Attached files
file | filename |
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EX-3.S - EXHIBIT - MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P. | mscdex3201.htm |
EX-2.S - EXHIBIT - MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P. | mscdex3102.htm |
EX-4.S - EXHIBIT - MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P. | mscdex3202.htm |
EX-1.S - EXHIBIT - MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P. | mscdex3101.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended September 30, 2009 or
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from __________________to__________________
Commission
File Number: 0-26282
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.)
|
|||
Demeter
Management LLC
|
||||
522
Fifth Avenue, 13th Floor
|
||||
New
York, NY
|
10036
|
|||
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code
|
(212)
296-1999
|
Morgan
Stanley Charter Aspect L.P.
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes 0 No
T
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
INDEX TO QUARTERLY REPORT ON
FORM 10-Q
September 30,
2009
PART I. FINANCIAL
INFORMATION
|
||
Item
1.
|
Financial
Statements (Unaudited)
|
|
Statements
of Financial Condition as of September 30, 2009 and December 31, 2008
|
2
|
|
Statements
of Operations for the Three and Nine Months Ended September 30, 2009 and
2008
|
3
|
|
Statements
of Changes in Partners’ Capital for the Nine Months Ended September 30,
2009 and 2008
|
4
|
|
Statements
of Cash Flows for the Nine Months Ended September 30, 2009 and 2008
|
5
|
|
Condensed
Schedules of Investments as of September 30, 2009 and December 31,
2008
|
6
|
|
Notes
to Financial Statements
|
7-19
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20-30
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
30-41
|
Item
4.
|
Controls
and Procedures
|
42
|
Item
4T.
|
Controls
and Procedures
|
42
|
PART II. OTHER INFORMATION
|
||
Item
1A.
|
Risk
Factors
|
43
|
Item
6.
|
Exhibits
|
43
|
PART I. FINANCIAL
INFORMATION
Item
1. Financial
Statements
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
STATEMENTS
OF FINANCIAL CONDITION
(Unaudited)
September
30,
|
December
31,
|
||
2009
|
2008
|
||
ASSETS
|
$
|
$
|
|
Trading
Equity:
|
|||
Unrestricted
cash
|
107,252,398
|
177,032,429
|
|
Restricted
cash
|
9,923,199
|
4,101,527
|
|
Total
cash
|
117,175,597
|
181,133,956
|
|
Net
unrealized gain on open contracts (MS&Co.)
|
5,444,365
|
7,917,392
|
|
Net
unrealized gain (loss) on open contracts (MSIP)
|
154,065
|
(406,906)
|
|
Total
net unrealized gain on open contracts
|
5,598,430
|
7,510,486
|
|
Total
Trading Equity
|
122,774,027
|
188,644,442
|
|
Interest
receivable (MS&Co.)
|
4,475
|
24,703
|
|
Total
Assets
|
122,778,502
|
188,669,145
|
|
LIABILITIES
AND PARTNERS’ CAPITAL
|
|||
Liabilities
|
|||
Redemptions
payable
|
1,012,161
|
13,633,679
|
|
Accrued
brokerage fees (MS&Co.)
|
595,070
|
895,284
|
|
Accrued
management fees
|
198,357
|
298,428
|
|
Accrued
incentive fee
|
–
|
1,678,806
|
|
Total
Liabilities
|
1,805,588
|
16,506,197
|
|
Partners’
Capital
|
|||
Limited
Partners (6,181,031.347 and 7,582,467.939 Units,
respectively)
|
119,734,120
|
170,429,845
|
|
General
Partner (63,950.223 and 77,106.223 Units, respectively)
|
1,238,794
|
1,733,103
|
|
Total
Partners’ Capital
|
120,972,914
|
172,162,948
|
|
Total
Liabilities and Partners’ Capital
|
122,778,502
|
188,669,145
|
|
NET
ASSET VALUE PER UNIT
|
19.37
|
22.48
|
The
accompanying notes are an integral part of these financial
statements.
- 2
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
STATEMENTS
OF OPERATIONS
(Unaudited)
For
the Three Months
Ended September 30,
|
For
the Nine Months
Ended September 30,
|
||||||
2009
|
2008
|
2009
|
2008
|
||||
$
|
$
|
$
|
$
|
||||
INVESTMENT
INCOME
|
|||||||
Interest
income (MS&Co.)
|
25,043
|
607,347
|
128,139
|
2,038,171
|
|||
EXPENSES
|
|||||||
Brokerage
fees (MS&Co.)
|
1,772,643
|
2,522,192
|
6,322,342
|
7,010,286
|
|||
Management
fees
|
590,880
|
840,730
|
2,107,447
|
2,336,762
|
|||
Incentive
fees
|
–
|
–
|
114,911
|
3,484,265
|
|||
Total
Expenses
|
2,363,523
|
3,362,922
|
8,544,700
|
12,831,313
|
|||
NET
INVESTMENT LOSS
|
(2,338,480)
|
(2,755,575)
|
(8,416,561)
|
(10,793,142)
|
|||
TRADING
RESULTS
|
|||||||
Trading
profit (loss):
|
|||||||
Realized
|
1,222,987
|
(10,468,669)
|
(10,689,397)
|
16,481,885
|
|||
Net
change in unrealized
|
5,959,683
|
(5,046,607)
|
(1,912,056)
|
(1,641,895)
|
|||
Total
Trading Results
|
7,182,670
|
(15,515,276)
|
(12,601,453)
|
14,839,990
|
|||
NET
INCOME (LOSS)
|
4,844,190
|
(18,270,851)
|
(21,018,014)
|
4,046,848
|
|||
NET
INCOME (LOSS) ALLOCATION
|
|||||||
Limited
Partners
|
4,795,582
|
(18,080,743)
|
(20,806,078)
|
4,005,634
|
|||
General
Partner
|
48,608
|
(190,108)
|
(211,936)
|
41,214
|
|||
NET
INCOME (LOSS) PER UNIT
|
|||||||
Limited
Partners
|
0.77
|
(2.19)
|
(3.13)
|
0.68
|
|||
General
Partner
|
0.77
|
(2.19)
|
(3.13)
|
0.68
|
|||
Units
|
Units
|
Units
|
Units
|
||||
WEIGHTED
AVERAGE NUMBER
|
|||||||
OF
UNITS OUTSTANDING
|
6,328,704.515
|
8,743,129.337
|
6,712,434.833
|
8,133,123.100
|
The
accompanying notes are an integral part of these financial
statements.
– 3
–
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
STATEMENTS
OF CHANGES IN PARTNERS’ CAPITAL
For the
Nine Months Ended September 30, 2009 and 2008
(Unaudited)
Units
of
|
|||||||
Partnership
|
Limited
|
General
|
|||||
Interest
|
Partners
|
Partner
|
Total
|
||||
$
|
$
|
$
|
|||||
Partners’
Capital,
|
|||||||
December
31, 2007
|
7,481,800.500
|
134,313,027
|
1,419,034
|
135,732,061
|
|||
Offering
of Units
|
2,335,252.350
|
45,085,695
|
370,000
|
45,455,695
|
|||
Net
Income
|
–
|
4,005,634
|
41,214
|
4,046,848
|
|||
Redemptions
|
(888,553.504)
|
(17,233,171)
|
–
|
(17,233,171)
|
|||
Partners’
Capital,
|
|||||||
September
30, 2008
|
8,928,499.346
|
166,171,185
|
1,830,248
|
168,001,433
|
|||
Partners’
Capital,
|
|||||||
December
31, 2008
|
7,659,574.162
|
170,429,845
|
1,733,103
|
172,162,948
|
|||
Net
Loss
|
–
|
(20,806,078)
|
(211,936)
|
(21,018,014)
|
|||
Redemptions
|
(1,414,592.592)
|
(29,889,647)
|
(282,373)
|
(30,172,020)
|
|||
Partners’
Capital,
|
|||||||
September
30, 2009
|
6,244,981.570
|
119,734,120
|
1,238,794
|
120,972,914
|
The
accompanying notes are an integral part of these financial
statements.
- 4
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
STATEMENTS
OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September
30,
|
|||
2009
|
2008
|
||
$
|
$
|
||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||
Net
income (loss)
|
(21,018,014)
|
4,046,848
|
|
Noncash
item included in net income (loss):
|
|||
Net
change in unrealized
|
1,912,056
|
1,641,895
|
|
(Increase)
decrease in operating assets:
|
|||
Restricted
cash
|
(5,821,672)
|
7,121,559
|
|
Interest
receivable (MS&Co.)
|
20,228
|
229,220
|
|
Increase
(decrease) in operating liabilities:
|
|||
Accrued
brokerage fees (MS&Co.)
|
(300,214)
|
166,048
|
|
Accrued
management fees
|
(100,071)
|
55,349
|
|
Accrued
incentive fees
|
(1,678,806)
|
–
|
|
Net
cash provided by (used for) operating activities
|
(26,986,493)
|
13,260,919
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||
Cash
received from offering of Units
|
–
|
47,556,482
|
|
Cash
paid for redemptions of Units
|
(42,793,538)
|
(16,350,651)
|
|
Net
cash provided by (used for) financing activities
|
(42,793,538)
|
31,205,831
|
|
Net
increase (decrease) in unrestricted cash
|
(69,780,031)
|
44,466,750
|
|
Unrestricted
cash at beginning of period
|
177,032,429
|
113,780,309
|
|
Unrestricted
cash at end of period
|
107,252,398
|
158,247,059
|
The
accompanying notes are an integral part of these financial
statements.
- 5
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
CONDENSED
SCHEDULES OF INVESTMENTS
September
30, 2009 and December 31, 2008 (Unaudited)
Futures and Forward
Contracts
|
Long
Unrealized
Gain
|
Percentage
of
Net Assets
|
Short Unrealized
Gain/(Loss)
|
Percentage
of
Net Assets
|
Net
Unrealized
Gain/(Loss)
|
$
|
%
|
$
|
%
|
$
|
|
September
30, 2009, Partnership Net Assets: $120,972,914
|
|||||
Commodity
|
1,472,275
|
1.22
|
(401,072)
|
(0.33)
|
1,071,203
|
Equity
|
306,519
|
0.25
|
–
|
–
|
306,519
|
Foreign
currency
|
850,080
|
0.70
|
209,645
|
0.17
|
1,059,725
|
Interest
rate
|
2,428,061
|
2.01
|
71,782
|
0.06
|
2,499,843
|
Grand
Total:
|
5,056,935
|
4.18
|
(119,645)
|
(0.10)
|
4,937,290
|
Unrealized
Currency Gain
|
0.55
|
661,140
|
|||
Total
Net Unrealized Gain on Open Contracts
|
5,598,430
|
||||
December
31, 2008, Partnership Net Assets: $172,162,948
|
|||||
Commodity
|
253,941
|
0.15
|
(332,170)
|
(0.19)
|
(78,229)
|
Equity
|
2,335
|
–
|
(115,208)
|
(0.07)
|
(112,873)
|
Foreign
currency
|
674,424
|
0.39
|
(1,113,530)
|
(0.65)
|
(439,106)
|
Interest
rate
|
7,328,297
|
4.26
|
–
|
–
|
7,328,297
|
Grand
Total:
|
8,258,997
|
4.80
|
(1,560,908)
|
(0.91)
|
6,698,089
|
Unrealized
Currency Gain
|
0.47
|
812,397
|
|||
Total
Net Unrealized Gain on Open Contracts
|
7,510,486
|
The
accompanying notes are an integral part of these financial
statements.
- 6
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS
September
30, 2009
(Unaudited)
The
unaudited financial statements contained herein include, in the opinion of
management, all adjustments necessary for a fair presentation of the financial
condition and results of operations of Morgan Stanley Smith Barney Charter
Aspect L.P. (formerly, Morgan Stanley 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, 2008.
1. Organization
Morgan
Stanley Smith Barney Charter Aspect L.P. (formerly, Morgan Stanley 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
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 Graham L.P., Morgan Stanley Smith Barney Charter
WNT L.P., and Morgan Stanley Smith Barney Charter Campbell L.P., (collectively,
the "Charter Series").
Effective
September 29, 2009, Demeter Management LLC (“Demeter”), the general partner of
the Partnership, changed the name of Morgan Stanley Charter Aspect L.P. to
Morgan Stanley Smith Barney Charter Aspect L.P.
- 7
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
The
Partnership’s general partner is Demeter. The commodity brokers are
Morgan Stanley & Co. Incorporated ("MS&Co.") and Morgan Stanley &
Co. International plc ("MSIP"). MS&Co. also acts as the
counterparty on all trading of foreign currency forward
contracts. MSIP serves as the commodity broker for trades on the
London Metal Exchange (“LME”). Demeter is a wholly-owned subsidiary of Morgan
Stanley Smith Barney Holdings LLC (“MSSB”). MSSB is majority-owned
indirectly by Morgan Stanley and minority-owned indirectly by Citigroup Inc.
MS&Co. and MSIP are wholly-owned subsidiaries of Morgan
Stanley. Aspect Capital Limited (the “Trading Advisor”) is the
trading advisor to the Partnership.
On July
1, 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(“GAAP”), also known as FASB Accounting Standards Codification (“ASC”)
105-10, Generally Accepted
Accounting Principles (“ASC 105-10” or the
“Codification”). ASC 105-10 established the exclusive authoritative
reference for U.S. GAAP for use in financial statements except for Securities
and Exchange Commission (“SEC”) rules and interpretive releases, which are also
authoritative GAAP for SEC registrants. The Codification supersedes
all existing non-SEC accounting and reporting standards. The
Codification became the single source of authoritative accounting principles
generally accepted in the United States and is effective for financial
statements issued for interim and annual periods ending after September 15,
2009.
2. Related Party
Transactions
The
Partnership’s cash is on deposit with MS&Co. and MSIP in futures, forward
and options trading accounts to
- 8
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
meet
margin requirements as needed. Monthly, MS&Co. credits the
Partnership with interest income 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 other similar customers on margin
deposits. In addition, MS&Co. 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 on the 4-week U.S. Treasury
bill discount rate during such month. The Partnership pays brokerage
fees to MS&Co.
3. Income
Taxes
No
provision for income taxes has been made in the accompanying financial
statements, as partners are individually responsible for reporting income or
loss based upon their respective share of the Partnership’s revenues or expenses
for income tax purposes. The Partnership files U.S. federal and state tax
returns.
ASC
740-10, Income Taxes
(which incorporates former FASB No. 109 and FASB Interpretation No. 48,
Income Taxes),
clarifies the accounting for uncertainty in income taxes recognized in a
Partnership's financial statements, and prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a
tax position taken or expected to be taken. The 2005 through
2008 tax years generally remain subject to examination by U.S. federal and most
state tax authorities.
- 9
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
4. Financial
Instruments
The
Partnership trades Futures Interests. Futures and forwards represent
contracts for delayed delivery of an instrument at a specified date and
price. Futures Interests are open commitments until settlement date,
at which time they are realized. They are valued at fair value,
generally on a daily basis, and the unrealized gains and losses on open
contracts (the difference between contract trade price and market price) are
reported in the Statements of Financial Condition as net unrealized gains or
losses on open contracts. The resulting net change in unrealized
gains and losses is reflected in the change in unrealized trading profit (loss)
on open contracts from one period to the next on the Statements of
Operations. The fair value of exchange-traded futures, options and
forwards contracts is determined by the various futures exchanges, and reflects
the settlement price for each contract as of the close of business on the last
business day of the reporting period. The fair value of foreign
currency forward contracts is extrapolated on a forward basis from the spot
prices quoted as of approximately 3:00 P.M. (E.T.) of the last business day of
the reporting period. The fair value of non-exchange-traded foreign
currency option contracts is calculated by applying an industry standard model
application for options valuation of foreign currency options, using as input,
the spot prices, interest rates, and option implied volatilities quoted as of
approximately 3:00 P.M. (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
- 10
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
liquidated
on such day due to the operation of daily limits or other rules of the exchange,
the settlement price shall be the settlement price on the first subsequent day
on which the contract could be liquidated. The fair value of
off-exchange-traded contracts is based on the fair value quoted by the
counterparty.
The
Partnership’s contracts are accounted for on a trade-date basis and marked to
market on a daily basis. The Partnership accounts for its derivative
investments as required by ASC 815-10-15, Derivative and Hedging
(formerly, SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities). A derivative is defined
as a financial instrument or other contract that has all three of the following
characteristics:
1)
|
One
or more underlying notional amounts or payment
provisions;
|
2)
|
Requires
no initial net investment or a smaller initial net investment than would
be required relative to changes in market
factors;
|
3)
|
Terms
require or permit net settlement.
|
Generally,
derivatives include futures, forward, swap or options contracts, and other
financial instruments with similar characteristics such as caps, floors, and
collars.
- 11
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
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
|
$
|
$
|
$
|
|||
Sep.
30, 2009
|
4,559,301
|
1,039,129
|
5,598,430
|
Mar.
2012
|
Oct.
2009
|
Dec.
31, 2008
|
7,949,609
|
(439,123)
|
7,510,486
|
Mar.
2010
|
Jan.
2009
|
The
Partnership has credit risk associated with counterparty
non-performance. As of the date of the financial statements, the
credit risk associated with the instruments in which the Partnership trades is
limited to the unrealized gain amounts reflected in the Partnership’s Statements
of Financial Condition.
The
Partnership also has credit risk because MS&Co. and MSIP act as the futures
commission merchants or the counterparties, with respect to most of the
Partnership’s assets. Exchange-traded futures, exchange-traded forward, and
exchange-traded futures-styled options contracts are marked to market on a daily
basis, with variations in value settled on a daily basis. MS&Co. and MSIP,
each acting as a commodity broker for the Partnership’s exchange-traded futures,
exchange-traded forward, and exchange-traded futures-styled options contracts,
are required, pursuant to regulations of the Commodity Futures Trading
Commission ("CFTC"), to segregate from their own assets, and for the sole
benefit of their commodity customers, all funds held by them with respect to
exchange-traded futures, exchange-traded forward, and exchange-traded
futures-styled options contracts, including an amount
- 12
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
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 $121,734,898 and $189,083,565 at
September 30, 2009, and December 31, 2008, respectively. With respect
to the Partnership’s off-exchange-traded forward currency contracts and forward
currency options contracts, there are no daily settlements of variation in
value, nor is there any requirement that an amount equal to the net unrealized
gains (losses) on such contracts be segregated. However, the
Partnership is required to meet margin requirements equal to the net unrealized
loss on open forward currency contracts in the Partnership accounts with the
counterparty, which is accomplished by daily maintenance of the cash balance in
a custody account held at MS&Co. With respect to those off-exchange-traded
forward currency contracts, the Partnership is at risk to the ability of
MS&Co., the sole counterparty on all such contracts, to
perform. The Partnership has a netting agreement with
MS&Co. This agreement, which seeks to reduce both the
Partnership’s and MS&Co.’s exposure on off-exchange-traded forward currency
contracts, should materially decrease the Partnership’s credit risk in the event
of MS&Co.’s bankruptcy or insolvency.
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 flows. Gains and
losses on open positions of exchange-traded futures, exchange-traded forward,
and exchange-traded futures-styled options
- 13
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
contracts
are settled daily through variation margin. Gains and losses on
off-exchange-traded forward currency contracts and forward currency options
contracts are settled upon termination of the contract. However, the
Partnership is required to meet margin requirements equal to the net unrealized
loss on open forward currency contracts in the Partnership accounts with the
counterparty, which is accomplished by daily maintenance of the cash balance in
a custody account held at MS&Co.
5. Derivative and
Hedging
ASC
815-10-65, Derivative and
Hedging (formerly, SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of SFAS No.
133), which was issued in March 2008, is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand how those
instruments and activities are accounted for; how and why they are used; and
their effects on a Partnership’s financial position, financial performance, and
cash flows. ASC 815-10-65 was effective as of January 1, 2009, for
the Partnership.
The
Partnership’s objective is to profit from speculative trading in Futures
Interests. Therefore, the Trading 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 absolute
quantity (the total of the open long and open short positions) has been
presented as a part of the volume disclosure, as position direction is not an
indicative factor in such volume disclosures. In regards to foreign currency
forward trades, each notional quantity amount has been converted to an
equivalent contract based upon an industry convention.
- 14
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
The
following table summarizes the valuation of the Partnership’s investments as
required by ASC 815-10-65 as of September 30, 2009 and reflects the contracts
outstanding at such time.
The
Effect of Trading Activities on the Statements of Financial Condition as of
September 30, 2009:
Futures and Forward
Contracts
|
Long
Unrealized
Gain
|
Long
Unrealized
Loss
|
Short
Unrealized
Gain
|
Short
Unrealized
Loss
|
Net Unrealized
Gain
|
Total
number of outstanding
contracts
(absolute quantity)
|
$
|
$
|
$
|
$
|
$
|
||
Commodity
|
1,765,251
|
(292,976)
|
340,440
|
(741,512)
|
1,071,203
|
1,799
|
Equity
|
453,611
|
(147,092)
|
–
|
–
|
306,519
|
872
|
Foreign
currency
|
855,564
|
(5,484)
|
289,420
|
(79,775)
|
1,059,725
|
913
|
Interest
rate
|
2,429,371
|
(1,310)
|
71,782
|
–
|
2,499,843
|
4,897
|
Total
|
5,503,797
|
(446,862)
|
701,642
|
(821,287)
|
4,937,290
|
|
Unrealized
currency gain
|
661,140
|
|||||
Total
net unrealized gain on open contracts
|
5,598,430
|
The
following tables summarize the net trading results of the Partnership during the
three and nine month periods as required by the disclosures about Derivative and
Hedging Topics of ASC 815-10-65.
The
Effect of Trading Activities on the Statements of Operations for the Three and
Nine Months Ended September 30, 2009 included in Total Trading
Results:
For
the Three Months
|
For
the Nine Months
|
|
Ended September 30,
2009
|
Ended September 30,
2009
|
|
Type of Instrument
|
$
|
$
|
Commodity
|
864,965
|
(6,232,639)
|
Equity
|
1,270,545
|
559,793
|
Foreign
currency
|
1,197,070
|
(4,036,775)
|
Interest
rate
|
3,914,581
|
(2,740,575)
|
Unrealized
currency loss
|
(64,491)
|
(151,257)
|
Total
|
7,182,670
|
(12,601,453)
|
- 15
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
Line
Items on the Statements of Operations for the Three and Nine Months Ended
September 30, 2009:
For
the Three Months
|
For
the Nine Months
|
|
Ended September 30, 2009
|
Ended September 30, 2009
|
|
Trading Results
|
$
|
$
|
Realized
|
1,222,987
|
(10,689,397)
|
Net
change in unrealized
|
5,959,683
|
(1,912,056)
|
Total
Trading Results
|
7,182,670
|
(12,601,453)
|
6. Fair Value Measurements and
Disclosures
As
defined by ASC 820-10-55, Fair
Value Measurements and Disclosures (formerly, SFAS No. 157, Fair Value Measurements),
fair value is the amount that would be recovered when an asset is sold or an
amount paid to transfer a liability, in an ordinary transaction, between market
participants at the measurement date (exit price). Market price
observability is impacted by a number of factors, including the types of
investments, the characteristics specific to the investment, and the state of
the market (including the existence and the transparency of transactions between
market participants). Investments with readily available actively
quoted prices in an ordinary market will generally have a higher degree of
market price observability and a lesser degree of judgment used in measuring
fair value.
ASC
820-10-55 requires use of a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three levels: Level 1 -
unadjusted quoted market prices in active markets for identical assets and
liabilities; Level 2 - inputs other than unadjusted quoted market prices that
are observable for the asset or liability, either directly or indirectly
(including quoted prices for similar investments, interest rates, credit risk);
and Level 3 - unobservable inputs for the asset or liability (including the
Partnership’s own assumptions used in determining the fair value of
investments).
- 16
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley 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
following tables summarize the valuation of the Partnership’s investments by the
above ASC 820-10-55 fair value hierarchy as of September 30, 2009 and December
31, 2008:
September 30,
2009
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
Significant
Other Observable Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
Total
|
||
$
|
$
|
$
|
|||
Assets
|
|||||
Net
unrealized gain on open contracts
|
4,559,301
|
1,039,129
|
n/a
|
5,598,430
|
December 31,
2008
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
Significant
Other Observable Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
Total
|
||
$
|
$
|
$
|
|||
Assets
|
|||||
Net
unrealized gain(loss) on open contracts
|
7,949,609
|
(439,123)
|
n/a
|
7,510,486
|
- 17
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONTINUED)
7. Recent Accounting
Pronouncements
(a) Fair Value
Measurements
ASC
820-10-65, Fair Value
Measurements (formerly, FASB Staff Position (“FSP”) SFAS No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly), was issued
in April 2009. ASC 820-10-65 provides additional guidance for
determining fair value and requires new disclosures regarding the categories of
fair value instruments, as well as the inputs and valuation techniques utilized
to determine fair value and any changes to the inputs and valuation techniques
during the period. ASC 820-10-65 is effective for the interim and
annual periods ending after June 15, 2009. The adoption of ASC
820-10-65 did not have a material impact on the Partnership’s financial
statements.
(b) Financial
Instruments
ASC
825-10-65, Financial
Instruments (formerly, FSP SFAS No. 107-1 and Accounting Principals Board
No. 28-1, Interim Disclosures
About Fair Value of Financial Instruments), was issued in April
2009. ASC 825-10-65 requires fair value disclosures of financial
instruments on a quarterly basis, as well as new disclosures regarding the
methodology and significant assumptions underlying the fair value measures and
any changes to the methodology and assumptions during the reporting
period. ASC 825-10-65 is effective for the interim and annual periods
ending after June 15, 2009. The adoption of ASC 825-10-65 did not
have a material impact on the Partnership’s financial statements.
- 18
-
MORGAN
STANLEY SMITH BARNEY CHARTER ASPECT L.P.
(formerly,
Morgan Stanley Charter Aspect L.P.)
NOTES TO FINANCIAL
STATEMENTS (CONCLUDED)
(c) Subsequent
Events
The
Partnership adopted ASC 855-10, Subsequent Events (formerly,
SFAS No. 165, Subsequent
Events), which was issued in May 2009. ASC 855-10
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date; that is, whether that date represents the date the financial statements
were issued or were available to be issued. ASC 855-10 is effective
for the interim and annual periods ending after June 15,
2009. Management has performed its evaluation of subsequent events
through November 12, 2009, the date these financial statements were issued and
has determined that there were no subsequent events requiring adjustment or
disclosure in the financial statements.
8. Restricted and Unrestricted
Cash
As
reflected on the Partnership’s Statements of Financial Condition, restricted
cash equals the cash portion of assets on deposit to meet margin requirements
plus the cash required to offset unrealized losses on foreign currency forwards
and options and offset losses on offset LME positions. All of these amounts are
maintained separately. Cash that is not classified as restricted cash
is therefore classified as unrestricted cash.
- 19
-
Item
2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
RESULTS
OF
OPERATIONS
|
Liquidity. The
Partnership deposits its assets with MS&Co. and MSIP as commodity brokers in
separate futures, forward and options trading accounts established for 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
fluctuations limits" or "daily limits". Trades may not be executed at
prices beyond the daily limit. If the price for a particular futures
or options contract has increased or decreased by an amount equal to the daily
limit, positions in that futures or options contract can neither be taken nor
liquidated unless traders are willing to effect trades at or within the limit.
Futures prices have occasionally moved the daily limit for several consecutive
days with little or no trading. These market conditions could prevent
the Partnership from promptly liquidating its futures or options contracts and
result in restrictions on redemptions.
There is
no limitation on daily price movements in trading forward contracts on foreign
currencies. The markets for some world currencies have low trading
volume and are illiquid, which may prevent the Partnership from trading in
potentially profitable markets or prevent the Partnership from promptly
liquidating unfavorable positions in such markets, subjecting it to substantial
losses. Either of these market conditions could result in
restrictions on redemptions. For the periods covered by this report,
illiquidity has not materially affected the Partnership’s assets.
- 20
-
There are
no known material trends, demands, commitments, events, or uncertainties at the
present time that are reasonably likely to result in the Partnership’s liquidity
increasing or decreasing in any material way.
Capital
Resources. The Partnership does not have, nor does it expect
to have, any capital assets. Redemptions of units of limited
partnership interest ("Unit(s)") in the future will affect the amount of funds
available for investments in futures, forwards and options in subsequent
periods. It is not possible to estimate the amount, and therefore the
impact, of future outflows of Units.
There are
no known material trends, favorable or unfavorable, that would affect, nor any
expected material changes to, the Partnership’s capital resource arrangements at
the present time.
Off-Balance Sheet
Arrangements and Contractual Obligations. The Partnership does
not have any off-balance sheet arrangements, nor does it have contractual
obligations or commercial commitments to make future payments that would affect
its liquidity or capital resources.
Results of
Operations
General. The
Partnership’s results depend on the Trading 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 following presents a
summary of the Partnership’s operations for the three and nine month periods
ended September 30, 2009 and 2008, and a general discussion of its trading
activities during each period. It is important to note, however, that
the Trading 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.
- 21
-
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 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 Partnership trades are accounted for on a trade-date basis and marked to
market on a daily basis. The difference between their original
contract value and market value is recorded on the Statements of Operations as
"Net change in unrealized trading profit (loss)" for open (unrealized)
contracts, and recorded as "Realized trading profit (loss)" when open positions
are closed out. The sum of these amounts constitutes the
Partnership’s trading results. The market value of a futures contract
is the settlement price on the exchange on which that futures contract is traded
on a particular day. The value of a foreign currency forward contract
is based on the spot rate as of the close of business. Interest
income, as well as management fees, incentive fees, and brokerage fees of the
Partnership are recorded on an accrual basis.
For the Three and Nine
Months Ended September 30, 2009
The
Partnership recorded total trading results including interest income totaling
$7,207,713 and expenses totaling $2,363,523, resulting in net income of
$4,844,190 for the three months ended September 30, 2009. The
Partnership’s net asset value per Unit increased from $18.60 at June 30, 2009,
to $19.37 at September 30, 2009.
- 22
-
The most
significant trading gains of approximately 3.3% were recorded within the global
interest rate sector throughout a majority of the quarter from long positions in
U.S. and European fixed-income futures as prices moved higher on investor
sentiment that the slow pace of the global economic recovery and signs of
moderate inflation might lead central banks in these regions to maintain low
interest rates in the near term. Within the global stock index
sector, gains of approximately 1.1% were experienced primarily during August and
September from long positions in U.S., European, and Pacific Rim equity index
futures as prices rose due to positive economic data and increased merger and
acquisition activity in the technology sector. Within the metals
markets, gains of approximately 1.0% were recorded throughout a majority of the
quarter from long futures positions in gold and silver as prices moved higher
amid a decline in the value of the U.S. dollar. Additional gains were
experienced in the metals complex from long positions in copper, lead, and zinc
futures as prices increased following news that China’s economy expanded during
the second quarter of 2009 and Chinese manufacturing jumped in July, thereby
spurring speculation that demand for base metals might rise. Within
the currency sector, gains of approximately 1.0% were recorded primarily during
September from long positions in the Japanese yen, Swiss franc, and Australian
dollar versus the U.S. dollar as the value of the U.S. dollar moved lower
against these currencies due to the aforementioned speculation that the U.S.
Federal Reserve might keep borrowing rates low after the U.S. central bank
indicated that it remained committed to its quantitative easing
program. Meanwhile, the value of the Australian dollar also moved
higher in the wake of stronger gold prices, while the Japanese yen was bolstered
by better-than-expected economic data out of Japan. Additional gains
of approximately 0.9% were experienced within the agricultural markets,
primarily during
- 23
-
August,
from long futures positions in sugar as prices moved sharply higher at the
beginning of the month following reports of damaged crops in India and reduced
yields in Brazil. Prices continued to climb throughout August,
reaching a 28-year high, on deepening concerns that unfavorable weather in
producing countries and rising import demand might worsen the global supply
shortfall. Smaller gains were recorded from long positions in cocoa
futures as prices increased during September after reports showed global
inventories reached a seven-month low. A portion of the Partnership’s
gains for the quarter was offset by losses of approximately 1.2% incurred within
the energy sector, primarily during July and September, from short futures
positions in crude oil and its related products as prices increased after
positive economic data spurred optimism that energy demand might
rebound.
The
Partnership recorded total trading results including interest income totaling
$(12,473,314) and expenses totaling $8,544,700, resulting in a net loss of
$21,018,014 for the nine months ended September 30, 2009. The
Partnership’s net asset value per Unit decreased from $22.48 at December 31,
2008 to $19.37 at September 30, 2009.
The most
significant trading losses of approximately 3.5% were recorded within the energy
markets, primarily during March, May, June, July, and September from short
futures positions in crude oil and its related products as prices increased on
optimism that a possible rebound in global economic growth might boost energy
demand. Within the currency sector, losses of approximately 2.6% were
experienced primarily during March, April,
- 24
-
May, and
July from short positions in the euro and British pound versus the U.S. dollar
as the value of the U.S. dollar moved lower against most of its rivals after
improving global economic data reduced demand for the U.S. dollar as a “safe
haven” currency. Additional losses were incurred from long positions
in the Japanese yen versus the U.S. dollar, primarily during June, as the value
of the Japanese yen reversed lower relative to the U.S. dollar amid pessimism
regarding the future growth of the Japanese economy. Within the
global interest rate sector, losses of approximately 1.9% were recorded
primarily during January and June. During January, losses were
experienced from long positions in U.S. fixed-income futures as prices declined
following news that debt sales might increase as governments around the world
boosted spending in an effort to ease the deepening economic
slump. Additional losses were recorded during June from long
positions in U.S. and Australian fixed-income futures prices moved lower amid
rising investor confidence, which reduced demand for the relative “safety” of
government bonds. Meanwhile, short positions in Japanese fixed-income
futures resulted in losses as prices increased during the second half of June
after the Bank of Japan indicated that it remained cautious about the Japanese
economy. Additional losses of approximately 1.8% were incurred within
the metals markets, primarily during March and April, from short futures
positions in aluminum and lead as prices rose amid speculation that economic
stimulus plans in the U.S. and China might help boost demand for base
metals. Smaller losses were experienced during June from long
positions in silver futures as prices reversed lower due to a temporary rise in
the value of the U.S. dollar. A portion of the Partnership’s losses
for the first nine months of the year was offset by gains of approximately 0.8%
recorded within the agricultural sector, primarily during June and August, from
long futures positions in sugar as prices moved higher amid expectations of a
drop in global production. During August, sugar prices moved sharply
higher at the beginning of the month following reports of damaged crops in India
and reduced yields in Brazil. Prices
- 25
-
continued
to climb throughout August, reaching a 28-year high, on deepening concerns that
unfavorable weather in producing countries and rising import demand may worsen
the global supply shortfall. Additional gains were experienced from
short positions in lean hog futures as prices fell during June on speculation
that demand for U.S. pork products might remain sluggish amid ongoing swine flu
concerns. Smaller gains of approximately 0.6% were recorded within
the global stock index sector, primarily during January, February, May, June,
August, and September. During January and February, short positions
in European and Pacific Rim equity index futures resulted in gains as prices
dropped on concerns that financial firms might need to raise additional capital
and a continued slowdown in global economic growth might further erode corporate
earnings. Additional gains were recorded during June from short
positions in European equity index futures as prices declined on speculation
that a recent rally in the European equity index markets might have outpaced the
prospects for corporate earnings growth. Further gains were
experienced during August and September from newly established long positions in
European and Pacific Rim equity index futures as prices rose due to positive
economic data and increased merger and acquisition activity in the technology
sector.
For the Three and Nine
Months Ended September 30, 2008
The
Partnership recorded total trading results including interest income totaling
$(14,907,929) and expenses totaling $3,362,922, resulting in a net loss of
$18,270,851 for the three months ended September 30, 2008. The
Partnership’s net asset value per Unit decreased from $21.01 at June 30, 2008,
to $18.82 at September 30, 2008.
The most
significant trading losses of approximately 5.5% were incurred within the
currency sector, primarily during August and September. Such losses
were incurred from long positions in the euro, Australian dollar,
- 26
-
Mexican
peso, and South African rand versus the U.S. dollar as the value of the U.S.
dollar reversed higher against most of its rivals in August after the U.S.
Commerce Department reported a larger than previously estimated increase in
Gross Domestic Product during the second quarter. The U.S. dollar
then moved sharply higher against these currencies during September in tandem
with surging U.S. Treasury prices amid a worldwide "flight-to-quality" due to
fears of an intense credit crunch and subsequent global recession, resulting in
further losses from long positions in these currencies versus the U.S.
dollar. Within the energy markets, losses of approximately 4.9% were
experienced primarily during July and August from long futures positions in
gasoline, gas oil, and heating oil as prices reversed lower amid signs that the
U.S. economic slump might extend into 2009 and curb future energy
demand. Meanwhile, long positions in natural gas futures resulted in
losses as prices sharply decreased in July amid rising inventories and news that
the Atlantic hurricane season's first storm had avoided the gas-producing fields
in the Gulf of Mexico. Additional losses of approximately 3.9% were
incurred within the agricultural sector throughout the majority of the quarter
from long futures positions in the soybean complex and corn as prices declined
on news that favorable weather might improve crop conditions in the U.S.
Midwest. Prices also moved lower amid speculation that a slowing U.S.
economy would reduce demand for alternative biofuels. Smaller losses
were recorded in July from long positions in cocoa futures as prices decreased
following news of a rise in exports
from the
Ivory Coast, the world’s largest cocoa producer. A portion of the
Partnership’s losses for the quarter was offset by gains of approximately 2.8%
recorded within the global stock index sector, primarily during September, from
short positions in European and Pacific Rim equity index futures as prices moved
sharply lower amid unprecedented U.S. financial market turmoil following news of
the collapse of a major U.S. investment bank and the government rescue of a U.S.
insurance giant. Furthermore, global equity markets plunged after the
U.S. House of Representatives rejected the Economic Stabilization Act of 2008,
which would have allowed the U.S. Treasury
- 27
-
to
purchase troubled mortgage-backed securities from U.S. financial
institutions. Additional gains of approximately 1.4% were experienced
within the metals markets, primarily during September, from short futures
positions in aluminum, copper, nickel, and zinc as prices dropped on concerns
that turmoil in the financial markets would further weaken the global economy
and erode demand for base metals. Smaller gains of approximately 1.3%
were recorded within the global interest rate sector, primarily during August
and September, from long position in U.S., Australian, and Japanese fixed-income
futures as prices increased amid a worldwide “flight-to-quality” due to the
aforementioned drop in the global equity markets and worries regarding the
fundamental health of the U.S. financial system.
The
Partnership recorded total trading results including interest income totaling
$16,878,161 and expenses totaling $12,831,313, resulting in net income of
$4,046,848 for the nine months ended September 30, 2008. The
Partnership’s net asset value per Unit increased from $18.14 at December 31,
2007, to $18.82 at September 30, 2008.
The most
significant trading gains of approximately 6.0% were experienced within the
global stock index sector from short positions in U.S., European, and Pacific
Rim equity index futures as prices decreased during January, February, May, and
June on concerns that a persistent U.S. housing slump, mounting losses linked to
U.S. sub-prime mortgage investments, rising commodity prices, and a weakening
job market would restrain consumer spending, erode corporate earnings, and curb
global economic growth. Additional gains were experienced in
September from short positions in global stock index futures as equity prices
dropped sharply amid unprecedented U.S. financial market
turmoil. Within the global interest rate sector, gains of
approximately 4.6% were recorded
- 28
-
primarily
during January, February, August, and September from long positions in U.S.,
Australian, and Japanese fixed-income futures as prices moved higher in a
worldwide “flight-to-quality” following the aforementioned drop in the global
equity markets throughout most of the year and worries regarding the fundamental
health of the global economy and financial system. Additionally, U.S.
fixed-income futures prices moved higher as the U.S. Federal Reserve cut
interest rates by 200 basis points throughout the first quarter and U.S.
government reports showed a rise in unemployment and slower-than-expected Gross
Domestic Product growth during the fourth quarter of 2007. Within the
metals markets, gains of approximately 1.7% were experienced primarily during
January and February from long positions in silver futures as prices increased
due to a decline in the value of the U.S. dollar during the first
quarter. Elsewhere, short futures positions in copper, aluminum,
nickel, and zinc resulted in gains as prices decreased during September on
concerns that turmoil in the financial markets would further weaken the global
economy and erode demand for base metals. Within the energy sector,
gains of approximately 1.6% were recorded primarily during February, March,
April, May, and June from long futures positions in crude oil and its related
products as prices moved higher due to speculation that OPEC would cut
production, ongoing geopolitical concerns in the Middle East, growing Asian fuel
consumption, and strong demand for physical commodities as an inflation
hedge. During the second quarter, prices were pressured higher amid
news of declining production in Western Canada, a continued decline in U.S.
inventories, and forecasts for an active hurricane season in the
Atlantic. Additional gains of approximately 1.1% were experienced
within the agricultural markets, primarily during June, from long positions in
cocoa futures as prices rose on speculation that crops in the Ivory Coast, the
world’s largest producer, were developing more slowly than
anticipated. Smaller gains were recorded from long futures positions
in soybeans and soybean oil as prices increased during January, February, and
June amid news that global production might drop, rising energy prices may boost
demand for alternative biofuels, and severe floods in the
-29
-
U.S.
Midwest damaged crops. Finally, short positions in lean hog and live
cattle futures resulted in gains, primarily during the third quarter, as prices
declined on signs of rising inventories in the U.S. and slowing demand for pork
in China. A portion of the Partnership’s gains for the first nine
months of the year was offset by losses of approximately 3.8% incurred within
the currency sector, primarily during April, from long positions in the euro,
Australian dollar, Canadian dollar, and South African rand as the value of the
U.S. dollar reversed higher against these currencies in April after the U.S.
Institute for Supply Management’s manufacturing index unexpectedly moved higher
and a U.S. economic report showed private sector jobs had unexpectedly increased
in March. Further losses were recorded during August and September
from short positions in the U.S. dollar versus these currencies as the value of
the U.S. dollar was pressured higher due to a larger-than-previously-estimated
increase in U.S. Gross Domestic Product during the second quarter and surging
U.S. Treasury prices amid the aforementioned worldwide
“flight-to-quality”. Smaller losses were experienced from short
positions in the euro versus the Norwegian krone as the value of the Norwegian
krone decreased relative to the euro in September after slowing global economic
growth prevented Norway’s Central Bank from raising its benchmark interest
rate.
|
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.
- 30
-
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. However, the
Partnership is required to meet margin requirements equal to the net unrealized
loss on open forward currency contracts in the Partnership accounts with the
counterparty, which is accomplished by daily maintenance of the cash balance in
a custody account held at MS&Co.
The
Partnership’s total market risk may increase or decrease as it is influenced by
a wide variety of factors, including, but not limited to, the diversification
among the Partnership’s open positions, the volatility present within the
markets, and the liquidity of the markets.
The face
value of the market sector instruments held by the Partnership is typically many
times the applicable margin requirements. Margin requirements
generally range between 2% and 15% of contract face
value. Additionally, the use of leverage causes the face value of the
market sector instruments held by the Partnership typically to be many times the
total capitalization of the Partnership.
- 31
-
The
Partnership’s past performance is no guarantee of its future
results. Any attempt to numerically quantify the Partnership’s market
risk is limited by the uncertainty of its speculative trading. The
Partnership’s speculative trading and use of leverage may cause future losses
and volatility (i.e.,
"risk of ruin") that far exceed the Partnership’s experience to date under the
“Partnership’s Value at Risk in Different Market Sectors" section and
significantly exceed the Value at Risk ("VaR") tables disclosed.
Limited
partners will not be liable for losses exceeding the current net asset value of
their investment.
Quantifying the
Partnership’s Trading Value at Risk
The
following quantitative disclosures regarding the Partnership’s market risk
exposures contain "forward-looking statements" within the meaning of the safe
harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934). All quantitative disclosures in this section are deemed to be
forward-looking statements for purposes of the safe harbor, except for
statements of historical fact.
The
Partnership accounts for open positions on the basis of mark to market
accounting principles. Any loss in the market value of the
Partnership’s open positions is directly reflected in the Partnership’s earnings
and cash flow.
-
32 -
The
Partnership’s risk exposure in the market sectors traded by the Trading Advisor
is estimated below in terms of VaR. The Partnership estimates VaR
using a model based upon historical simulation (with a confidence level of 99%)
which involves constructing a distribution of hypothetical daily changes in the
value of a trading portfolio. The VaR model takes into account linear
exposures to risk including equity and commodity prices, interest rates, foreign
exchange rates, and correlation among these variables. The hypothetical changes
in portfolio value are based on daily percentage changes observed in key market
indices or other market factors ("market risk factors") to which the portfolio
is sensitive. The one-day 99% confidence level of the Partnership’s
VaR corresponds to the negative change in portfolio value that, based on
observed market risk factors, would have been exceeded once in 100 trading days,
or one day in 100. VaR typically does not represent the worst case
outcome. Demeter uses approximately four years of daily market data
(1,000 observations) and re-values its portfolio (using delta-gamma
approximations) for each of the historical market moves that occurred over this
time period. This generates a probability distribution of daily
"simulated profit and loss" outcomes. The VaR is the appropriate
percentile of this distribution. For example, the 99% one-day VaR
would represent the 10th worst outcome from Demeter’s simulated profit and loss
series.
The
Partnership’s VaR computations are based on the risk representation of the
underlying benchmark for each instrument or contract and do not distinguish
between exchange and non-exchange dealer-based instruments. They are
also not based on exchange and/or dealer-based maintenance margin
requirements.
VaR
models, including the Partnership’s are continually evolving as trading
portfolios become more diverse and modeling techniques and systems capabilities
improve. Please note that the VaR model is used to numerically
quantify market risk for historic reporting purposes only and is not utilized by
either Demeter or
- 33
-
the Trading Advisor in their
daily risk management activities. Please further note that VaR as
described above may not be comparable to similarly-titled measures used by other
entities.
The Partnership’s Value at
Risk in Different Market Sectors
The
following table indicates the VaR associated with the Partnership’s open
positions as a percentage of total net assets by primary market risk category at
September 30, 2009 and 2008. At September 30, 2009 and 2008, the
Partnership’s total capitalization was approximately $121 million and $168
million, respectively.
Primary
Market
|
September
30, 2009
|
September
30, 2008
|
Risk Category
|
Value at Risk
|
Value at Risk
|
Equity
|
(1.72)%
|
(0.19)%
|
Interest
Rate
|
(1.40)
|
(0.54)
|
Currency
|
(0.64)
|
(0.16)
|
Commodity
|
(0.94)
|
(0.65)
|
Aggregate
Value at Risk
|
(2.27)%
|
(1.00)%
|
The VaR
for a market category represents the one-day downside risk for the aggregate
exposures associated with this market category. The Aggregate Value
at Risk listed above represents the VaR of the Partnership’s open positions
across all the market categories, and is less than the sum of the VaRs for all
such market categories due to the diversification benefit across asset
classes.
Because
the business of the Partnership is the speculative trading of futures, forwards
and options on such contracts, the composition of its trading portfolio can
change significantly over any given time period, or even within a single trading
day. Such changes could positively or negatively materially
impact market risk as measured by VaR.
- 34
-
The table
below supplements the quarter-end VaR set forth above by presenting the
Partnership’s high, low, and average VaR, as a percentage of total net assets
for the four quarter-end reporting periods from October 1, 2008 through
September 30, 2009.
Primary Market Risk
Category
|
High
|
Low
|
Average
|
Equity
|
(1.72)%
|
(0.05)%
|
(0.55)%
|
Interest
Rate
|
(1.40)
|
(0.53)
|
(0.98)
|
Currency
|
(0.64)
|
(0.14)
|
(0.39)
|
Commodity
|
(0.94)
|
(0.50)
|
(0.68)
|
Aggregate
Value at Risk
|
(2.27)%
|
(0.94)%
|
(1.46)%
|
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
|
- 35
-
·
|
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.
|
In
addition, the VaR tables above, as well as the past performance of the
Partnership, give no indication of the Partnership’s potential "risk of
ruin".
The VaR
tables provided present the results of the Partnership’s VaR for each of the
Partnership’s market risk exposures and on an aggregate basis at September 30,
2009 and 2008, and for the four quarter-end reporting periods from October 1,
2008, through September 30, 2009. VaR is not necessarily
representative of the Partnership’s historic risk, nor should it be used to
predict the Partnership’s future financial performance or its ability to manage
or monitor risk. There can be no assurance that the Partnership’s
actual losses on a particular day will not exceed the VaR amounts indicated
above or that such losses will not occur more than once in 100 trading
days.
Non-Trading
Risk
The
Partnership has non-trading market risk on its foreign cash
balances. These balances and any market risk they may represent are
immaterial.
The
Partnership also maintains a substantial portion of its available assets in cash
at MS&Co.; as of September 30, 2009, such amount was equal to approximately
89% 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.
- 36
-
Materiality,
as used throughout this section, is based on an assessment of reasonably
possible market movements and any associated potential losses, taking into
account the leverage, optionality, and multiplier features of the Partnership’s
market-sensitive instruments, in relation to the Partnership’s Net
Assets.
Qualitative Disclosures
Regarding Primary Trading Risk Exposures
The
following qualitative disclosures regarding the Partnership’s market risk
exposures - except for (A) those disclosures that are statements of historical
fact and (B) the descriptions of how the Partnership manages its primary market
risk exposures - constitute forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. The Partnership’s primary market risk exposures, as well as the strategies
used and to be used by Demeter and the Trading 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 and expropriations,
illiquid markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx of new market
participants, increased regulation, and many other factors could result in
material losses, as well as in material changes to the risk exposures and the
risk management strategies of the Partnership.
The
Trading Advisor, in
general, tends to utilize trading system(s) to take positions when
market opportunities develop, and Demeter anticipates that the Trading Advisor
will continue to do so.
Investors
must be prepared to lose all or substantially all of their investment in the
Partnership.
- 37
-
The
following were the primary trading risk exposures of the Partnership at
September 30, 2009, by market sector. It may be anticipated, however,
that these market exposures will vary materially over time.
Equity. The
largest market exposure of the Partnership at September 30, 2009, was to the global
stock index sector, primarily to equity price risk in the G-7
countries. The G-7 countries consist of France, the U.S., the United
Kingdom, Germany, Japan, Italy, and Canada. The stock index futures
traded by the Partnership are by law limited to futures on broadly-based
indices. At September 30, 2009, the Partnership’s primary market
exposures were to the FTSE 100 (United Kingdom), S&P 500 (U.S.), OMX 30
(Sweden), SPI 200 (Australia), IBEX 35 (Spain), CAC 40 (France), DAX (Germany),
Nikkei 225 (Japan), NASDAQ 100 (U.S.), S&P MIB (Italy), Canadian S&P 60
(Canada), Euro Stox 50 (Europe), Taiwan (Taiwan), Hang Seng (Hong Kong), Dow
Jones (U.S.), Russell 2000 (U.S.), AEX (The Netherlands), H-Shares (Hong Kong),
TOPIX (Japan), All Share (South Africa), S&P Midcap (U.S.), and Singapore
Free (Singapore) stock indices. The Partnership is typically exposed
to the risk of adverse price trends or static markets in the U.S., European, and
Pacific Rim stock indices. Static markets would not cause major market changes,
but would make it difficult for the Partnership to avoid trendless price
movements, resulting in numerous small losses.
Interest
Rate. The second largest market exposure of the Partnership at
September 30, 2009, was to the global interest rate sector. Exposure
was primarily spread across European, U.S., Japanese, Australian, and Canadian
interest rate sectors. Interest rate movements directly affect the
price of the sovereign bond futures positions held by the Partnership and
indirectly affect the value of its stock index and currency
positions. Interest rate movements in one country, as well as
relative interest rate movements between countries, materially
impact
- 38
-
the
Partnership’s profitability. The Partnership’s primary interest rate
exposure is generally to interest rate fluctuations in the U.S. and the other
G-7 countries. However, the Partnership also takes futures positions in the
government debt of smaller countries- e.g.,
Australia. Demeter anticipates that the G-7 countries’ interest rate
will remain the primary interest rate exposure of the Partnership for the
foreseeable future. The speculative futures positions held by the
Partnership may range from short to long-term
instruments. Consequently, changes in short, medium, or long-term
interest rates may have an effect on the Partnership.
Currency. At
September 30, 2009, the Partnership had market exposure to the currency sector.
The Partnership’s currency exposure is to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships between
different currencies and currency pairs. Interest rate changes, as
well as political and general economic conditions influence these
fluctuations. The Partnership trades a number of currencies,
including cross-rates - i.e., positions between two currencies other than the
U.S. dollar. At September 30, 2009, the Partnership’s major exposures
were to Czech koruna, euro, Polish zloty, Hungarian forint, Norwegian krone, and
Swedish krona currency crosses, as well as to outright U.S. dollar
positions. Outright positions consist of the U.S. dollar vs. other
currencies. These other currencies include major and minor
currencies. Demeter does not anticipate that the risk associated with
the Partnership’s currency trades will change significantly in the
future.
Commodity.
Soft Commodities and
Agriculturals. The third largest market exposure of the
Partnership at September 30, 2009, was to the markets that comprise these
sectors. Most of the exposure was to the
- 39
-
sugar,
cocoa, wheat, coffee, corn, lean hogs, live cattle, feeder cattle, soybean meal,
rapeseed, cotton, soybeans, soybean oil, and orange juice
markets. Supply and demand inequalities, severe weather disruptions,
and market expectations affect price movements in these markets.
Energy. At
September 30, 2009, the Partnership had market exposure to the energy
sector. The Partnership’s primary energy exposure was to futures
contracts in crude oil and its related products, as well as natural
gas. Price movements in these markets result from geopolitical
developments, particularly in the Middle East, as well as weather patterns, and
other economic fundamentals. Significant profits and losses, which
have been experienced in the past, are expected to continue to be experienced in
the future. Natural gas has exhibited volatility in price resulting
from weather patterns and supply and demand factors and will likely continue in
this choppy pattern.
Metals. At
September 30, 2009, the Partnership had market exposure to the metals
sector. The Partnership's metals exposure was to fluctuations in the
price of precious metals, such as silver, gold, and platinum, as well as base
metals, such as copper, zinc, lead, aluminum, and nickel. Economic
forces, supply and demand inequalities, geopolitical factors, and market
expectations influence price movements in these markets.
- 40
-
|
Qualitative
Disclosures Regarding Non-Trading Risk
Exposure
|
The
following was the only non-trading risk exposure of the Partnership at September
30, 2009:
Foreign Currency
Balances. The Partnership’s primary foreign currency balances at
September 30, 2009, were in
Australian dollars, Hong Kong dollars, Japanese yen, euros, Singapore dollars,
British pounds, Canadian dollars, and Swedish kronor. The Partnership
controls the non-trading risk of foreign currency balances by regularly
converting them back into U.S. dollars upon liquidation of their respective
positions.
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. Demeter 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 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.
Demeter
monitors and controls the risk of the Partnership’s non-trading instrument,
cash. Cash is the only Partnership investment directed by Demeter, rather than
the Trading Advisor.
- 41
-
Item
4. CONTROLS AND
PROCEDURES
As of the
end of the period covered by this quarterly report, the President and Chief
Financial Officer of Demeter, have evaluated the effectiveness of the
Partnership’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act), and have judged
such controls and procedures to be effective.
Changes in Internal Control
over Financial Reporting
There
have been no material changes during the period covered by this quarterly report
in the Partnership’s internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected
or are reasonably likely to affect the Partnership’s internal control over
financial reporting.
Limitations on the
Effectiveness of Controls
Any
control system, no matter how well designed and operated, can provide reasonable
(not absolute) assurance that its objectives will be
met. Furthermore, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been
detected.
Item
4T. CONTROLS AND
PROCEDURES
Not
applicable.
- 42
-
PART II. OTHER
INFORMATION
Item
1A.
|
RISK
FACTORS
|
There
have been no material changes from the risk factors previously referenced in the
Partnership’s Report on Form 10-K for the fiscal year ended December 31,
2008.
Item
6.
|
EXHIBITS
|
31.01
|
Certification
of President of Demeter Management LLC, the general partner of the
Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.02
|
Certification
of Chief Financial Officer of Demeter Management LLC, the general partner
of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.01
|
Certification
of President of Demeter Management LLC, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.02
|
Certification
of Chief Financial Officer of Demeter Management LLC, the general partner
of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
– 43
–
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:
|
Demeter
Management LLC
|
||
(General
Partner)
|
|||
November
12, 2009
|
By:
|
/s/Christian
Angstadt
|
|
Christian
Angstadt
|
|||
Chief
Financial Officer
|
The
General Partner which signed the above is the only party authorized to act for
the registrant. The registrant has no principal executive officer,
principal financial officer, controller, or principal accounting officer and has
no Board of Directors.
- 44
-