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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 March 31, 2012 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: 0-26282

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
 
 
(Exact name of registrant as specified in its charter)
 

 
Delaware
 
13-3775071
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
       
Ceres Managed Futures LLC
   
522 Fifth Avenue, 14th Floor
   
New York, NY
 
10036
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code
 
(212) 296-1999


(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 x  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 CHARTER ASPECT L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2012



 
PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited)
 
     
 
Statements of Financial Condition as of March 31, 2012 and December 31, 2011
2
     
 
Condensed Schedule of Investments as of March 31, 2012
3
     
 
Condensed Schedule of Investments as of December 31, 2011
4
     
 
Statements of Income and Expenses for the Quarters Ended March 31, 2012 and 2011
5
     
 
Statements of Changes in Partners’ Capital for the Quarters Ended March 31, 2012 and 2011
6
     
 
Notes to Financial Statements
  7-23
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24-31
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
31-38
     
Item 4.
Controls and Procedures
38-39
     
 
PART II. OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
40
     
Item 1A.
Risk Factors
40
     
Item 4.
Mine Safety Disclosures
40
     
Item 6.
Exhibits
40-41



 
 

 

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
STATEMENTS OF FINANCIAL CONDITION

 
(Unaudited)
   
 
March 31,
 
December 31,
 
2012
 
2011
ASSETS
$
 
$
       
Trading Equity:
     
       
Unrestricted cash
81,765,739
 
85,155,171
Restricted cash
8,793,489
 
9,058,228
       
Total cash
90,559,228
 
 94,213,399
       
Net unrealized gain on open contracts (MS&Co.)
1,285,842
 
3,019,365
Net unrealized gain (loss) on open contracts (MSIP)
       60,556
 
       (43,288)
       
Total net unrealized gain on open contracts
1,346,398
 
2,976,077
       
Total Trading Equity
  91,905,626
 
  97,189,476
       
Interest receivable (MSSB)
6,525
 
820
       
Total Assets
  91,912,151
 
  97,190,296
       
LIABILITIES AND PARTNERS’ CAPITAL
     
       
Liabilities:
     
       
Redemptions payable
1,757,391
 
2,812,224
Accrued brokerage fees (MS&Co.)
469,220
 
474,378
Accrued management fees
156,407
 
158,126
       
Total Liabilities
2,383,018
 
3,444,728
       
Partners’ Capital:
     
       
Limited Partners (4,219,801.505 and 4,425,308.924 Units, respectively)
     88,457,319
 
     92,674,799
General Partner (51,130.223 and 51,130.223Units, respectively)
1,071,814
 
1,070,769
       
Total Partners’ Capital
89,529,133
 
93,745,568
       
Total Liabilities and Partners’ Capital
  91,912,151
 
  97,190,296
       
NET ASSET VALUE PER UNIT
              20.96
 
              20.94






The accompanying notes are an integral part of these financial statements.

- 2 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
CONDENSED SCHEDULE OF INVESTMENTS
March 31, 2012 (Unaudited)



Futures and Forward Contracts Purchased
Net unrealized
gain/(loss) on
open contracts
% of
Partners’ Capital
 
$
 
Commodity
 (580,882)
      (0.65)
Equity
                     525,857
 0.59
Foreign currency
 109,408
        0.12
Interest rate
                    (79,138)
 (0.09)               
     
Total Futures and Forward Contracts Purchased
                       (24,755)
 (0.03)                
     
Futures and Forward Contracts Sold
   
     
     
Commodity
                   789,264
 0.88
Equity
                         92,223
 0.10
Foreign currency
(129,803)                     
(0.14)
Interest rate
                (176,297)
(0.20)
     
Total Futures and Forward Contracts Sold
                  575,387
   0.64
     
Unrealized Currency Gain
           795,766
 0.89
     
Net fair value
                      1,346,398
      1.50
     






















The accompanying notes are an integral part of these financial statements.

- 3 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
CONDENSED SCHEDULE OF INVESTMENTS
December 31, 2011



Futures and Forward Contracts Purchased
Net unrealized
gain/(loss) on
open contracts
% of
Partners’ Capital
 
$
 
Commodity
(256,740)  
   (0.27)
Equity
   43,794
 0.04
Foreign currency
56,385
     0.06
Interest rate
    1,522,523 
     1.62
     
Total Futures and Forward Contracts Purchased
    1,365,962
                                 1.45                            
     
Futures and Forward Contracts Sold
   
     
Commodity
    575,422
 0.61
Equity
 159,533
 0.17
Foreign currency
33,139
 0.04
Interest rate
      (6,585)  
     (0.01)
     
Total Futures and Forward Contracts Sold
      761,509
   0.81
     
Unrealized Currency Gain
       848,606                          
        0.91                                 
     
Net fair value
           2,976,077
       3.17
     
























The accompanying notes are an integral part of these financial statements.

- 4 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
STATEMENTS OF INCOME AND EXPENSES
(Unaudited)



 
For the Quarters Ended March 31,
       
 
2012
 
2011
 
$
 
$
INVESTMENT INCOME
     
Interest income (MSSB)
 9,334 
 
26,195 
       
EXPENSES
     
Brokerage fees (MS&Co.)
1,405,147 
 
1,585,402 
Management fees
468,382 
 
528,467 
       
Total Expenses
1,873,529 
 
2,113,869 
       
NET INVESTMENT LOSS
(1,864,195) 
 
(2,087,674) 
       
TRADING RESULTS
     
Trading profit (loss):
     
Net realized
3,633,938 
 
4,824,566 
Net change in unrealized
(1,629,679) 
 
(3,641,393) 
       
Total Trading Results
2,004,259 
 
1,183,173  
       
NET INCOME (LOSS)
140,064 
 
(904,501) 
       
NET INCOME (LOSS) ALLOCATION
     
       
Limited Partners
139,019 
 
(894,698) 
General Partner
1,045 
 
(9,803) 
       
NET INCOME (LOSS) PER UNIT *
     
       
Limited Partners
0.02 
 
(0.17) 
General Partner
0.02 
 
(0.17) 
       
 
Units
 
Units
WEIGHTED AVERAGE NUMBER
     
OF UNITS OUTSTANDING
4,417,756.326 
 
5,121,607.987 


* Based on change in net asset value per Unit.





The accompanying notes are an integral part of these financial statements.

- 5 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
For the Quarters Ended March 31, 2012 and 2011
(Unaudited)



 
Units of
           
 
Partnership
 
Limited
 
General
   
 
Interest
 
Partners
 
Partner
 
Total
     
$
 
$
 
$
Partners’ Capital,
             
December 31, 2011
4,476,439.147 
 
92,674,799 
 
1,070,769 
 
93,745,568 
               
Net Income
 
139,019 
 
1,045 
 
140,064 
               
Redemptions
(205,507.419) 
 
(4,356,499) 
 
 
(4,356,499) 
               
Partners’ Capital,
             
March 31, 2012
4,270,931.728 
 
88,457,319 
 
1,071,814  
 
89,529,133 
               
               
               
               
Partners’ Capital,
             
December 31, 2010
5,169,640.931 
 
105,911,284 
 
1,157,861 
 
107,069,145 
               
Net Loss
 
(894,698) 
 
(9,803) 
 
(904,501) 
               
Redemptions
(143,292.098) 
 
(2,944,632) 
 
 
(2,944,632) 
               
Partners’ Capital,
             
March 31, 2011
5,026,348.833 
 
102,071,954 
 
1,148,058 
 
103,220,012 


















The accompanying notes are an integral part of these financial statements.



- 6 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(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 Charter Aspect 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, 2011.

1.  Organization
Morgan Stanley Smith Barney Charter Aspect L.P. is a Delaware limited partnership organized in 1993 to engage primarily in the speculative trading of futures contracts, options on futures and forwards 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 Charter series of funds, comprised of the Partnership, Morgan Stanley Smith Barney Charter WNT L.P., and Morgan Stanley Smith Barney Charter Campbell L.P. (collectively, the “Charter Series”).





- 7 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The Partnership’s general partner is Ceres Managed Futures LLC (“Ceres” or the “General Partner”).  The non-clearing commodity broker is Morgan Stanley Smith Barney LLC (“MSSB”).  The clearing commodity brokers are Morgan Stanley & Co. LLC (“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”).  Ceres is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”).  MSSBH is majority-owned indirectly by Morgan Stanley and minority-owned indirectly by Citigroup Inc.  MSSB is the principal subsidiary of MSSBH.  MS&Co. and MSIP are wholly-owned subsidiaries of Morgan Stanley.  Aspect Capital Limited (“Aspect”) (the “Trading Advisor”) is the trading advisor to the Partnership.












- 8 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)



2.  
Financial Highlights
Financial Highlights for the three months ended March 31, 2012 and 2011 were as follows:
                   For the Quarters Ended March 31,

 
2012
2011
         Per Unit operating performance:
   
         Net asset value, January 1:
$     20.94
$     20.71
     
                     Interest Income
–   (3)
0.01
                     Expenses
       (0.43)
       (0.41)
                     Realized/Unrealized Income (1 )
        0.45
        0.23 (4)
                     Net Income (Loss)
        0.02
       (0.17)
     
         Net asset value, March 31:
$     20.96
$     20.54
     
         Ratios to average net assets:
   
                     Net Investment Loss (2)
      (8.1)%
      (8.1)%
                     Expenses before  Incentive Fees (2)
       8.2 %
       8.2 %
                     Expenses after Incentive Fees (2)
       8.2 %
       8.2 %
                     Net Income (Loss)  (2)
       0.6%
      (3.5)%
         Total return before incentive fees
       0.1%
      (0.8)%
         Total return after incentive fees
       0.1%
      (0.8)%
     


  (1) Realized/Unrealized Income is a balancing amount necessary to reconcile the change in net asset value per Unit
       with the other per Unit information.
  (2) Annualized (except for incentive fees, if applicable).
 
 
  (3) Amounts less than $0.005 per Unit.


   (4)
These amounts have been reclassified from the prior year financial statements to conform to the current year
 
presentation.  Specifically, realized and unrealized income per Unit amounts were combined in the 2011 Financial Highlights presentation.




3.  Related Party Transactions
The Partnership’s cash is on deposit with MSSB, MS&Co., and MSIP in Futures Interests trading accounts to


- 9 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

meet margin requirements as needed.  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 the 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 such 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.  The Partnership pays a flat rate brokerage fee to MSSB which then pays or reimburses the Partnership for all fees and costs charged or incurred by MS&Co., MSIP or any other entity acting as a commodity broker for the Partnership.

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 a net unrealized gain or loss on open contracts.  The resulting net change in unrealized gains and losses is reflected in the “Net change in unrealized” trading profit (loss) on open contracts from one period to the next on the Statements of Income and Expenses.  The fair value of exchange-traded futures, options and forward contracts is

- 10 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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.  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.





- 11 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 described in Note 5,  Derivatives and Hedging as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or the “Codification”).  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 a 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, forwards, swaps or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars.

The net unrealized gains (losses) 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 (Losses) on Open Contracts
Longest Maturities
Date
Exchange-Traded
Off-Exchange-Traded
Total
Exchange-Traded
Off-Exchange-Traded
 
$
$
$
   
Mar. 31, 2012
1,365,482
(19,084)
1,346,398
Sep. 2014
Apr. 2012
Dec. 31, 2011
2,898,002
78,075
2,976,077
Jun. 2014
Jan. 2012

- 12 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

In general, the risks associated with off-exchange-traded contracts are greater than those associated with exchange-traded contracts because of the greater risk of default by the counterparty to an off-exchange-traded contract.  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 net unrealized gains (losses) on open contracts is further disclosed gross by type of contract and corresponding fair value level in Note 6, Fair Value Measurements and Disclosures.

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 fair valued on a daily basis, with variations in value settled on a daily basis. MS&Co. and MSIP, each acting as a commodity futures 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, total cash 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 (losses) on all open exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, which funds, in the aggregate, totaled $91,924,710 and $97,111,401 at March 31, 2012, and December 31, 2011, respectively.  With respect to the Partnership’s off-exchange-traded forward currency contracts, there are no daily settlements of variation in value, nor is there any

- 13 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 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.  The primary terms are based on industry standards master agreements.  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.

The General Partner monitors and attempts to control the Partnership’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership may be subject.  These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics.  In addition, online monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

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

- 14 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.

5.  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 quantities (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.





- 15 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The following tables summarize the valuation of the Partnership’s investments as of March 31, 2012 and December 31, 2011, respectively.

The Effect of Trading Activities on the Statements of Financial Condition as of March 31, 2012:
Futures and Forward Contracts
Long Unrealized
Gain
Long Unrealized
Loss
 Short Unrealized
Gain
  Short Unrealized
Loss
Net   Unrealized
Gain/(Loss)
Average number of contracts
outstanding for the three months   (absolute quantity)
 
$
$
$
$
$
 
             
Commodity
200,706
(781,588)
900,553
(111,289)
208,382
958
Equity
819,466
(293,609)
92,757
(534)
618,080
638
Foreign currency
327,764
(218,356)
84,846
(214,649)
(20,395)
927
Interest rate
     76,068
    (155,206)
      43,465 
  (219,762)
  (255,435)
 3,476
Total
  1,424,004
 (1,448,759)
1,121,621
  (546,234)
550,632
 
             
Unrealized currency gain
       
    795,766
 
Total net unrealized gain on open contracts
       
 
  1,346,398
 

The Effect of Trading Activities on the Statements of Financial Condition as of December 31, 2011:
Futures and Forward Contracts
Long
Unrealized
Gain
Long Unrealized
Loss
 Short
Unrealized
Gain
  Short Unrealized
Loss
  Net
 Unrealized
Gain
Average number of contracts
outstanding for the year (absolute quantity)
 
    $
$
$
$
$
 
             
Commodity
85,884
(342,624) 
976,621
(401,199)
318,682 
 673
Equity
59,202
(15,408) 
183,235
(23,702)
203,327 
 407
Foreign currency
59,707
(3,322) 
         175,112
(141,973)
89,524 
    974
Interest rate
    1,708,363
    (185,840) 
         –     
     (6,585)
  1,515,938 
3,152
Total
  1,913,156
     (547,194) 
1,334,968
  (573,459)
2,217,471 
 
             
Unrealized currency gain
       
    848,606 
 
Total net unrealized gain on open contracts
       
 
  2,976,077 
 





 - 16 -
 
 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


The following tables summarize the net trading results of the Partnership for the quarters ended March 31, 2012 and 2011, respectively.


The Effect of Trading Activities on the Statements of Income and Expenses for the Quarter Ended March 31, 2012 included in Total Trading Results:

Type of Instrument
                      $
   
Commodity
3,145,899
Equity
498,448
Foreign currency
(119,871)
Interest rate
(1,467,378)
Unrealized currency gain
     (52,839)
Total
   2,004,259

Line Items on the Statements of Income and Expenses for the Quarter Ended March 31, 2012:
Trading Results
                      $
   
Net realized
3,633,938
Net change in unrealized
                         (1,629,679)
Total Trading Results
     2,004,259

The Effect of Trading Activities on the Statements of Income and Expenses for the Quarter Ended March 31, 2011 included in Total Trading Results:
   
Type of Instrument
                      $
   
Commodity
3,751,272
Equity
                      (749,651)
Foreign currency
650,639
Interest rate
                      (2,460,439)
Unrealized currency loss
                             (8,648)
Total
    1,183,173

Line Items on the Statements of Income and Expenses for the Quarter Ended March 31, 2011:
Trading Results
                      $
   
Net realized
4,824,566
Net change in unrealized
   (3,641,393)
Total Trading Results
     1,183,173





- 17 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


6.  Fair Value Measurements and Disclosures
Effective January 1, 2012, the Partnership adopted ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.”  The amendments within this ASU change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between U.S. GAAP and IFRS.  However, some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  This new guidance did not have a significant impact on the Partnership’s financial statements.

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).



- 18 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT 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 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.


March 31, 2012
Unadjusted
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
 
Total
 
$
$
$
 
$
 Assets
         
 Futures
2,141,870
n/a
 
2,141,870
     Forwards
                    –     
         403,755
n/a
 
    403,755   
           
  Total Assets
  2,141,870
    403,755
n/a
 
             2,545,625
           
    Liabilities
         
Futures
1,572,154
n/a
 
  1,572,154
    Forwards
                    –     
          422,839
n/a
 
    422,839
           
  Total Liabilities
 1,572,154
    422,839
n/a
 
                 1,994,993
           
Unrealized currency gain
       
                     795,766
           
  *Net fair value
   569,716
      (19,084)
n/a
 
                   1,346,398
           







- 19 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


December 31, 2011
Unadjusted
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
 
Total
 
$
$
$
 
$
Assets
         
Futures
3,027,158
            –      
n/a
 
3,027,158
Forwards
              –      
        220,966                            
n/a
 
     220,966
           
  Total Assets
 3,027,158
        220,966
n/a
 
            3,248,124
           
  Liabilities
         
Futures
      977,762
            –      
n/a
 
       977,762
Forwards
             –      
       142,891      
n/a
 
            142,891
           
  Total Liabilities
    977,762
       142,891      
n/a
 
       1,120,653
           
Unrealized currency gain
       
          848,606
           
  *Net fair value
   2,049,396
         78,075
n/a
 
     2,976,077


* This amount comprises the “Total net unrealized gain on open contracts” on the Statements of Financial Condition.

During the period January 1, 2012 to March 31, 2012, there were no Level 3 assets and liabilities, and there were no transfers of assets or liabilities between Level 1 and Level 2.

7.  Other Pronouncements
In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, “Disclosures about Offsetting Assets and Liabilities”, which creates a new disclosure requirement about the nature of an entity’s rights of setoff and the related arrangements associated with its financial instruments and derivative instruments. Entities are required to disclose both gross information and net



- 20 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”) and those entities that prepare their financial statements on the basis of International Financial Reporting Standards (“IFRS”). The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership should also provide the disclosures retrospectively for all comparative periods presented.  The Partnership is currently evaluating the impact that the pronouncement would have on the financial statements. 

In October 2011, the FASB issued a proposed ASU intended to improve and converge financial reporting by setting forth consistent criteria for determining whether an entity is an investment company.  Under longstanding U.S. GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company.  The primary changes being proposed by the FASB relate to which entities would be considered investment companies as well as certain disclosure and presentation requirements.  In addition to the changes to the criteria for determining whether an entity is an investment company, the FASB also proposes that an investment




- 21 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

company be required to consolidate another investment company if it holds a controlling financial interest in the entity.  The Partnership will evaluate the impact that this proposed update would have on the financial statements once the pronouncement is issued.

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 contracts and offset unrealized 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.

9.  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. 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



- 22 -
 
 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

of a tax position taken or expected to be taken.  The Partnership has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements as of March 31, 2012 and December 31, 2011.  If applicable, the Partnership recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statements of Income and Expenses.  Generally, the 2008 through 2011 tax years remain subject to examination by U.S. federal and most state tax authorities.  No income tax returns are currently under examination.

10.  Subsequent Events
Management of Ceres performed its evaluation of subsequent events through the date of filing, and has determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements.










- 23 -
 
 
 

 
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS


As of March 31, 2012, the percentage of assets allocated to each market sector was approximately as follows: Interest Rate 11.69%; Currency 44.19%; Equity 13.45%; and Commodity 30.67%.

Liquidity.  The Partnership deposits its assets with MSSB as non-clearing commodity broker and MS&Co. and MSIP as clearing commodity brokers in separate futures, forward and options trading accounts established for the 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 fluctuation 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.


- 24 -
 
 
 

 
There is no limitation on daily price moves 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.

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.

As of March 31, 2012, approximately 56.22% of the Partnership’s total investments are futures contracts which are exchange-traded while approximately 43.78% are forward contracts which are off-exchange traded.

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.


- 25 -
 
 
 

 
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 Advisor and the ability of the Trading Advisor’s trading program to take advantage of price movements in the futures, forward and options markets.  The Trading Advisor trades the Partnership’s assets in accordance with its Diversified Program, a proprietary, systematic trading system.  The Diversified Program is a proprietary, systematic global futures trading program.  Its goal is the generation of significant long-term capital growth independent of stock and bond market returns.  This program continuously monitors price movements in a wide range of global financial, currency and commodity markets, searching for profit opportunities over periods ranging from a few hours to several months.

The Trading Advisor has designed the Diversified Program to have broad market diversification (subject to liquidity constraints).  Aspect’s quantitative resources are sufficient to enable it to design and implement a broadly diversified portfolio with a significant allocation to numerous different markets.

The Trading Advisor’s Diversified Program trades over 100 markets in the seven major sectors:  currencies, energy, metals, stock indices, bonds, agricultural commodities and interest rates implementing momentum strategies.  Aspect is constantly examining new liquid and uncorrelated markets to incorporate in the program with the aim of improving its reward/risk ratio and capacity.  Aspect has no market or sector preferences, believing that allowing for liquidity effects, equal

- 26 -
 
 
 

 
profitability can be achieved in the long-term in all markets.  The key factors in determining the asset allocation are correlation and liquidity.  Correlations are analyzed at the sector, sub-sector, economic block and market levels to design a portfolio which is highly diversified.

The following presents a summary of the Partnership’s operations for the quarters ended March 31, 2012 and 2011, and a general discussion of its trading activities during each period.  It is important to note, however, that the Trading Advisor trades 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 Advisor or will be profitable in the future.  Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisor’s 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 23 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 Income and Expenses as “Net change in unrealized” trading profit (loss) for open contracts, and recorded as “Net 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 approximately 3:00 P.M. (E.T.) the close of the


- 27 -
 
 
 

 
business day.  Interest income, as well as management fees, incentive fees, and brokerage fees of the Partnership are recorded on an accrual basis.

Ceres believes that, based on the nature of the operations of the Partnership, no assumptions relating to the application of critical accounting policies other than those presently used could reasonably affect reported amounts.

For the Quarter Ended March 31, 2012
The Partnership recorded total trading results including interest income totaling $2,013,593 and expenses totaling $1,873,529, resulting in net income of $140,064 for the quarter ended March 31, 2012.  The Partnership’s net asset value per Unit increased from $20.94 at December 31, 2011 to $20.96 at March 31, 2012.

During the first quarter, the Partnership posted a gain in net asset value per Unit as profits in energies and stock indices more than offset losses within the global interest rate, metals, agricultural, and currency markets.

The most significant gains were recorded within the energy markets during January and March from short positions in natural gas futures as prices dropped amid ample inventories and mild weather across the U.S. Additional gains were experienced during February from long futures positions in RBOB (unleaded) gasoline, Brent crude, and gas oil as prices increased on concerns over inventory levels and rising tensions in the Middle East. Within the global stock index sector, gains were achieved throughout the majority of the quarter from long positions in U.S. equity index futures as

- 28 -
 
 
 

 
prices were buoyed by better-than-expected economic reports and after the U.S. Federal Reserve Board raised its assessment of the U.S. economy.

A portion of the Partnership’s gains for the quarter was offset by losses incurred within the global interest rate sector during March from long positions in U.S., Japanese, and European fixed-income futures as prices fell after the U.S. Federal Reserve upwardly revised their U.S. economic outlook and China cut banks’ reserve requirements to fuel lending. Within the metals markets, losses were recorded primarily in January from short positions in zinc and aluminum futures as prices advanced on speculation metals demand will be supported by economic expansion in the U.S. and an easing credit policy in China. Smaller losses were experienced in this sector during February and March. Losses were incurred within the agricultural complex during January from short positions in wheat futures as prices advanced amid an increase in U.S. exports. Additional losses were experienced within the currency markets during February from long positions in the Japanese yen versus the U.S. dollar as the value of the Japanese yen declined amid an investor shift into riskier currency assets as the potential of a Greek bailout looked promising. During January, short positions in the euro and British pound versus the U.S. dollar resulted in losses as the value of these currencies reversed higher against the U.S. dollar.

For the Quarter Ended March 31, 2011
The Partnership recorded total trading results including interest income totaling $1,209,368 and expenses totaling $2,113,869, resulting in a net loss of $904,501 for the quarter ended March 31, 2011.  The Partnership’s net asset value per Unit decreased from $20.71 at December 31, 2010 to $20.54 at March 31, 2011.

- 29 -
 
 
 

 
The most significant trading losses were incurred within the global interest rate sector, primarily during January, from long positions in European fixed-income futures as prices declined after European Central Bank President Jean-Claude Trichet said inflationary pressures in the euro region may increase. Additional losses were recorded in February due to short positions in U.S. and European fixed-income futures as prices increased amid a “flight-to-safety” spurred by geopolitical concerns in the Middle East and North Africa. Within the global stock index markets, losses were experienced primarily during March from long positions in Japanese equity index futures as prices moved sharply lower following the worst earthquake and tsunami in Japanese history. Losses were incurred within the metals complex, primarily during January, due to long futures positions in silver and gold as prices fell amid a strengthening U.S. dollar, which reduced the “safe haven” appeal of precious metals.


A portion of the Partnership’s losses for the quarter was offset by gains achieved within the energy markets from long futures positions in crude oil and its related products as prices rose after political tension in Egypt stoked worries that protests may spread to crude-producing parts of the Middle East. Further gains were recorded after futures prices of crude oil and its related products continued to increase as geopolitical tensions extended to Libya. Within the currency markets, gains were experienced primarily during February from long positions in the euro, Canadian dollar, and Mexican peso versus the U.S. dollar as the value of these currencies rose against the U.S. dollar following a report that revealed U.S. manufacturing rose at the fastest pace in almost seven years, spurring demand for riskier assets. Gains were achieved within the agricultural complex, primarily during January, due to long futures positions in cotton as prices increased on signs that global output


- 30 -
 
 
 

 
may fail to keep pace with rising demand in China, the world’s biggest buyer of the fiber. In February, additional gains were achieved within the agricultural sector from long positions in coffee futures as prices increased amid reports that stockpiles held by exporting nations such as Colombia remain near a 40-year low.

 
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.

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 termination of the contract. Gains and losses on off-exchange-traded forward currency options contracts are settled upon an agreed upon settlement date.  However, the Partnership is required to meet margin requirements equal

- 31 -
 
 
 

 
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.

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 as discussed 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.


- 32 -
 
 
 

 
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 fair value 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 Advisor is estimated below in terms of VaR.  Please note that the VaR model is used to numerically quantify market risk or historic reporting purposes only and is not utilized by either Ceres or the Trading Advisor in their daily risk management activities.

VaR is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector.  However, the inherent uncertainty of the Partnership’s speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated VaR or the Partnership’s experience to date (i.e., “risk of ruin”).  In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should

- 33 -
 
 
 

 
not be considered to constitute any assurance or representation that the Partnership’s losses in any market sector will be limited to VaR or by the Partnership’s attempts to manage its market risk.

Exchange maintenance margin requirements have been used by the Partnership as the measure of its VaR.  Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95% - 99% of any one-day interval.  Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to VaR.

The Partnership’s Value at Risk in Different Market Sectors
The following tables indicate the trading VaR associated with the Partnership’s open positions by market category as of March 31, 2012 and the highest, lowest and average values during the three
months ended March 31, 2012.  All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below.  As of March 31, 2012, the Partnership’s total capitalization was approximately $90 million.

Primary Market
 
% of Total
Risk Category
VaR
Capitalization
     
Currency
$6,291,323
7.03%
     
Interest Rate
1,666,879
1.86%
     
Equity
1,912,727
2.14%
     
Commodity
4,366,102
4.88%
     
Total
$14,237,031
15.91%





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                                Three Months Ended March 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$6,467,879
$1,680,453
$4,789,433
Interest Rate
$5,355,824
$1,480,023
$3,827,700
Equity
$2,448,416
$1,292,115
$1,929,237
Commodity
$4,366,102
$3,252,889
$3,780,401
Total
     
* Average of month-end VaR

The following tables indicate the trading VaR associated with the Partnership’s open positions by market category as of December 31, 2011 and the highest, lowest and average values during the twelve months ended December 31, 2011.  All open position trading risk exposure of the Partnership have been included in calculating the figures set forth below.  As of December 31, 2011, the Partnership’s total capitalization was approximately $94 million.

Primary Market
 
% of
Risk Category
VaR
Total Capitalization
     
Currency
$1,562,741
1.67%
     
Interest Rate
4,400,840
4.69%
     
Equity
1,341,297
1.43%
     
Commodity
3,260,381
3.48%
     
Total
$10,565,259
11.27%




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                            Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$3,649,575
$672,098
$1,445,024
Interest Rate
$5,505,309
$689,590
$2,731,414
Equity
$1,582,774
$201,774
$842,983
Commodity
$3,260,381
$657,901
$1,977,851
*Average of month-end VaR.
     

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.


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Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash balances not needed for margin.  These balances and any market risk they may represent are immaterial.

The Partnership also maintains a substantial portion of its available assets in unrestricted cash at MSSB; as of March 31, 2012, such amount was equal to approximately 91% 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.

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 Ceres and the Trading Advisor 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

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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.  Investors must be prepared to lose all or substantially all of their investment in the Partnership.

Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisor, separately, attempt to manage the risk of the Partnership’s open positions in essentially the same manner in all market categories traded. Ceres attempts to manage market exposure by diversifying the Partnership’s assets among different market sectors through the selection of a commodity trading advisor and by daily monitoring of its performance.  In addition, the Trading Advisor establishes diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument.

Ceres monitors and controls the risk of the Partnership’s non-trading instrument, cash. Cash is the only Partnership investment directed by Ceres, rather than the Trading Advisor.



Item 4.   CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of Ceres, at the time this quarterly report was filed, Ceres’ President (Ceres’ principal executive officer) and Chief Financial Officer

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(Ceres’ principal financial officer) have evaluated the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2012.  The Partnership’s disclosure controls and procedures are designed to provide reasonable assurance that information the Partnership is required to disclose in the reports that the Partnership files or submits under the Exchange Act are recorded, processed and summarized and reported within the time period specified in the applicable rules and forms.  Based on this evaluation, the President and Chief Financial Officer of Ceres have concluded that the disclosure controls and procedures of the Partnership were effective at March 31, 2012.

Changes in Internal Control over Financial Reporting
There have been no 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 materially affect the Partnership’s internal control over financial reporting.



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.




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PART II.  OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS
There were no additional information to supplement or amend the discussion set forth under Part I, Item 3, “Legal Proceedings” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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, 2011.

Item 4.  MINE SAFETY DISCLOSURES
Not applicable.


Item 6.
EXHIBITS

31.01
Certification of President of Ceres Managed Futures 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 Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.01
Certification of President of Ceres Managed Futures 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 Ceres Managed Futures 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.
 
101.INS*
XBRL Instance Document
 
101.SCH*
XBRL Taxonomy Extension Schema Document
 
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
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101.LAB*
XBRL Taxonomy Extension Label Document
 
101.PRE*
XBRL Taxonomy Extension Presentation Document
 
101.DEF*
XBRL Taxonomy Extension Definition Document
 

 
 
Notes to Exhibits List
 
 
*Submitted electronically herewith.
 
 
Pursuant to applicable securities laws and regulations, the Partnership is deemed to have complied with the reporting obligation relating to the submission of interactive data files in Exhibit 101 to this report and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Partnership has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
 
 
 
 





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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 Charter Aspect L.P.
 
(Registrant)
     
 
By:
Ceres Managed Futures LLC
   
(General Partner)
     
May 11, 2012
By:
/s/Brian Centner
   
Brian Centner
   
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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