Attached files
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 June 30, 2010 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: 0-26340
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MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
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(Exact name of registrant as specified in its charter)
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Delaware
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13-3782232
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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Demeter Management LLC
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522 Fifth Avenue, 13th Floor
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New York, NY
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10036
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code
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(212) 296-1999
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(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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer x
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Smaller reporting company o
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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 GLOBAL BALANCED L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2010
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PART I. FINANCIAL INFORMATION
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Item 1.
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Financial Statements (Unaudited)
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Statements of Financial Condition as of June 30, 2010 and December 31, 2009
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2
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Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009
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3
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Statements of Changes in Partners’ Capital for the Six Months Ended June 30, 2010 and 2009
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4
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Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009
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5
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Condensed Schedules of Investments as of June 30, 2010 and December 31, 2009
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6
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Notes to Financial Statements
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7-22
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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23-31
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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32-43
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Item 4.
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Controls and Procedures
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43-44
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PART II. OTHER INFORMATION
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Item 1A.
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Risk Factors
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45
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Item 6.
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Exhibits
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45
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
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June 30,
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December 31,
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2010
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2009
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ASSETS
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$
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$
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Trading Equity:
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Unrestricted cash
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17,168,204
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17,741,979
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Restricted cash
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1,273,685
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950,387
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Total cash
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18,441,889
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18,692,366
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Net unrealized gain on open contracts (MS&Co.)
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1,315,379
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1,347,276
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Net unrealized gain (loss) on open contracts (MSIP)
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(28,942)
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23,422
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Total net unrealized gain on open contracts
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1,286,437
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1,370,698
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Options purchased (premiums paid $80,680 and $1,034, respectively)
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78,220
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87
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Total Trading Equity
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19,806,546
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20,063,151
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Interest receivable (MSSB)
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1,384
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351
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Total Assets
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19,807,930
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20,063,502
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LIABILITIES AND PARTNERS’ CAPITAL
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Liabilities
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Redemptions payable
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181,171
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149,623
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Accrued brokerage fees (MS&Co.)
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75,323
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78,937
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Accrued management fees
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24,684
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25,592
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Options written (premiums received $12,430 and $0, respectively)
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12,993
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–
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Total Liabilities
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294,171
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254,152
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Partners’ Capital
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Limited Partners (1,216,063.196 and 1,287,159.251 Units, respectively)
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19,315,761
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19,608,456
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General Partner (12,465.331 and 13,187.331 Units, respectively)
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197,998
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200,894
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Total Partners’ Capital
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19,513,759
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19,809,350
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Total Liabilities and Partners’ Capital
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19,807,930
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20,063,502
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NET ASSET VALUE PER UNIT
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15.88
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15.23
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The accompanying notes are an integral part of these financial statements.
- 2 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
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For the Three Months
Ended June 30,
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For the Six Months
Ended June 30,
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2010
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2009
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2010
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2009
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$
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$
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$
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$
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INVESTMENT INCOME
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Interest income (MSSB)
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6,525
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7,105
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9,310
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16,329
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EXPENSES
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Brokerage fees (MS&Co.)
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229,296
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282,778
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453,926
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611,118
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Management fees
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74,766
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92,518
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148,180
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199,841
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Total Expenses
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304,062
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375,296
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602,106
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810,959
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NET INVESTMENT LOSS
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(297,537)
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(368,191)
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(592,796)
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(794,630)
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TRADING RESULTS
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Trading profit (loss):
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Realized
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1,402,637
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(574,750)
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1,508,185
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206,580
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Net change in unrealized
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(997,332)
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602,593
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(86,337)
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(1,576,272)
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Total Trading Results
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405,305
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27,843
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1,421,848
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(1,369,692)
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NET INCOME (LOSS)
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107,768
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(340,348)
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829,052
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(2,164,322)
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NET INCOME (LOSS) ALLOCATION
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Limited Partners
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106,699
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(336,922)
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820,739
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(2,142,553)
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General Partner
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1,069
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(3,426)
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8,313
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(21,769)
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NET INCOME (LOSS) PER UNIT *
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Limited Partners
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0.08
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(0.23)
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0.65
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(1.39)
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General Partner
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0.08
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(0.23)
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0.65
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(1.39)
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Units
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Units
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Units
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Units
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WEIGHTED AVERAGE NUMBER
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OF UNITS OUTSTANDING
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1,254,715.734
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1,472,204.927
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1,272,817.132
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1,557,398.710
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* Based on change in Net Asset Value per Unit.
The accompanying notes are an integral part of these financial statements.
– 3 –
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
For the Six Months Ended June 30, 2010 and 2009
(Unaudited)
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Units of
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Partnership
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Limited
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General
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Interest
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Partners
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Partner
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Total
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$
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$
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$
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Partners’ Capital,
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December 31, 2009
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1,300,346.582
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19,608,456
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200,894
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19,809,350
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Net Income
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–
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820,739
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8,313
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829,052
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Redemptions
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(71,818.055)
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(1,113,434)
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(11,209)
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(1,124,643)
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Partners’ Capital,
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June 30, 2010
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1,228,528.527
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19,315,761
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197,998
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19,513,759
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Partners’ Capital,
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December 31, 2008
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1,735,551.506
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30,071,901
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305,574
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30,377,475
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Net Loss
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–
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(2,142,553)
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(21,769)
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(2,164,322)
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Redemptions
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(332,167.059)
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(5,455,887)
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(55,584)
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(5,511,471)
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Partners’ Capital,
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June 30, 2009
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1,403,384.447
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22,473,461
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228,221
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22,701,682
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The accompanying notes are an integral part of these financial statements.
- 4 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
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For the Six Months Ended June 30,
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2010
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2009
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$
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$
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net income (loss)
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829,052
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(2,164,322)
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Noncash item included in net income (loss):
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Net change in unrealized
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86,337
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1,576,272
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Increase in operating assets:
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Restricted cash
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(323,298)
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(814,065)
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Net premiums paid for options purchased
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(79,646)
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(19,867)
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Interest receivable (MSSB)
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(1,033)
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(1,611)
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Increase (decrease) in operating liabilities:
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Accrued brokerage fees (MS&Co.)
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(3,614)
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(26,656)
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Accrued management fees
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(908)
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(8,370)
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Premiums received from options written
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12,430
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4,459
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Accrued incentive fee
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–
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(158,261)
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Net cash provided by (used for) operating activities
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519,320
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(1,612,421)
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CASH FLOWS FROM FINANCING ACTIVITIES
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Cash paid for redemptions of Units
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(1,093,095)
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(6,538,055)
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Net cash used for financing activities
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(1,093,095)
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(6,538,055)
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Net decrease in unrestricted cash
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(573,775)
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(8,150,476)
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Unrestricted cash at beginning of period
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17,741,979
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29,138,620
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Unrestricted cash at end of period
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17,168,204
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20,988,144
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The accompanying notes are an integral part of these financial statements.
- 5 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
CONDENSED SCHEDULES OF INVESTMENTS
June 30, 2010 and December 31, 2009 (Unaudited)
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Futures and Forward Contracts
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Long Unrealized
Gain/(Loss)
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Percentage of
Net Assets
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Short Unrealized
Gain/(Loss)
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Percentage of
Net Assets
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Net Unrealized
Gain/(Loss)
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$
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%
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$
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%
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$
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June 30, 2010 Partnership Partners’ Capital:
$19,513,759
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Commodity
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(6,920)
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(0.03)
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77,960
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0.40
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71,040
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Equity
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(94,338)
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(0.48)
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4,113
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0.02
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(90,225)
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Foreign currency
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(1,067)
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(0.01)
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(63,303)
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(0.32)
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(64,370)
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Interest rate
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595,979
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3.05
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(3,021)
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(0.02)
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592,958
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Grand Total:
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493,654
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2.53
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15,749
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0.08
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509,403
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Unrealized Currency Gain
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3.98
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777,034
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Total Net Unrealized Gain on Open Contracts
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1,286,437
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Options Contracts
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Fair Value
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Percentage of
Net Assets
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$
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%
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Options purchased on Futures Contracts
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–
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–
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Options purchased on Forward Contracts
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78,220
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0.40
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Options written on Futures Contracts
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–
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–
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Options written on Forward Contracts
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(12,993)
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(0.07)
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Futures and Forward Contracts
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Long Unrealized
Gain
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Percentage of
Net Assets
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Short Unrealized
Gain/(Loss)
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Percentage of
Net Assets
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Net Unrealized
Gain
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$
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%
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$
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%
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$
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December 31, 2009 Partnership Partners’ Capital: $19,809,350
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Commodity
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186,850
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0.94
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(53,915)
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(0.27)
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132,935
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Equity
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82,036
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0.41
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(961)
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–
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81,075
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Foreign currency
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19,583
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0.10
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26,941
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0.14
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46,524
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Interest rate
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90,053
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0.45
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13,882
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0.07
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103,935
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Grand Total:
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378,522
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1.90
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(14,053)
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(0.06)
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364,469
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Unrealized Currency Gain
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5.08
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1,006,229
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Total Net Unrealized Gain on Open Contracts
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1,370,698
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Options Contracts
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Fair Value
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Percentage of
Net Assets
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$
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%
|
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Options purchased on Futures Contracts
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–
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–
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Options purchased on Forward Contracts
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87
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–
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Options written on Futures Contracts
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–
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–
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Options written on Forward Contracts
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–
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–
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The accompanying notes are an integral part of these financial statements.
- 6 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2010
(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 Global Balanced 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, 2009.
1. Organization
Morgan Stanley Smith Barney Spectrum Global Balanced L.P. is a Delaware limited partnership organized in 1994 to engage primarily in the speculative trading of futures contracts, options on futures and forward contracts, and forward contracts on physical commodities and other commodity interests, including, but not limited to, foreign currencies, financial instruments, metals, energy, and agricultural products (collectively, "Futures Interests") (refer to Note 4. Financial Instruments). The Partnership is one of the Morgan Stanley Smith Barney Spectrum series of funds, comprised of the Partnership, Morgan Stanley Smith Barney Spectrum Currency L.P., Morgan Stanley Smith Barney Spectrum Select L.P., Morgan Stanley Smith Barney Spectrum Strategic L.P., and Morgan Stanley Smith Barney Spectrum Technical L.P. (collectively, the "Spectrum Series").
- 7 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership’s general partner is Demeter Management LLC (“Demeter”). The non-clearing commodity broker is Morgan Stanley Smith Barney LLC (“MSSB”) as of May 1, 2010. The clearing commodity brokers are Morgan Stanley & Co. Incorporated ("MS&Co.") and Morgan Stanley & Co. International plc ("MSIP"). MS&Co. also acts as the counterparty on all trading of foreign currency forward contracts. Morgan Stanley Capital Group Inc. ("MSCG") acts as the counterparty on all trading of options on foreign currency forward contracts. MSIP serves as the commodity broker for trades on the London Metal Exchange (“LME”). Demeter is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”). MSSBH is majority-owned indirectly by Morgan Stanley and minority-owned indirectly by Citigroup Inc. MS&Co., MSIP, and MSCG are wholly-owned subsidiaries of Morgan Stanley. The trading advisors to the Partnership are SSARIS Advisors, LLC, Altis Partners (Jersey) Limited, and C-View International Limited (each individually, a “Trading Advisor”, or collectively, the “Trading Advisors”).
2. Related Party Transactions
The Partnership’s cash is on deposit with MS&Co., MSIP, and MSSB in futures, forward and options trading accounts to meet margin requirements as needed. MSSB pays the Partnership at each month end interest income on 80% of the funds on deposit with the commodity brokers at a rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate during such month. MSSB will retain any interest earned in excess of the interest paid by MSSB to the Partnership. The Partnership pays brokerage fees to MS&Co. MSCG acts as the counterparty on all trading of options on foreign currency forward contracts.
- 8 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
The guidance issued by the Financial Accounting Standards Board (“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 June 30, 2010. If applicable, the Partnership recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statements of Operations. Generally, the 2006 through 2009 tax years remain subject to examination by U.S. federal and most state tax authorities.
4. Financial Instruments
The Partnership trades Futures Interests. Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price. Futures Interests are open commitments until settlement date, at which
time they are realized. They are valued at fair value, generally on a daily basis, and the unrealized gains and losses on open contracts (the difference between contract trade price and market price) are reported in the
- 9 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 net change in unrealized trading profit (loss) 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 inputs, 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 buy or write put and call options through listed exchanges and the over-the-counter market. The buyer of an option has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of a specific Futures Interest on the underlying asset at a specified price prior to or on a specified expiration date. The writer of an option is exposed to the risk of loss if the fair value of the Futures Interest on the underlying asset declines (in the case of a put option) or increases (in the case of a call option). The writer of an option can never profit by more than the premium paid by the buyer but can potentially lose an unlimited amount.
- 10 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Premiums received/premiums paid from writing/purchasing options are recorded as liabilities/assets on the Statements of Financial Condition and are subsequently adjusted to fair values. The difference between the fair value of the option and the premiums received/premiums paid is treated as an unrealized gain or loss.
The fair value of exchange-traded contracts is based on the settlement price quoted by the exchange on the day with respect to which fair value is being determined. If an exchange-traded contract could not have been liquidated on such day due to the operation of daily limits or other rules of the exchange, the settlement price will be equal to the settlement price on the first subsequent day on which the contract could be liquidated. The fair value of off-exchange-traded contracts is based on the fair value quoted by the counterparty.
The Partnership’s contracts are accounted for on a trade-date basis and marked to market on a daily basis. The Partnership accounts for its derivative investments as required by the Derivatives and Hedging as required by the FASB Accounting Standards Codification (“ASC” or the “Codification”). A derivative is defined as a financial instrument or other contract that has all three of the following characteristics:
|
1)
|
a) One or more underlyings and b) 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.
|
- 11 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Generally, derivatives include futures, forwards, swaps or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars.
The net unrealized gains on open contracts, reported as a component of "Trading Equity" on the Statements of Financial Condition, and their longest contract maturities were as follows:
|
Net Unrealized Gains on Open Contracts
|
Longest Maturities
|
||||
|
Date
|
Exchange-Traded
|
Off-Exchange-Traded
|
Total
|
Exchange-Traded
|
Off-Exchange-Traded
|
|
$
|
$
|
$
|
|||
|
Jun. 30, 2010
|
1,262,909
|
23,528
|
1,286,437
|
Jun. 2012
|
Aug. 2010
|
|
Dec. 31, 2009
|
1,313,616
|
57,082
|
1,370,698
|
Dec. 2011
|
Mar. 2010
|
The Partnership has credit risk associated with counterparty nonperformance. As of the date of the financial statements, the credit risk associated with the instruments in which the Partnership trades is limited to the unrealized gain amounts reflected in the Partnership’s Statements of Financial Condition.
The Partnership also has credit risk because MS&Co., MSIP, and/or MSCG act as the futures commission merchants or the counterparties, with respect to most of the Partnership’s assets. Exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts are marked to market on a daily basis, with variations in value settled on a daily basis. MS&Co. and MSIP, each acting as a commodity broker for the Partnership’s exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled
- 12 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 equal to the net unrealized gains on all open exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, which funds, in the aggregate, totaled $19,704,798 and $20,005,982 at June 30, 2010 and December 31, 2009, respectively. With respect to the Partnership’s off-exchange-traded forward currency contracts and forward currency options contracts, there are no daily settlements of variation in value, nor is there any requirement that an amount equal to the net unrealized gains (losses) on such contracts be segregated. However, the Partnership is required to meet margin requirements equal to the net unrealized loss on open forward currency contracts in the Partnership accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at MS&Co. With respect to those off-exchange-traded forward currency contracts, the Partnership is at risk to the ability of MS&Co., the sole counterparty on all such contracts, to perform. With respect to those off-exchange-traded forward currency options contracts, the Partnership is at risk to the ability of MSCG, the sole counterparty on all such contracts, to perform. The Partnership has a netting agreement with each counterparty. These agreements, which seek to reduce both the Partnership’s and the counterparties’ exposure on off-exchange-traded forward currency contracts, including options on such contracts, should materially decrease the Partnership’s credit risk in the event of MS&Co.’s or MSCG’s bankruptcy or insolvency.
- 13 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 are settled upon termination of the contract. Gains and losses on off-exchange-traded forward currency options contracts are settled upon an agreed upon settlement date. However, the Partnership is required to meet margin requirements equal to the net unrealized loss on open forward currency contracts in the Partnership’s accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at MS&Co.
5. Derivatives and Hedging
Effective January 1, 2009, the Partnership adopted the provision of the Derivatives and Hedging Topic of the FASB Codification, which 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 the Partnership’s financial position, financial performance, and cash flows. The adoption of this new guidance did not have a material impact on the Partnership’s financial statements, other than enhanced financial statements disclosures.
- 14 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership’s objective is to profit from speculative trading in Futures Interests. Therefore, the Trading Advisors for the Partnership will take speculative positions in Futures Interests where they feel the best profit opportunities exist for their trading strategy. As such, the average number of contracts outstanding in absolute quantities (the total of the open long and open short positions) has been presented as a part of the volume disclosure, as position direction is not an indicative factor in such volume disclosures. In regards to foreign currency forward trades, each notional quantity amount has been converted to an equivalent contract based upon an industry convention.
The following tables summarize the valuation of the Partnership’s investments as required by the disclosures about Derivatives and Hedging as of June 30, 2010 and December 31, 2009, respectively.
The Effect of Trading Activities on the Statements of Financial Condition as of June 30, 2010:
|
Futures and Forward Contracts
|
Long
Unrealized
Gain
|
Long Unrealized
Loss
|
Short Unrealized
Gain
|
Short Unrealized
Loss
|
Net Unrealized
Gain/(Loss)
|
Average number of contracts
outstanding for six months (absolute quantity)
|
|
|
$
|
$
|
$
|
$
|
$
|
|||
|
Commodity
|
166,788
|
(173,708)
|
116,629
|
(38,669)
|
71,040
|
340
|
|
|
Equity
|
234
|
(94,572)
|
4,113
|
–
|
(90,225)
|
47
|
|
|
Foreign currency
|
91,906
|
(92,973)
|
19,828
|
(83,131)
|
(64,370)
|
1,665
|
|
|
Interest rate
|
600,069
|
(4,090)
|
–
|
(3,021)
|
592,958
|
430
|
|
|
Total
|
858,997
|
(365,343)
|
140,570
|
(124,821)
|
509,403
|
||
|
Unrealized currency gain
|
777,034
|
||||||
|
Total net unrealized gain on open contracts
|
1,286,437
|
||||||
|
Average number of
contracts outstanding
|
|||||||
|
Fair
|
for six months
|
||||||
|
Value
|
(absolute quantity)
|
||||||
|
Option Contracts
|
$
|
||||||
|
Options purchased
|
78,220
|
2
|
|||||
|
Options written
|
(12,993)
|
1
|
|||||
- 15 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Effect of Trading Activities on the Statements of Financial Condition as of December 31, 2009:
|
Futures and Forward Contracts
|
Long
Unrealized
Gain
|
Long Unrealized
Loss
|
Short Unrealized
Gain
|
Short Unrealized
Loss
|
Net Unrealized
Gain
|
Average number of contracts
outstanding for the year (absolute quantity)
|
|
$
|
$
|
$
|
$
|
$
|
||
|
Commodity
|
290,387
|
(103,537)
|
24,773
|
(78,688)
|
132,935
|
278
|
|
Equity
|
83,030
|
(994)
|
–
|
(961)
|
81,075
|
42
|
|
Foreign currency
|
81,951
|
(62,368)
|
75,615
|
(48,674)
|
46,524
|
952
|
|
Interest rate
|
159,043
|
(68,990)
|
15,050
|
(1,168)
|
103,935
|
357
|
|
Total
|
614,411
|
(235,889)
|
115,438
|
(129,491)
|
364,469
|
|
|
Unrealized currency gain
|
1,006,229
|
|||||
|
Total net unrealized gain on open contracts
|
1,370,698
|
|
Average number of
|
||
|
contracts outstanding
|
||
|
Fair
|
for the year
|
|
|
Value
|
(absolute quantity)
|
|
|
Option Contracts
|
$
|
|
|
Options purchased
|
87
|
2
|
|
Options written
|
–
|
1
|
The following tables summarize the net trading results of the Partnership for the three and six months ended June 30, 2010 and 2009, respectively, as required by the disclosures about Derivatives and Hedging.
The Effect of Trading Activities on the Statements of Operations for the Three and Six Months Ended June 30, 2010, included in Total Trading Results:
|
For the Three Months
|
For the Six Months
|
|
|
Ended June 30, 2010
|
Ended June 30, 2010
|
|
|
Type of Instrument
|
$
|
$
|
|
Commodity
|
(700,952)
|
(465,435)
|
|
Equity
|
(502,757)
|
(446,649)
|
|
Foreign currency
|
289,829
|
904,506
|
|
Interest rate
|
1,527,082
|
1,658,621
|
|
Unrealized currency loss
|
(207,897)
|
(229,195)
|
|
Total
|
405,305
|
1,421,848
|
- 16 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Line Items on the Statements of Operations for the Three and Six Months Ended June 30, 2010:
|
For the Three Months
|
For the Six Months
|
|
|
Ended June 30, 2010
|
Ended June 30, 2010
|
|
|
Trading Results
|
$
|
$
|
|
Realized
|
1,402,637
|
1,508,185
|
|
Net change in unrealized
|
(997,332)
|
(86,337)
|
|
Total Trading Results
|
405,305
|
1,421,848
|
The Effect of Trading Activities on the Statements of Operations for the Three and Six Months Ended June 30, 2009 included in Total Trading Results:
|
For the Three Months
|
For the Six Months
|
|
|
Ended June 30, 2009
|
Ended June 30, 2009
|
|
|
Type of Instrument
|
$
|
$
|
|
Commodity
|
(16,681)
|
(394,643)
|
|
Equity
|
88,018
|
(75,823)
|
|
Foreign currency
|
13,698
|
(623,960)
|
|
Interest rate
|
(306,436)
|
(525,990)
|
|
Unrealized currency gain
|
249,244
|
250,724
|
|
Total
|
27,843
|
(1,369,692)
|
Line Items on the Statements of Operations for the Three and Six Months Ended June 30, 2009:
|
For the Three Months
|
For the Six Months
|
|
|
Ended June 30, 2009
|
Ended June 30, 2009
|
|
|
Trading Results
|
$
|
$
|
|
Realized
|
(574,750)
|
206,580
|
|
Net change in unrealized
|
602,593
|
(1,576,272)
|
|
Total Trading Results
|
27,843
|
(1,369,692)
|
6. Fair Value Measurements and Disclosures
Financial instruments are carried at fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified and disclosed in the following three levels: Level 1 - unadjusted quoted market prices in
- 17 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
June 30, 2010
|
Unadjusted
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 futures contracts
|
1,262,909
|
—
|
n/a
|
1,262,909
|
|
|
Net unrealized gain on forward contracts
|
—
|
23,528
|
n/a
|
23,528
|
|
|
Options purchased
|
—
|
78,220
|
n/a
|
78,220
|
|
|
Liabilities
|
|||||
|
Options written
|
—
|
(12,993)
|
n/a
|
(12,993)
|
- 18 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2009
|
Unadjusted
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 futures contracts
|
1,313,616
|
—
|
n/a
|
1,313,616
|
|
|
Net unrealized gain on forward contracts
|
—
|
57,082
|
n/a
|
57,082
|
|
|
Options purchased
|
—
|
87
|
n/a
|
87
|
7. Other Pronouncements
(a) Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
In June 2009, the FASB issued accounting guidance to establish FASB Codification. ASC established the exclusive authoritative reference for accounting principles generally accepted in the United States of America (“U.S. GAAP”) for use in financial statements except for Securities and Exchange Commission (“SEC”) rules and interpretive releases, which are also authoritative U.S. GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. The Codification became the single source of authoritative U.S. GAAP and is effective for financial statements issued for interim and annual periods ending after September 15, 2009.
(b) Fair Value Measurements
In April 2009, the FASB issued additional guidance relating to Fair Value Measurements for determining fair value and requires new disclosures regarding the categories of fair value instruments, as well as the
- 19 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
inputs and valuation techniques utilized to determine fair value and any changes to the inputs and valuation techniques during the period. It is effective for the interim and annual periods ending after June 15, 2009 and the adoption did not have a material impact on the Partnership’s financial statements.
(c) Financial Instruments
In April 2009, the FASB issued new guidance that 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. This guidance is effective for the interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Partnership’s financial statements.
(d) Subsequent Events
In May 2009, the FASB issued accounting guidance to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In February 2010, the FASB issued Accounting Standards Update, Subsequent Events – Amendments to Certain Recognition and Disclosures Requirements, which was effective immediately, and amends the previous guidance on subsequent events and no longer requires SEC filers to disclose the date through which subsequent events have been evaluated. Management performed its evaluation of subsequent events and has determined that there were no subsequent events requiring adjustment in the financial statements. The nature of the subsequent event effective July 28, 2010 is disclosed in the Subsequent Event section on page 22.
- 20 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(e) Improving Disclosures about Fair Value Measurements
In January 2010, the FASB issued guidance which, among other things, amends fair value measurements and disclosures to require entities to separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and which clarifies existing disclosure requirements regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level
2 or Level 3 of the fair value hierarchy. This guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Partnership’s financial statements.
(f) Consolidation of Variable Interest Entities
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for variable interest entities. It contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity.
It also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be
- 21 -
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
disregarded. The amendment is effective for annual periods beginning after November 15, 2009, and interim periods thereafter. Effective February 25, 2010, the FASB has decided to indefinitely defer the application of this amendment for certain entities. Management believes that the Partnership meets the criteria of the indefinite deferral of the application of this guidance.
|
|
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.
9. Subsequent Event
On July 28, 2010, the Partnership received a settlement award payment in the amount of $29,602 from the Natural Gas Commodity Litigation Settlement Administrator. This settlement represents the Partnership’s portion of the 2006 Net Settlement Fund and the 2007 Net Settlement Fund. The proceeds from settlement was accounted for in the period it was received for the benefit of the partners in the Partnership.
- 22 -
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity. The Partnership deposits its assets with MS&Co. and MSIP as commodity brokers in separate futures, forward and options trading accounts established for each Trading Advisor. Such assets are used as margin to engage in trading and may be used as margin solely for the Partnership’s trading. The assets are held in either non-interest bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds. Since the Partnership’s sole purpose is to trade in futures, forwards and options, it is expected that the Partnership will continue to own such liquid assets for margin purposes.
The Partnership’s investment in futures, forwards and options may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as "daily price 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.
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.
- 23 -
There are no known material trends, demands, commitments, events, or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.
Capital Resources. The Partnership does not have, nor does it expect to have, any capital assets. Redemptions of units of limited partnership interest ("Unit(s)") in the future will affect the amount of funds available for investments in futures, forwards and options in subsequent periods. It is not possible to estimate the amount, and therefore the impact, of future outflows of Units.
There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership’s capital resource arrangements at the present time.
Off-Balance Sheet Arrangements and Contractual Obligations. The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments that would affect its liquidity or capital resources.
Results of Operations
General. The Partnership’s results depend on the Trading Advisors and the ability of each Trading Advisor’s trading program to take advantage of price movements in the futures, forward and options markets. The following presents a summary of the Partnership’s operations for the three and six month periods ended June 30, 2010 and 2009, 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
- 24 -
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.
The Partnership’s results of operations set forth in the financial statements on pages 2 through 22 of this report are prepared in accordance with U.S. GAAP, which requires 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 approximately 3:00 P.M. (E.T.) 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.
For the Three and Six Months Ended June 30, 2010
The Partnership recorded total trading results including interest income totaling $411,830 and expenses totaling $304,062, resulting in net income of $107,768 for the three months ended June 30, 2010. The Partnership’s net asset value per Unit increased from $15.80 at March 31, 2010, to $15.88 at June 30, 2010.
- 25 -
The most significant trading gains of approximately 8.1% were recorded within the global interest rate sector throughout the quarter from long positions in U.S., European, and Japanese fixed-income futures as prices rose after credit-rating downgrades of Greece and Portugal spurred concern the European debt crisis might derail the global economic recovery, thereby boosting demand for the relative “safety” of government bonds. Prices also moved higher after the European Central Bank left interest rates at a record low after Europe’s sovereign debt crisis forced it to start buying government bonds. Within the currency markets, gains of approximately 0.9% were recorded primarily during April from short positions in the euro and Swiss franc versus the U.S. dollar as the value of these currencies declined against the U.S. dollar amid concern Greece might struggle to raise further funds, thereby reducing demand for European currency assets. A portion of the Partnership’s gains for the quarter was offset by losses of approximately 2.5% experienced within the global stock index sector, primarily during May and June, from long positions in European and U.S. equity index futures as prices fell on growing concerns that Greece’s sovereign debt crisis may spread throughout Europe, in addition to reports that revealed weakening growth in China and a slump in U.S. consumer confidence. Losses of approximately 1.5% were recorded within the agricultural complex, primarily during April and May, from short positions in wheat futures as prices climbed higher amid speculation that cold weather in the U.S. might damage crops, thereby decreasing output. Within the energy markets, losses of approximately 1.4% were experienced primarily during May and June due to long futures positions in crude oil and its related products as prices declined on continued worries that Europe’s debt troubles might slow down the global economic recovery and thereby weaken energy demand. Meanwhile, short positions in natural gas futures recorded losses as prices increased amid higher-than-normal temperatures in the Eastern U.S. and forecasts for an active hurricane season. Lastly, losses of approximately 0.7% were incurred in the metals sector, primarily during May, from long positions in nickel futures as prices were pressured lower on concern
- 26 -
that demand for base metals might be slipping. In addition, long positions in silver futures resulted in losses as prices declined after a rally prompted profit-taking.
The Partnership recorded total trading results including interest income totaling $1,431,158 and expenses totaling $602,106, resulting in net income of $829,052 for the six months ended June 30, 2010. The Partnership’s net asset value per Unit increased from $15.23 at December 31, 2009, to $15.88 at June 30, 2010.
The most significant trading gains of approximately 8.8% were experienced in the global interest rate sector throughout a majority of the first half of the year from long positions in European, U.S., and Japanese fixed-income futures. In January and February, prices increased on speculation that the European Union may be reluctant to help Greece, Portugal, and Spain bolster their finances, reigniting concerns of a major sovereign debt default and thereby boosting demand for the relative “safety” of government bonds. Prices were pressured higher throughout the second quarter after credit-rating downgrades of Greece and Portugal spurred concern the European debt crisis might derail the global economic recovery and after the European Central Bank left interest rates at a record low. Within the currency markets, gains of approximately 4.2% were achieved primarily during February, March, and April from short positions in the euro versus the U.S. dollar as the value of the euro declined against the U.S. dollar amid concerns that Greece’s mounting debt burden might spread to other European nations. During March and April, additional gains were recorded from long positions in the Mexican peso versus the U.S. dollar as the value of the Mexican peso moved higher against the U.S. dollar after U.S. retail sales unexpectedly increased and a U.S. report showed jobs increased the most in three years, diminishing “safe haven” demand for the U.S. dollar. A portion of the Partnership’s gains
- 27 -
for the first six months of the year was offset by losses of approximately 2.2% within the global stock index sector, primarily during January, May, and June. In January, long positions in European, U.S., and Pacific Rim equity index futures resulted in losses as prices moved lower amid disappointing U.S. corporate earnings reports and mounting concerns over sovereign debt defaults from a number of European countries. During May and June, losses were incurred from long positions in European, U.S., and Japanese equity-index futures as prices moved lower on growing concerns that Greece’s sovereign debt crisis might spread throughout Europe. Losses of approximately 1.3% were recorded in the energy markets, primarily during January, from long futures positions in crude oil and its related products as prices declined on reports of increased U.S. inventories, as well as amid speculation that China’s economic activity and energy demand may ease. During May, long futures positions in crude oil and its related products resulted in additional losses as prices declined on continued worries that Europe’s debt troubles might slow down the global economic recovery and thereby weaken energy demand. Smaller losses of approximately 0.7% were incurred within the agricultural complex, primarily during February, April, and May. In February, losses were recorded from long positions in sugar futures as prices fell on speculation that Brazil, the world’s largest sugar producer, might increase exports. During April, losses were experienced from short positions in wheat futures as prices climbed higher amid speculation that cold weather in the U.S. might damage crops and reduce supplies. In May, long futures positions in the soybean complex resulted in losses as prices fell following news that U.S. farmers might boost plantings this year to a record high. Lastly, losses of approximately 0.4% were experienced within the metals sector, primarily during January, from long futures positions in copper and nickel as prices fell sharply on speculation that demand for base metals may wane after Chinese banks begin to restrict lending. Further losses were incurred during May from long positions in nickel futures as prices were pressured lower on concern that demand for base metals might be slipping.
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For the Three and Six Months Ended June 30, 2009
The Partnership recorded total trading results including interest income totaling $34,948 and expenses totaling $375,296, resulting in a net loss of $340,348 for the three months ended June 30, 2009. The Partnership’s net asset value per Unit decreased from $16.42 at March 31, 2009, to $16.18 at June 30, 2009.
The most significant trading losses of approximately 0.9% were incurred within the global interest rate sector primarily during April and June. During April, losses were experienced from long positions in European and U.S. fixed-income futures as prices reversed lower after a pledge from Group of 20 (“G-20”) leaders to support the global economy sapped demand for the “safe haven” of government bonds. Additional losses were recorded in June from long positions in short-term European fixed-income futures as prices declined amid rising investor confidence due to better-than-expected economic data. Within the metals sector, losses of approximately 0.4% were recorded primarily during April and June from short positions in aluminum futures as prices moved higher amid sentiment that efforts by the Chinese government to revive the nation’s economy might boost demand for the base metal. Meanwhile, long positions in zinc futures resulted in losses as prices fell during June amid speculative selling. Elsewhere in the metals markets, long futures positions in gold and silver resulted in losses as prices reversed lower in June due to a sharp rise in the value of the U.S. dollar, which eroded demand for precious metals as an alternative investment. A portion of the Partnership’s losses for the quarter was offset by gains of approximately 0.5% experienced within the global stock index sector, primarily during April and May, from long positions in European and Hong Kong equity index futures as prices rose amid better-than-expected corporate earnings reports and news that G-20 leaders pledged more than $1 trillion in emergency aid to cushion the global economy from further financial turmoil. Smaller gains of approximately 0.2% were recorded within the agricultural markets, primarily during April and May, from
- 29 -
long positions in soybean meal futures as prices increased on speculation of increased demand from China and news of a bigger-than-expected drop in world inventories. Additional gains were experienced from short positions in lean hog futures as prices fell on speculation that demand for U.S. pork products might remain sluggish due to ongoing swine flu concerns. Elsewhere, short positions in fluid milk futures resulted in gains as prices fell amid weak demand. Furthermore, gains were achieved from long positions in sugar futures as prices moved higher on expectations of a drop in global production. Lastly, gains of approximately 0.1% were achieved in the energy markets, primarily during May, from long positions in gasoline futures as prices moved higher on optimism that a possible rebound in global economic growth might boost energy demand.
The Partnership recorded total trading results including interest income totaling $(1,353,363) and expenses totaling $810,959, resulting in a net loss of $2,164,322 for the six months ended June 30, 2009. The Partnership’s net asset value per Unit decreased from $17.50 at December 31, 2008, to $16.18 at June 30, 2009.
The most significant trading losses of approximately 2.1% were recorded in the currency sector primarily during March, April, and May from short positions in the Australian dollar, Mexican peso, and euro versus the U.S. dollar as the value of the U.S. dollar moved lower against most of its rivals after a government report showed U.S. employers cut fewer jobs than forecast, which reduced demand for the U.S. dollar as a “safe haven” currency. Additional losses were incurred during June from long positions in the euro and Australian dollar versus the U.S. dollar as the value of the U.S. dollar reversed higher amid speculation that the U.S. Federal Reserve might raise interest rates amid news that U.S. payrolls fell less-than-expected in May. Within the global interest rate sector, losses of approximately 1.5% were incurred primarily during January
- 30 -
from long positions in U.S. and European fixed-income futures as prices dropped following news that debt sales might increase as governments around the world boosted spending in an effort to ease the deepening economic slump. Additional losses were incurred during April and June from long positions in U.S. and European fixed-income futures as prices moved lower after a pledge from G-20 leaders to support the global economy’s reduced demand for the relative “safety” of government bonds. Losses of approximately 1.0% were recorded in the metals sector throughout a majority of the first half of the year from short futures positions in zinc, lead, and aluminum as prices reversed higher on speculation that economic stimulus plans in the U.S. and China would help boost demand for base metals. Further losses were recorded during June from newly established long positions in zinc futures as prices fell amid speculative selling. Meanwhile, losses were also incurred during March and June from long positions in gold and silver futures as prices fell amid a rise in the value of the U.S. dollar, which eroded demand for precious metals as an alternative investment. Smaller losses of approximately 0.9% were incurred within the agricultural complex primarily during March and June from short futures positions in feeder cattle and coffee as prices rose on speculation that government bailouts might help revive the world economy and boost demand for these commodities. Further losses in the agricultural complex were recorded, primarily during June, from long positions in cocoa futures as prices fell on concerns that demand might decline more than previously expected. A portion of the Partnership’s losses for the first six months of the year was offset by gains of approximately 0.5% experienced within the energy markets throughout the first quarter and April from short futures positions in natural gas as prices moved lower amid speculation that the ongoing global economic recession might continue to erode energy demand.
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|
|
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. 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.
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The face value of the market sector instruments held by the Partnership is typically many times the applicable margin requirements. Margin requirements generally range between 2% and 15% of contract face value. Additionally, the use of leverage causes the face value of the market sector instruments held by the Partnership typically to be many times the total capitalization of the Partnership.
The Partnership’s past performance is no guarantee of its future results. Any attempt to numerically quantify the Partnership’s market risk is limited by the uncertainty of its speculative trading. The Partnership’s speculative trading and use of leverage may cause future losses and volatility (i.e., “risk of ruin”) that far exceed the Partnership’s experience to date under the “Partnership’s Value at Risk in Different Market Sectors” section and significantly exceed the Value at Risk ("VaR") tables disclosed.
Limited partners will not be liable for losses exceeding the current net asset value of their investment.
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.
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The Partnership’s risk exposure in the market sectors traded by the Trading Advisors is estimated below in terms of VaR. The Partnership estimates VaR using a model based upon historical simulation (with a confidence level of 99%) which involves constructing a distribution of hypothetical daily changes in the value of a trading portfolio. The VaR model takes into account linear exposures to risk including equity and commodity prices, interest rates, foreign exchange rates, and correlation among these variables. The hypothetical changes in portfolio value are based on daily percentage changes observed in key market indices or other market factors ("market risk factors") to which the portfolio is sensitive. The one-day 99% confidence level of the Partnership’s VaR corresponds to the negative change in portfolio value that, based on observed market risk factors, would have been exceeded once in 100 trading days, or one day in 100. VaR typically does not represent the worst case outcome. Demeter uses approximately four years of daily market data (1,000 observations) and re-values its portfolio (using delta-gamma approximations) for each of the historical market 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
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the Trading Advisors in their daily risk management activities. Please further note that VaR as described above may not be comparable to similarly-titled measures used by other entities.
The Partnership’s Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the Partnership’s open positions as a percentage of
total net assets by primary market risk category at June 30, 2010 and 2009. At June 30, 2010 and 2009, the Partnership’s total capitalization was approximately $20 million and $23 million, respectively.
|
Primary Market
|
June 30, 2010
|
June 30, 2009
|
|
Risk Category
|
Value at Risk
|
Value at Risk
|
|
Interest Rate
|
(1.56)%
|
(0.37)%
|
|
Equity
|
(0.55)
|
(0.33)
|
|
Currency
|
(0.30)
|
(0.62)
|
|
Commodity
|
(0.51)
|
(0.51)
|
|
Aggregate Value at Risk
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(1.73)%
|
(0.98)%
|
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
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even within a single trading day. Such change could positively or negatively materially impact market risk as measured by VaR.
The tables below supplement 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 July 1, 2009 through June 30, 2010 and July 1, 2008 through June 30, 2009, respectively.
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June 30, 2010
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|||
|
Primary Market Risk Category
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High
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Low
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Average
|
|
Interest Rate
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(1.56)%
|
(0.72)%
|
(1.07)%
|
|
Equity
|
(1.12)
|
(0.55)
|
(0.88)
|
|
Currency
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(0.96)
|
(0.30)
|
(0.55)
|
|
Commodity
|
(1.63)
|
(0.38)
|
(0.83)
|
|
Aggregate Value at Risk
|
(2.40)%
|
(1.38)%
|
(1.73)%
|
|
June 30, 2009
|
|||
|
Primary Market Risk Category
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High
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Low
|
Average
|
|
Interest Rate
|
(0.60)%
|
(0.19)%
|
(0.43)%
|
|
Equity
|
(0.33)
|
(0.03)
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(0.19)
|
|
Currency
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(0.62)
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(0.15)
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(0.32)
|
|
Commodity
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(1.09)
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(0.28)
|
(0.58)
|
|
Aggregate Value at Risk
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(1.11)%
|
(0.60)%
|
(0.85)%
|
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Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio’s aggregate market risk exposure, incorporating a range of varied market risks, reflect risk reduction due to portfolio diversification or hedging activities, and can cover a wide range of portfolio assets. However, VaR risk measures should be viewed in light of the methodology’s limitations, which include, but may not be limited to the following:
|
·
|
past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements;
|
|
·
|
changes in portfolio value caused by market movements may differ from those of the VaR model;
|
|
·
|
VaR results reflect past market fluctuations applied to current trading positions while future risk depends on future positions;
|
|
·
|
VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and
|
|
·
|
the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements.
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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 June 30, 2010 and 2009, and for the four quarter-end reporting periods from July 1, 2009 through June 30, 2010 and from July 1, 2008 through June 30, 2009, respectively. VaR is not necessarily representative of the Partnership’s historic risk, nor should it be used to predict the Partnership’s
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future financial performance or their 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 not needed for margin. These balances and any market risk they may represent are immaterial.
The Partnership also maintains a substantial portion of its available assets in cash at MSSB; as of June 30, 2010, such amount was equal to approximately 92% of the Partnership’s net asset value. A decline in short-term interest rates would result in a decline in the Partnership’s cash management income. This cash flow risk is not considered to be material.
Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality, and multiplier features of the Partnership’s market-sensitive instruments, in relation to the Partnership’s net assets.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership’s market risk exposures - except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership’s primary market risk
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exposures, as well as the strategies used and to be used by Demeter and the Trading Advisors for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant
fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership. Investors must be prepared to lose all or substantially all of their investment in the Partnership.
The Trading Advisors, in general, tend to utilize trading system(s) to take positions when market opportunities develop, and Demeter anticipates that the Trading Advisors will continue to do so.
The following were the primary trading risk exposures of the Partnership at June 30, 2010, by market sector. It may be anticipated, however, that these market exposures will vary materially over time.
Interest Rate. The largest market exposure of the Partnership at June 30, 2010, was to the global interest rate sector. Exposure was primarily spread across the Japanese, U.S., European, Canadian, Australian, and New Zealand interest rate sectors. Interest rate movements directly affect the price of the sovereign bond futures positions held by the Partnership and indirectly affect the value of its stock index and currency positions. Interest rate movements in one country, as well as relative interest rate movements between countries, materially impact the Partnership’s profitability. The Partnership’s interest rate exposure is generally to interest rate fluctuations in the U.S. and the other G-7 countries’ interest rates. The G-7 countries consist of France, the
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U.S., the United Kingdom, Germany, Japan, Italy, and Canada. However, the Partnership also takes futures positions in the government debt of smaller countries - e.g., Australia and New Zealand. Demeter anticipates that the G-7 countries interest rates, as well as Australian and New Zealand interest rates, will remain the primary interest rate exposures of the Partnership for the foreseeable future. The speculative futures positions held by the Partnership range from short to long-term instruments. Consequently, changes in short, medium, or long-term interest rates may have an effect on the Partnership.
Equity. At June 30, 2010, the Partnership had market exposure to the global stock index sector, primarily to equity price risk in the G-7 countries. The stock index futures traded by the Partnership are by law limited to futures on broadly-based indices. At June 30, 2010, the Partnership’s primary exposures were to the DAX (Germany), S&P 60 (Canada), S&P 500 (U.S.), FTSE 100 (U.K.), NASDAQ 100 (U.S.), CAC 40 (France), and H-Shares (Hong Kong) stock indices. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the European, Asian, and North American stock indices. Static markets would not cause major market changes, but would make it difficult for the Partnership to avoid trendless price movements, potentially resulting in numerous small losses.
Currency. At June 30, 2010, 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 large number of currencies, including cross-rates - i.e., positions between two currencies other than the U.S. dollar. At June 30, 2010, the Partnership’s major exposures were to the euro, Australian dollar, British pound, Hungarian forint, New
- 40 -
Zealand dollar, Japanese yen, Canadian dollar, Swedish krona, and Swiss franc 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 second largest market exposure of the Partnership at June 30, 2010, was to the markets that comprise these sectors. Most of the exposure was to wheat, corn, soybean meal, cocoa, rubber, robusta coffee, cotton, lumber, rapeseed, fluid milk, lean hogs, coffee, orange juice, soybean oil, and red wheat markets. Supply and demand inequalities, severe weather disruptions, and market expectations affect price movements in these markets.
Metals. The third largest market exposure of the Partnership at June 30, 2010, was to the metals sector. The Partnership’s metals exposure was to fluctuations in the price of precious metals, such as gold, silver, and platinum, as well as base metals, such as tin, aluminum, zinc, nickel, copper, and lead. Economic forces, supply and demand inequalities, geopolitical factors, and market expectations influence price movements in these markets.
Energy. At June 30, 2010, the Partnership had market exposure to the energy sector. The Partnership’s energy exposure was primarily 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. Oil and gas prices can be volatile and
- 41 -
significant profits and losses, which have been experienced in the past, are expected to continue to be experienced in these markets in the future.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the Partnership at June 30, 2010:
Foreign Currency Balances. The Partnership’s primary foreign currency balances at June 30, 2010, were in Japanese yen, Australian dollars, euros, British pounds, Polish zlotych, Mexican pesos, Czech koruny, Hong Kong dollars, Canadian dollars, New Zealand dollars, South African rand, Swiss francs, Swedish kronor, Israeli shekels, Turkish lira, Singapore dollars, Norwegian kroner, Hungarian forint, and Danish kroner. The Partnership controls the non-trading risk of foreign currency balances by regularly converting them back into U.S. dollars upon liquidation of their respective positions.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to manage the risk of the Partnership’s open positions in essentially the same manner in all market categories traded. Demeter attempts to manage market exposure by diversifying the Partnership’s assets among different market sectors and trading approaches through the selection of Commodity Trading Advisors and by daily monitoring their performance. In addition, the Trading Advisors establish diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument.
- 42 -
Demeter monitors and controls the risk of the Partnership’s non-trading instrument, cash. Cash is the only Partnership investment directed by Demeter, rather than the Trading Advisors.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of Demeter, at the time this quarterly
report was filed, Demeter’s President (Demeter’s principal executive officer) and Chief Financial Officer (Demeter’s 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(c) and 15d-15(e) under the Exchange Act) as of June 30, 2010. 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 Demeter have concluded that the disclosure controls and procedures of the Partnership were effective at June 30, 2010.
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 materially affect the Partnership’s internal control over financial reporting.
- 43 -
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.
- 44 -
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, 2009.
|
|
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.
|
– 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 Global Balanced L.P.
|
||
|
(Registrant)
|
||
|
By:
|
Demeter Management LLC
|
|
|
(General Partner)
|
||
|
August 12, 2010
|
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.
- 46 -