair value are classified and disclosed in the following 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 unadjusted quoted market 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).
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.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(continued)
The Partnership's assets and liabilities measured at fair value on a
recurring basis are summarized in the following tables by the type of inputs
applicable to the fair value measurements.
UNADJUSTED
QUOTED
PRICES IN
ACTIVE
MARKETS SIGNIFICANT
FOR OTHER SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE
ASSETS INPUTS INPUTS
(LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
---------- ----------- ------------ ----------
DECEMBER 31, 2010
----------------- $ $ $ $
ASSETS
Futures 7,142,799 -- n/a 7,142,799
Forwards -- 5,003,221 n/a 5,003,221
--------- --------- ----------
Total Assets 7,142,799 5,003,221 n/a 12,146,020
--------- --------- ----------
LIABILITIES
Futures 2,700,493 -- n/a 2,700,493
Forwards -- 955,416 n/a 955,416
--------- --------- ----------
Total Liabilities 2,700,493 955,416 n/a 3,655,909
--------- --------- ----------
Unrealized currency loss (184,614)
----------
*Net fair value 4,442,306 4,047,805 n/a 8,305,497
========= ========= ==========
DECEMBER 31, 2009**
-------------------
ASSETS
Futures 9,639,812 -- n/a 9,639,812
Forwards -- 2,754,171 n/a 2,754,171
--------- --------- ----------
Total Assets 9,639,812 2,754,171 n/a 12,393,983
--------- --------- ----------
LIABILITIES
Futures 4,721,705 -- n/a 4,721,705
Forwards -- 1,711,116 n/a 1,711,116
--------- --------- ----------
Total Liabilities 4,721,705 1,711,116 n/a 6,432,821
--------- --------- ----------
Unrealized currency loss (39,656)
----------
*Net fair value 4,918,107 1,043,055 n/a 5,921,506
========= ========= ==========
* This amount comprises of the net unrealized gain/(loss) on open contracts and
options purchased and options written on the Statements of Financial
Condition.
**The amounts have been reclassified from the December 31, 2009 prior year
financial statements to conform to the current year presentation based on new
fair value guidance.
MANAGED FUTURES CHARTER GRAHAM L.P.
(FORMERLY, MORGAN STANLEY SMITH BARNEY CHARTER GRAHAM L.P.)
NOTES TO FINANCIAL STATEMENTS
(concluded)
--------------------------------------------------------------------------------
8. FINANCIAL HIGHLIGHTS
CHARTER GRAHAM
2010 2009 2008
-------- ------- -------
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1: $ 28.89 $ 29.13 $ 22.02
-------- ------- -------
NET OPERATING RESULTS:
Interest Income 0.03 0.02 0.34
Expenses (2.16) (2.57) (2.58)
Realized Profit/(1)/ 1.93 1.99 9.29
Unrealized Profit 0.18 0.32 0.06
-------- ------- -------
Net Income (Loss) (0.02) (0.24) 7.11
-------- ------- -------
NET ASSET VALUE, DECEMBER 31: $ 28.87 $ 28.89 $ 29.13
======== ======= =======
FOR THE CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
Net Investment Loss (7.8)% (9.0)% (8.8)%
Expenses before Incentive Fees 7.9 % 8.2 % 7.9 %
Expenses after Incentive Fees 7.9 % 9.1 % 10.1 %
Net Income (Loss) (0.7)% (1.2)% 28.3 %
TOTAL RETURN BEFORE INCENTIVE FEES (0.1)% 0.1 % 34.9 %
TOTAL RETURN AFTER INCENTIVE FEES (0.1)% (0.8)% 32.3 %
INCEPTION-TO-DATE RETURN 188.7 %
COMPOUND ANNUALIZED RETURN 9.4 %
(1)Realized Profit (Loss) is a balancing amount necessary to reconcile the
change in Net Asset Value per Unit with the other per Unit information.
--------------------------------------------------------------------------------
9. SUBSEQUENT EVENTS
Management of Ceres performed its evaluation of subsequent events and has
determined that there were no subsequent events requiring adjustment or
disclosure in the financial statements.
PRE-SORTED
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