Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPFinancial_Report.xls
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR3.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR6.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR7.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR2.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR8.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR9.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR4.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR1.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR14.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR13.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR19.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR21.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR11.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR17.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR15.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR16.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR18.htm
EX-32.02 - EXHIBIT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPdwssex3202.htm
EX-31.02 - EXHIBIT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPdwssex3102.htm
EX-31.01 - EXHIBIT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPdwssex3101.htm
EX-32.01 - EXHIBIT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPdwssex3201.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR5.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR10.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR20.htm
XML - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LPR12.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 0-26280

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

 
Delaware
 
13-3782225
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
       
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
 
(855) 672-4468


(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 SPECTRUM STRATEGIC L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2012


 
PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited)
 
     
 
Statements of Financial Condition as of September 30, 2012 and December 31, 2011
2
     
 
Condensed Schedules of Investments as of September 30, 2012 and December 31, 2011
3
     
 
Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2012 and 2011
4
     
 
Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2012 and 2011
5
     
 
Notes to Financial Statements
  6-19
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20-29
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
30-37
     
Item 4.
Controls and Procedures
37-38
     
 
PART II. OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
39-42
     
Item 1A.
Risk Factors
42-43
     
Item 4.
Mine Safety Disclosures
43
     
Item 5.
Other Information nformation
43-44
     
Item 6.
Exhibits
44-45



 
 

 

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

 
September 30,
 
December 31,
 
2012
 
2011
ASSETS
$
 
$
       
Investments:
     
Investment in BHM I, LLC (cost $25,876,270 and $55,017,097, respectively)
73,169,936
 
101,259,072
Investment in MB Master Fund (cost $8,264,021 and $8,952,411, respectively)
8,718,174
 
8,832,023
Investment in PGR Master Fund (cost $6,128,267 and $8,952,411 respectively)
5,457,378
 
9,193,011
       
Total Investments
87,345,488
 
119,284,106
       
Interest receivable (MS&Co. & MSSB)
4,923
 
328
       
Total Assets
87,350,411
 
119,284,434
       
LIABILITIES AND PARTNERS’ CAPITAL
     
       
Liabilities:
     
       
Redemptions payable
2,230,810
 
1,603,104
Accrued brokerage fees (MS&Co.)
436,364
 
596,827
Accrued management fees
197,858
 
272,302
Accrued incentive fee
 
37,676
       
Total Liabilities
2,865,032
 
2,509,909
       
Partners’ Capital:
     
       
Limited Partners (5,552,305.329 and 7,211,352.161 Units, respectively)
83,509,242
 
115,518,403
General Partner (64,900.692 and 78,414.692 Units, respectively)
976,137
 
1,256,122
       
Total Partners’ Capital
84,485,379
 
116,774,525
       
Total Liabilities and Partners’ Capital
87,350,411
 
119,284,434
       
NET ASSET VALUE PER UNIT
15.04
 
16.02










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

- 2 -

 
 

 

MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
CONDENSED SCHEDULES OF INVESTMENTS
September 30, 2012 (Unaudited) and December 31, 2011



As of September 30, 2012 and December 31, 2011 the Partnership held no futures or forward contracts; therefore, there were no net unrealized gains or losses on futures or forward contracts.














































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

- 3 -

 
 

 

MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF INCOME AND EXPENSES
(Unaudited)
       
 
For the Three Months
Ended September  30,
 
For the Nine Months
 Ended September 30,
               
 
2012
 
2011
 
2012
 
2011
 
$
 
$
 
$
 
$
INVESTMENT INCOME
             
Interest income (MS&Co. & MSSB)
15,764
 
5,094
 
41,076
 
52,229
               
EXPENSES
             
Brokerage fees (MS&Co.)
1,331,064
 
2,223,265
 
4,625,300
 
7,382,471
Management fees
603,735
 
964,521
 
2,104,315
 
3,276,583
Incentive fee
 
 
 
1,200,403
               
Total Expenses
1,934,799
 
3,187,786
 
6,729,615
 
11,859,457
               
NET INVESTMENT LOSS
(1,919,035)
 
(3,182,692)
 
(6,688,539)
 
(11,807,228)
               
TRADING RESULTS
             
Trading profit (loss):
             
Net realized
 
7,703,480
 
 
4,725,285
Net change in unrealized
 
661,962
 
 
(8,427,101)
Realized gain (loss) on investment in
   BHM I, LLC
381,306
 
143,263
 
(257,232)
 
(795,324)
Realized gain on investment in MB Master Fund
2,077
 
 
6,533
 
Realized loss on investment in PGR Master Fund
(2,995)
 
 
(23,902)
 
Unrealized appreciation (depreciation) on investment in BHM I, LLC
3,005,657
 
(15,971,159)
 
1,051,691
 
(17,842,132)
Unrealized appreciation on investment in MB Master Fund
332,886
 
 
574,541
 
Unrealized appreciation (depreciation) on investment in PGR Master Fund
103,092
 
 
(911,489)
 
               
Total Trading Results
3,822,023
 
(7,462,454)
 
440,142
 
(22,339,272)
               
NET INCOME (LOSS)
1,902,988
 
(10,645,146)
 
(6,248,397)
 
(34,146,500)
               
NET INCOME (LOSS) ALLOCATION
             
Limited Partners
1,881,505
 
(10,534,748)
 
(6,168,419)
 
(33,773,712)
General Partner
21,483
 
(110,398)
 
(79,978)
 
(372,788)
               
NET INCOME (LOSS) PER UNIT *
             
Limited Partners
0.31
 
(1.41)
 
(0.98)
 
(4.35)
General Partner
0.31
 
(1.41)
 
(0.98)
 
(4.35)
               
 
Units
 
Units
 
Units
 
Units
WEIGHTED AVERAGE NUMBER
             
OF UNITS OUTSTANDING
5,964,788.262
 
7,724,877.060
 
6,547,764.774
 
8,003,371.615
               
* Based on change in net asset value per Unit.

The accompanying notes are an integral part of these financial statements.
- 4 -

 
 

 

MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
For the Nine Months Ended September 30, 2012 and 2011
(Unaudited)



 
Units of   
           
 
Partnership  
   
Limited   
 
General  
   
 
Interest  
 
Partners 
 
Partner  
 
Total   
     
$     
 
$    
 
$      
               
Partners’ Capital,
             
December 31, 2011
7,289,766.853
 
115,518,403
 
1,256,122
 
116,774,525
               
Net Loss
 
(6,168,419)
 
(79,978)
 
(6,248,397)
               
Redemptions
(1,672,560.832)
 
(25,840,742)
 
(200,007)
 
(26,040,749)
               
Partners’ Capital,
             
September 30, 2012
5,617,206.021
 
83,509,242
 
976,137
 
84,485,379
               
               
               
               
               
Partners’ Capital,
             
December 31, 2010
8,352,365.929
 
177,594,148
 
1,916,408
 
179,510,556
               
Net Loss
 
(33,773,712)
 
(372,788)
 
(34,146,500)
               
Redemptions
(756,969.732)
 
(14,967,524)
 
(199,468)
 
(15,166,992)
               
Partners’ Capital,
             
September 30, 2011
7,595,396.197
 
128,852,912
 
1,344,152
 
130,197,064
               


















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

- 5 -

 
 

 

MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS

September 30, 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 Spectrum Strategic L.P. (the “Partnership”).  The financial statements and condensed notes herein should be read in conjunction with the Partnership’s Annual Report on Form 10-K for the fiscal year ending December 31, 2011 (the “Form 10-K”).

1.  Organization
Morgan Stanley Smith Barney Spectrum Strategic L.P. is a Delaware limited partnership organized in 1994 to engage primarily in the speculative trading of futures contracts, options on futures and forward contracts, and forward contracts on physical commodities and other commodity interests, including, but not limited to, foreign currencies, financial instruments, metals, energy, and agricultural products (collectively, “Futures Interests”) (refer to Note 4, Financial Instruments).  The Partnership is one of the Morgan Stanley Spectrum series of funds, comprised of the Partnership, Morgan Stanley Smith Barney Spectrum Currency and Commodity L.P., Morgan Stanley Smith Barney Spectrum Global Balanced L.P., Morgan Stanley Smith Barney Spectrum Select L.P., and Morgan Stanley Smith Barney Spectrum Technical L.P. (collectively, the “Spectrum Series”).

Ceres Managed Futures LLC, a Delaware limited liability company, acts as a general partner (“Ceres” or the “General Partner”) and commodity pool operator of the Partnership.  Ceres is a wholly-owned

- 6 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”).  MSSBH is majority-owned indirectly by Morgan Stanley and minority-owned indirectly by Citigroup Inc.  As of September 26, 2012, Morgan Stanley Smith Barney LLC (“MSSB”) is doing business as Morgan Stanley Wealth Management.  This entity, where the Partnership continues to maintain a cash account previously acted as a non-clearing commodity broker for the Partnership.  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. Morgan Stanley Capital Group Inc. (“MSCG”) acts as the counterparty on all trading of options on foreign currency forward contracts. MSIP serves as the commodity broker for trades on the London Metal Exchange (“LME”).   Morgan Stanley Wealth Management is a principal subsidiary of MSSBH.  MS&Co., MSIP, and MSCG are wholly-owned subsidiaries of Morgan Stanley. The trading advisors to the Partnership are Blenheim Capital Management, L.L.C. (“Blenheim”), Aventis Asset Management, LLC (“Aventis”) and PGR Capital L.P. (“PGR”) (each individually, a “Trading Advisor”, or collectively, the “Trading Advisors”).

Blenheim, Aventis and PGR manage the assets of the Partnership through its investment in Morgan Stanley Smith Barney BHM I, LLC (“BHM I, LLC”), MB Master Fund L.P. (“MB Master Fund”) and PGR Master Fund L.P. (“PGR Master Fund”), respectively (collectively, “the Funds”).  Ceres is a trading manager to BHM I, LLC and the general partner to MB Master Fund and PGR Master Fund.



- 7 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)



The current term of the Management Agreement with Blenheim will expire on November 30, 2012 and will renew annually unless terminated by the General Partner or the Trading Advisor.  The current term of the Management Agreement with PGR will expire on June 30, 2013 and will renew annually unless terminated by the General Partner or the Trading Advisor.  The current term of the Management Agreement with Aventis will expire on September 30, 2013 and will renew annually unless terminated by the General Partner or the Trading Advisor.  In general, each Management Agreement may be terminated upon notice by either party.


2.  
Financial Highlights
Financial Highlights for the three and nine months ended September 30, 2012 and 2011 were as follows:

    For the Three Months                                                       For the Nine Months                                        
   Ended September 30,                                                         Ended September 30,                                       

 
2012
2011
2012
2011
         Per Unit operating performance:
       
         Net asset value at the beginning of the period:
$    14.73
$    18.55
$    16.02
$    21.49
         
                     Interest Income
–   (3)   
–   (3)   
0.01
0.01
                     Expenses
 (0.33)
 (0.41)
 (1.04)
(1.49)
                     Realized/Unrealized Income (Loss) (1)
         0.64
      (1.00)
         0.05
     (2.87)
                     Net Income (Loss)
         0.31
      (1.41)
      (0.98)
     (4.35)
         
         Net asset value, September 30:
$    15.04
$    17.14
$    15.04
$    17.14
         
         Ratios to average net assets:
       
                     Net Investment Loss  (2)
(8.8)%
(8.8)%
(9.0)%
(9.7)%
                     Expenses before Incentive Fees (2)
8.9%
8.8%
9.1%
9.0 %
                     Expenses after Incentive Fees (2)
8.9%
8.8%
9.1%
9.7 %
                     Net Income (Loss)  (2)
8.8%
   (29.5)%
(8.4)%
(28.5)%
         Total return before incentive fees
2.1%
(7.6)%
(6.1)%
(19.5)%
         Total return after incentive fees
2.1%
(7.6)%
(6.1)%
(20.2)%

(1)
 
Realized/Unrealized Income (Loss) 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.
- 8 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.  Related Party Transactions
The Partnership’s cash is on deposit with MS&Co. in Futures Interests trading accounts to meet margin requirements as needed.  Monthly MS&Co. pays the Partnership interest income on 100% of the average daily equity maintained in cash in the Partnership’s account during each month at a rate equal to 80% of the monthly average of the 4-week U.S. Treasury bill discount rate.  For purposes of such interest payments, daily funds do not include monies due to the Partnership on or with respect to futures, forwards, or options contracts that have not been received.  MS&Co. will retain any interest earned in excess of the interest paid to the Partnership.  The Partnership pays brokerage fees to MS&Co.


4.  Financial Instruments
The Partnership trades Futures Interests.  Subsequent to December 1, 2011, the Partnership trades futures and forwards through its investment in the Funds.  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 Partnership’s 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 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.
- 9 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 Partnership may invest in affiliated underlying funds.  Relevant authoritative guidance permits, as a practical expedient, the Partnership to measure the fair value of its investment in affiliated underlying funds on the basis of the net asset value per share of such investments (or the equivalent) if the net asset value per share of such investments (or the equivalent) is calculated in a manner consistent with the measurement principles of applicable authoritative guidance as of the Partnership’s reporting date.  The fair value of each affiliated underlying fund is based on the information provided by the affiliated underlying fund which reflects the Partnership’s share of the fair value of the net assets of the affiliated underlying fund (i.e., the practical expedient is used).



- 10 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 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”). 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.

- 11 -
 
 
 

 

MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC 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 on termination of the contract.  Gains and losses on off-exchange-traded forward currency options contracts are settled upon an agreed-upon settlement date.

5.  Derivatives and Hedging
As of September 30, 2012 and December 31, 2011, the Partnership held no futures and forward contracts; therefore, there were no net unrealized gains or losses on futures or forward contracts.


The following tables summarize the net trading results of the Partnership for the three and nine months ended September 30, 2012 and 2011, respectively.





- 12 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)



The Effect of Trading Activities on the Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2012 included in Total Trading Results:

 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2012
 
Ended September 30, 2012
Type of Instrument
$
 
$
       
Commodity
3,199,294
 
1,224,151
Equity
(643,446)
 
(3,049,528)
Foreign currency
 61,437
 
         (76,225)
Interest rate
      1,204,738
 
       2,341,744
Total
      3,822,023
 
          440,142


Line Items on the Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2012:
 
 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2012
 
Ended September 30, 2012
Trading Results
$
 
$
       
Realized gain (loss) on investment in BHM I, LLC
 
381,306
 
 
(257,232)
Realized gain on investment in MB Master Fund
2,077
 
6,533
Realized loss on investment in PGR Master Fund
(2,995)
 
(23,902)
Unrealized appreciation on investment in BHM I, LLC
 
3,005,657
 
 
1,051,691
Unrealized appreciation on investment in MB Master Fund
 
332,886
 
 
574,541
Unrealized appreciation (depreciation) on investment in PGR Master Fund
 
    103,092
 
 
   (911,489)
Total Trading Results
   3,822,023
 
     440,142


The Effect of Trading Activities on the Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2011 included in Total Trading Results:

 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2011
 
Ended September 30, 2011
Type of Instrument
$
 
$
       
Commodity
(13,452,016)
 
(17,982,367)
Equity
(1,739,443)
 
(2,063,393)
Foreign currency
(4,064,224)
 
(11,168,824)
Interest rate
 11,953,230
 
         8,963,066
Unrealized currency loss
      (160,001)
 
       (87,754)
Total
   (7,462,454)
 
  (22,339,272)






- 13 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Line Items on the Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2011:
 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2011
 
Ended September 30, 2011
Trading Results
$
 
$
       
Net realized
7,703,480
 
4,725,285
Net change in unrealized
661,962
 
(8,427,101)
Realized gain (loss) on investment in
BHM I, LLC
 
143,263
 
 
(795,324)
Unrealized depreciation on investment in
   BHM I, LLC
 
 (15,971,159)
 
 
 (17,842,132)
Total Trading Results
   (7,462,454)
 
 (22,339,272)




6.  Fair Value Measurements and Disclosures
Effective January 1, 2012, the Partnership adopted Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in the accounting principles generally accepted in the United States of America (“U.S. GAAP”)and International Financial Reporting Standards (“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.



- 14 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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.

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.

 
 
 
 
 
September 30, 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
       
Investment in BHM I, LLC
              –        
73,169,936
n/a
73,169,936
Investment in MB Master Fund
              –        
8,718,174
n/a
8,718,174
Investment in PGR Master Fund
              –        
   5,457,378
n/a
   5,457,378
Total Assets
              –        
 87,345,488
n/a
 87,345,488


- 15 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC 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
       
Investment in BHM I, LLC
              –         
101,259,072
n/a
101,259,072
Investment in PGR Master Fund
              –         
9,193,011
n/a
9,193,011
Investment in MB Master Fund
              –          
    8,832,023
n/a
   8,832,023
Total Assets
              –          
119,284,106
n/a
119,284,106



During the period January 1, 2012 to September 30, 2012, there were no Level 3 assets and liabilities and there were no transfers of assets or liabilities between Level 1 and Level 2.

Investment in BHM I, LLC, MB Master Fund and PGR Master Fund
The Partnership’s investment represents approximately 86.6% and 86.7% for BHM I, LLC, 10.3% and 7.6% for MB Master Fund, and 6.5% and 7.9% for PGR Master Fund respectively, of the net asset value of the Partnership at September 30, 2012 and December 31, 2011, respectively.

The tables below represent summarized Income Statement information for BHM I, LLC for the three and nine months ended September 30, 2012 and 2011, respectively, and MB Master Fund and PGR Master Fund for the three and nine months ended September 30, 2012, respectively in accordance with Rule 3-09 of Regulation S-X as follows:
 
For the Three Months
Ended September 30, 2012
 
 
 Investment
Income
Net
  Investment Loss
 
Total Trading Results
 
 Net
Income
 
 
$
$
$
$
  BHM I, LLC
(1,923,755)
19,756,649
17,832,894
MB Master Fund
7,610
(176,891)
1,766,012
1,589,121
PGR Master Fund
6,635
(28,037)
615,526
587,489



- 16 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


For the Nine Months
Ended September 30, 2012
 
 
 Investment
Income/(Loss)
Net
  Investment Loss
 
Total Trading Results
 
 Net
Income/(Loss)
 
 
$
$
$
$
BHM I, LLC
(48,368)
(6,242,475)
2,057,898
(4,184,577)
MB Master Fund
16,412
(485,321)
2,849,616
2,364,295
PGR Master Fund
17,953
(97,360)
 (6,275,503)
(6,372,863)

For the Three Months
Ended September 30, 2011
 
 
 Investment
Loss
Net
  Investment Loss
 
Total Trading Results
 
 Net
Loss
 
 
$
$
$
$
 BHM I, LLC
(19,396)
(2,147,827)
(59,690,597)
(61,838,424)

For the Nine Months
Ended September 30, 2011
 
 
 Investment
Loss
Net
  Investment Loss
 
Total Trading Results
 
 Net
Loss
 
 
$
$
$
$
 BHM I, LLC
(27,873)
(5,078,434)
(84,720,205)
(89,798,639)

7.  Other Pronouncements
In December 2011, the FASB issued 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 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 U.S.




- 17 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


GAAP and those entities that prepare their financial statements on the basis of 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 company be required to consolidate another investment company if it holds a controlling financial interest in the entity.  In August 2012, the FASB updated the proposed ASU to state that entities regulated under the Investment Company Act of 1940 should qualify to be investment companies within the proposed investment company guidance.  The Partnership will evaluate the impact that this proposed update would have on the financial statements once the pronouncement is issued.





- 18 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)


8.  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 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 September 30, 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 2009 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.

9.  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 adjustments of or disclosure in the financial statements.

- 19 -
 
 
 

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


As of September 30, 2012, the percentage of assets allocated to each market sector was approximately as follows: Interest Rate 16.08%, Currency 21.49%; Equity 3.67%; and Commodity 58.76%.
 
 
Liquidity.  The Partnership deposits its assets with MS&Co. and MSIP as clearing commodity brokers in separate futures, forward and options trading accounts established for each Trading Advisor.  Such assets are used as margin to engage in trading and may be used as margin solely for the Partnership’s trading. The assets are held in either non-interest bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds.  Since the Partnership’s sole purpose is to trade in futures, forwards and options, it is expected that the Partnership will continue to own such liquid assets for margin purposes.

The Partnership’s investment in futures, forwards and options may, from time to time, be illiquid.  Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as “daily price 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.


- 20 -
 
 
 

 
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 September 30, 2012, approximately 79.43% of the Partnership’s total investments through investments in underlying funds are futures contracts which are exchange-traded while approximately    20.57% 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.

- 21 -
 
 
 

 
Off-Balance Sheet Arrangements and Contractual Obligations.  The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to
 make future payments that would affect its liquidity or capital resources.

Results of Operations
General.  The Partnership’s results depend on the Trading Advisors and the ability of each Trading Advisor’s trading program to take advantage of price movements in the futures, forward and options markets.  Blenheim trades its Global Markets Strategy—Futures/FX on behalf of the Partnership.  The objective of the Global Markets Strategy is to capture substantial profits through the establishment of risk-controlled, strategic investment positions in markets where Blenheim has identified an unsustainable level of market disequilibrium that has not been reflected in the current market price. The essence of Blenheim’s trading approach is its ability to use discretion in formulating the most effective mix of trading methodologies, investment vehicles, and markets to maintain performance objectives. As trading opportunities are identified, Blenheim analyzes potential trading applications in order to achieve maximum capital appreciation with prudent risk management procedures.

Aventis trades its Aventis Barbarian Program on behalf of the Partnership.  The Aventis Barbarian Program is based on an ensemble of three discretionary subprograms: spreads, flat price directional, and options trading.  This type of trading is based primarily on the fundamentals of the market (i.e., changes in supply or demand of a commodity).  It will also include supply and demand of the pit, (i.e., discovery of over bought and over sold conditions).


- 22 -
 
 
 

 
PGR trades its PGR Mayfair Program on behalf of the Partnership.  PGR’s futures investment program seeks to profit over the medium term by exploiting inefficiencies in futures and forward markets across a broad range of asset classes and geographic regions. Proprietary models developed by the founding partners are implemented in an in-house trading system which systematically processes real-time data and executes trades automatically on electronic future exchanges and foreign exchange trading platforms.

The following chart sets forth the percentage and the amount of the Partnership’s net assets allocated to each Trading Advisor for the period ending September 30, 2012, and June 30, 2012, respectively, and the change during the applicable period.
Trading Advisor
Allocations as of
 September 30,
     2012 (%)
Allocations as of June 30,
2012 (%)
Allocations as of
September 30,
 2012($)
  Allocations as of June 30,
2012 ($)
Change during the
 period (%)
           
Blenheim
83.32
83.84
70,396,472
76,600,782
(8.10)
Aventis
10.26
  9.29
  8,664,363
  8,489,381
2.06
PGR
  6.42
  6.87
  5,424,544
   6,277,362
(13.59)

The following presents a summary of the Partnership’s operations for the three and nine months ended September 30, 2012 and 2011, and a general discussion of its trading activities during each period.  It is important to note, however, that the Trading Advisors trade in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Advisors or will be profitable in the future.  Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisors’ trading activities on behalf of the Partnership during the period in question.  Past performance is no guarantee of future results.


- 23 -
 
 
 

 
The Partnership’s results of operations set forth in the financial statements on pages 2 through 19 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 Funds trade are accounted for on a trade-date basis and marked to market on a daily basis.  The difference between their original contract value and fair value is recorded on the Statements of Income and Expenses as “Net change in unrealized gain (loss)” for open contracts, and recorded as “Net realized trading gain (loss)” when open positions are closed out.  The sum of these amounts constitutes the Funds’ 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 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 Three and Nine Months Ended September 30, 2012
The Partnership recorded total trading results including interest income totaling $3,837,787 and expenses totaling $1,934,799, resulting in net income of $1,902,988 for the three months ended September 30, 2012.
The Partnership’s net asset value per Unit increased from $14.73 at June 30, 2012, to $15.04 at September 30, 2012.

- 24 -
 
 
 

 
The most significant trading gains were achieved within the metals sector, primarily during August and September. During August, gains were achieved from long positions in palladium and platinum futures as prices rose amid concern continued labor-related violence at mines in South Africa will curb supplies. Additional gains were recorded from long positions in tin futures. During September, gains were achieved from long futures positions in platinum and palladium as prices advanced on concern that the continued violence at South African mines would possibly reduce supplies. Within the agricultural sector, gains were achieved primarily during July and August from long positions in soybean and corn futures as prices rose as a heat wave and drought in the U.S. Midwest threatened to limit output. A portion of the Partnership’s gains for the quarter was offset by losses incurred in the energy sector, throughout the quarter, from short positions in crude oil and its related products as prices advanced on rising concern that instability in the Middle East will disrupt supplies from a region responsible for about one-third of world production. Additional losses were incurred from short positions in natural gas futures as prices climbed higher on forecasts of hotter-than-normal weather that may erode a natural gas stockpile surplus. Within the currency sector, losses were incurred primarily during August and September. During August, losses were incurred from short positions in the euro versus the U.S. dollar as the value of the euro advanced against the U.S. dollar after German Chancellor Angela Merkel reiterated her commitment to working with the European Central Bank to resolve the euro-zone’s financial turmoil. During September, losses were incurred from long positions in the Australian dollar versus the U.S. dollar as the value of the Australian dollar moved lower against the U.S. dollar after a report signaled that Chinese manufacturing will contract, dimming prospects for Australia’s exports. Within the global interest rate sector, losses were incurred primarily during August from short positions in U.S. fixed-income futures as prices rose late in the month on concern European leaders were making minimal progress in resolving the region’s debt crisis.
- 25 -
 
 
 

 
The Partnership recorded total trading results including interest income totaling $481,218 and expenses totaling $6,729,615, resulting in a net loss of $6,248,397 for the nine months ended September 30, 2012.
The Partnership’s net asset value per Unit decreased from $16.02 at December 31, 2011, to $15.04 at September 30, 2012.

The most significant trading losses were incurred within the global interest rate markets, primarily during April, from short positions in U.S. fixed-income futures as prices advanced as Standard & Poor’s cut Spain’s credit rating, adding to concern central banks and politicians are failing to contain the European debt crisis. Within the currency markets, losses were incurred primarily during March and June. During March, losses were incurred from long positions in the Brazilian real versus the U.S. dollar as concern over earnings in China reduced demand for higher-yielding currency assets. During June, losses were incurred from short positions in the euro as the value of the euro rose against the U.S. dollar after European Union leaders eased terms on Spanish bank loans and moved towards resolving the region’s debt crisis. Within the global stock index markets, losses were incurred primarily during May from long positions in U.S. and Pacific Rim equity index futures as prices declined amid an unexpected rise in the U.S. unemployment rate and weakening economic data from China and Europe. Within the energy sector, losses were incurred primarily in February from short futures positions in crude oil and its related products as prices increased after Iran denied nuclear inspectors access to a military base, adding to concern that global oil supplies may be disrupted. A portion of the Partnership’s losses for the first nine months of the year was offset by gains achieved within the agricultural sector, primarily during July and August, from long positions in soybean and corn futures as prices rose as a heat wave and drought in the U.S. Midwest threatened to limit output. Within the metals sector, gains were achieved primarily during

- 26 -
 
 
 

 
January from long positions in aluminum, tin, and platinum as prices advanced on speculation metals demand will be supported by economic expansion in the U.S. and an easing credit policy in China.
Additional gains in this sector were achieved during August and September. During August and September, gains were achieved from long positions in palladium and platinum futures as prices rose amid
concern continued labor-related violence at mines in South Africa will curb supplies. Additional gains were recorded from long positions in tin futures.

For the Three and Nine Months Ended September 30, 2011
The Partnership recorded total trading results including interest income totaling $(7,457,360) and expenses totaling $3,187,786, resulting in a net loss of $10,645,146 for the three months ended September 30, 2011.  The Partnership’s net asset value per Unit decreased from $18.55 at June 30, 2011, to $17.14 at September 30, 2011.

The most significant trading losses were incurred within the metals sector, primarily during August and September, from long futures positions in aluminum, palladium, and copper as prices fell after continued fears of a “double dip” recession in the U.S. and Europe, along with inflationary pressures in China, spurred speculation global demand for metals may weaken. Additional losses were incurred in the metals sector during August from long futures positions in copper, aluminum, and zinc as prices declined after a report revealed U.S. manufacturing slowed more than estimated. Within the agricultural complex, losses were incurred primarily during September due to long futures positions in corn and soybeans as prices declined on speculation that Europe’s sovereign debt crisis may hinder the global economy, reducing demand for the grains for use as food, livestock feed, and crop-based fuel. Additionally, prices of corn

- 27 -
 
 
 

 
futures continued to decline after a U.S. government report revealed bigger-than-expected U.S. inventories. Within the currency sector, losses were incurred primarily during August due to long positions in the Australian dollar, Japanese yen, and Canadian dollar versus the U.S. dollar as the value of the U.S. dollar was boosted higher against these currencies by “safe haven” demand following central bank intervention in the Japanese yen and amid concerns related to the European debt crisis. Within the global stock index sector, losses were incurred primarily during July due to long positions in U.S. and European equity index futures as prices fell amid concern about the European sovereign debt crisis and the U.S. debt ceiling debate. Within the energy sector, smaller losses were incurred throughout the quarter due to long futures positions in crude oil and its related products as prices fell on concern that energy demand may falter amid slowing economic growth in the U.S. and a deepening debt crisis in Europe. A portion of the Partnership’s losses for the quarter was offset by gains achieved within the global interest rate markets, primarily during July and August, due to long positions in European and U.S. fixed income futures as prices rose on increased demand for the relative “safety” of government bonds due to concern about a faltering global economic recovery.

The Partnership recorded total trading results including interest income totaling $(22,287,043) and expenses totaling $11,859,457, resulting in a net loss of $34,146,500 for the nine months ended September 30, 2011.  The Partnership’s net asset value per Unit decreased from $21.49 on December 31, 2010 to $17.14 at September 30, 2011.

The most significant trading losses were incurred within the metals markets, primarily during August and September, from long futures positions in aluminum, palladium, and copper as prices fell after continued

- 28 -
 
 
 

 
fears of a “double dip” recession in the U.S. and Europe, along with inflationary pressures in China, spurred speculation global demand for metals may weaken. Additional losses were incurred in the metals sector during August from long futures positions in copper, aluminum, and zinc as prices declined after a report revealed U.S. manufacturing slowed more than estimated. Within the currency sector, losses were incurred primarily during August due to long positions in the Australian dollar, Japanese yen, and Canadian dollar versus the U.S. dollar as the value of the U.S. dollar was boosted higher against these currencies by “safe haven” demand following central bank intervention in the Japanese yen and amid concerns related to the European debt crisis. Within the agricultural complex, losses were incurred primarily during September due to long futures positions in corn and soybeans as prices declines on speculation that Europe’s sovereign debt crisis may hinder the global economy, reducing demand for the grains. Additionally, prices of corn futures continued to decline after a U.S. government report revealed bigger-than-expected U.S. inventories. Losses were also recorded in this sector during June from long positions in corn and wheat futures. Within the global stock index sector, losses were incurred primarily during July due to long positions in U.S. and European equity index futures as prices fell amid concern about the European sovereign debt crisis and the U.S. debt ceiling debate. Within the energy sector, small losses were incurred primarily during May from long futures positions in crude oil and its related products as prices moved lower after signs the global economic recovery is slowing spurred concern energy demand may weaken. A portion of the Partnership’s losses during the first nine months of the year was offset by gains recorded in the global interest rate sector, primarily during July and August, due to long positions in European and U.S. fixed income futures as prices rose on increased demand for the relative “safety” of government bonds due to concern about a faltering global economic recovery.


- 29 -

 
 
 

 
 
\
 
 
 
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.

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.

- 30 -

 
 
 

 
 
 

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.


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.


 
- 31 -

 
 

 
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 Advisors is estimated below in terms of VaR.  Please note that the VaR model is used to numerically quantify market risk for historic reporting purposes only and is not utilized by either Ceres or the Trading Advisors 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 of 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 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.
 
- 32 -

 
 

 
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 September 30, 2012 and December 31, 2011, and the highest, lowest and average values during the three months ended September 30, 2012 and for the twelve months ended December 31, 2011.  All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below.  There has been no material change in the trading VaR information previously disclosed in the Form 10-K.

As of September 30, 2012, the Partnership’s total capitalization was approximately $84 million.
 
                         September 30, 2012

Primary Market
 
% of Total
Risk Category
VaR
Capitalization
     
Currency
$1,931,609
2.29%
     
Interest Rate
  1,446,046
1.71%
     
Equity
    329,864
0.39%
     
Commodity
 5,282,579
 6.25%
     
Total
$8,990,098
   10.64%








- 33 -
 
 
 

 
 
 
 

 
                                   Three Months Ended September 30, 2012
Market Sector
High VaR
$
Low VaR
$
Average VaR*
$
Currency
1,938,388
   117,136
 1,094,681
Interest Rate
1,467,720
   612,198
 1,073,767
Equity
   522,644
   198,844
    346,439
Commodity
5,306,253
3,908,933
 4,723,590
* Average of month-end VaR

As of December 31, 2011 the Partnership’s total capitalization was approximately $117 million.
 
                            December 31, 2011

Primary Market
 
% of
Risk Category
VaR
Total Capitalization
     
Currency
$2,812,309
2.41%
     
Interest Rate
    570,216
0.49%
     
Equity
    375,308
0.32%
     
Commodity
 5,499,718
 4.71%
     
Total
$9,257,551
7.93%



                                  Twelve Months Ended December 31, 2011
Market Sector
High VaR
$
Low VaR
$
Average VaR*
$
Currency
  3,140,576
  413,677
1,775,895
Interest Rate
  6,720,718
    88,183
1,751,695
Equity
  4,813,555
 –
1,024,858
Commodity
10,477,239
2,758,917
6,387,716
*Average of month-end VaR.
     

- 34 -
 
 
 

 
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.

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.

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.

- 35 -
 
 
 

 
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 Advisors for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies.  Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership.  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 Advisors, 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 and trading approaches through the selection of the commodity trading advisors and by daily monitoring of their performance.  In addition, the Trading Advisors establish diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument.

- 36 -
 
 
 

 
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 Advisors.

Item 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of Ceres, Ceres’ President (Ceres’ principal executive officer) and Chief Financial Officer (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 September 30, 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 September 30, 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.





- 37 -
 
 
 

 
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.








 
- 38 -
 
 
 

 
PART II.  OTHER INFORMATION



Item 1.  LEGAL PROCEEDINGS
Unless the context otherwise requires, for purposes of this section, the terms the “Company,” “we,” “us” and “our” mean Morgan Stanley and its consolidated subsidiaries. In addition to the matters described in the Form 10-K, those described in the Partnership’s Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2012 (the “Second Quarter Form 10-Q”), and those described below, in the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or in financial distress.

The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company’s business, including, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

The Company contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the condensed consolidated financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the estimated loss by a charge to income.



- 39 -
 
 
 

 
In many proceedings, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. The Company cannot predict with certainty if, how or when such proceedings will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for proceedings that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for any proceeding. Subject to the foregoing, the Company believes, based on current knowledge and after consultation with counsel, that the outcome of such proceedings will not have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such proceedings could be material to the Company’s operating results and cash flows for a particular period depending on, among other things, the level of the Company’s revenues or income for such period.

Over the last several years, the level of litigation and investigatory activity focused on residential mortgage and credit crisis related matters has increased materially in the financial services industry. As a result, the Company expects that it may become the subject of increased claims for damages and other relief regarding residential mortgages and related securities in the future and, while the Company has identified below certain proceedings that the Company believes to be material, individually or collectively, there can be no assurance that additional material losses will not be incurred from residential mortgage claims that have not yet been notified to the Company or are not yet determined to be material.
- 40 -
 
 
 

 
The following developments have occurred with respect to certain matters previously reported in the Form 10-K or the Second Quarter Form 10-Q or concern new actions that have been filed since the Second Quarter Form 10-Q:

The Company
Residential Mortgage and Credit Crisis Related Matters.
Class Actions.
On September 12, 2012, the Company filed its answer to the third amended complaint in In re Morgan Stanley Pass-Through Certificates Litigation. On September 20, 2012, the plaintiffs filed a motion seeking to expand the offerings at issue in the litigation, relying on recent precedent from the United States Court of Appeals for the Second Circuit (“Second Circuit”). Defendants have opposed the motion. If the motion is granted, plaintiffs will be purporting to represent investors who purchased approximately $7.82 billion in mortgage pass through certificates issued in 2006 by thirteen trusts.

Other Litigation.
On August 17, 2012, the court in Abu Dhabi Commercial Bank, et al. v. Morgan Stanley & Co. Inc., et al. granted the Company’s motion for summary judgment with respect to the plaintiffs’ fraud claim, denied the Company’s motion for summary judgment with respect to the plaintiffs’ aiding and abetting fraud claim, and ordered plaintiffs to show cause why the negligent misrepresentation claim should not be dismissed. The court dismissed all or part of the claims of three of the fifteen plaintiffs based on lack of standing or reliance and plaintiffs have moved for reconsideration of the dismissal. On September 17, 2012, plaintiffs filed expert reports with the court alleging that they are seeking $713 million in compensatory damages on behalf of all fifteen plaintiffs. On October 5, 2012, the court ruled that

- 41 -
 
 
 

 
plaintiffs sufficiently showed cause as to why the negligent misrepresentation claim against the Company should not be dismissed.

On October 2, 2012, the court in Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc. et al. denied, in substantial part, defendants’ motion to dismiss plaintiff’s amended complaints.

On October 11, 2012, defendants filed motions to dismiss the amended complaint in Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al.

Item 1A.  RISK FACTORS

There have been no material changes from the risk factors previously referenced in Part II, Item 1A, Risk Factors in the Partnership’s Report on Form 10-Q for the quarter ended June 30, 2012 other than as set forth below.

Speculative position and trading limits may reduce profitability.
The CFTC and U.S. exchanges have established speculative position limits on the maximum net long or net short positions which any person may hold or control in particular futures and options on futures.  The trading instructions of an advisor may have to be modified, and positions held by the Partnership may have to be liquidated in order to avoid exceeding these limits.  Such modification or liquidation could adversely affect the operations and profitability of the Partnership by increasing transaction costs to liquidate positions and foregoing potential profits.



- 42 -
 
 
 

 
In October 2011, the CFTC adopted new rules governing position limits.  In September 2012, these rules were vacated by the United States District Court for the District of Columbia and remanded to the CFTC  for further consideration.  It is possible, nevertheless, that these rules may take effect in some form via re-promulgation or a successful appeal by the CFTC of the District Court’s ruling.  The vacated rules established position limits on certain futures contracts and any economically equivalent futures, options and swaps.


Item 4.  MINE SAFETY DISCLOSURES
Not applicable.


Item 5.  OTHER INFORMATION
The registrant does not have a board of directors.  The registrant’s general partner, Ceres Managed Futures LLC, is managed by a board of directors.

Effective November 14, 2012, Mr. Damian George will be appointed a director of Ceres.

Damian George, age 45, has been a Director of the General Partner since November 2012.  Since June 2012, Mr. George has been the Chief Financial Officer and a principal of the General Partner and is an associate member of the National Futures Association.  Since August 2009, Mr. George has been
employed by Morgan Stanley Smith Barney LLC (“Morgan Stanley Smith Barney”), a financial services firm, where his responsibilities include oversight of budgeting, finance and Sarbanes-Oxley testing for the Alternative Investments–Managed Futures group.  Since August 2009, Mr. George has been

- 43 -
 
 
 

 
registered as an associated person of Morgan Stanley Smith Barney.  From November 2005 through July 2009, Mr. George was employed by Citi Alternative Investments, a division of Citigroup

Inc. (“Citigroup”), a financial services firm, which administered Citigroup’s hedge fund and fund of funds business, where he served as Director and was responsible for budgeting, finance and Sarbanes-Oxley testing for the Hedge Fund Management group.  From November 2004 through July 2009, Mr. George was registered as an associated person of Citigroup Global Markets Inc.  Mr. George earned his Bachelor of Science degree in Accounting in May 1989 from Fordham University and his Master of Business Administration degree in International Finance in February 1998 from Fordham University.  Mr. George is a Certified Public Accountant.


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
 
101.LAB*
XBRL Taxonomy Extension Label Document
 

 
 
- 44 -
 
 
 

 
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.
 

 

 

 

 

 

 

 

 

 

 

 

 
- 45 -
 

 
 

 


 

 

 

 

 
SIGNATURE



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




 
Morgan Stanley Smith Barney Spectrum Strategic L.P.
 
 (Registrant)
     
 
By:
Ceres Managed Futures LLC
   
(General Partner)
     
November 13, 2012
By:
/s/Damian George
   
Damian George
   
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.




















- 46 -