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, 2011 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: 0-19511
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MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
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(Exact name of registrant as specified in its charter)
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Delaware
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13-3619290
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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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Ceres Managed Futures LLC
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522 Fifth Avenue, 14th 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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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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 SELECT L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2011
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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, 2011 and December 31, 2010
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2
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Condensed Schedule of Investments as of June 30, 2011
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3
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Condensed Schedule of Investments as of December 31, 2010
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4
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Statements of Income and Expenses for the Three and Six Months Ended June 30, 2011 and 2010
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5
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Statements of Changes in Partners’ Capital for the Six Months Ended June 30, 2011 and 2010
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6
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Notes to Financial Statements
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7-21
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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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22-30
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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30-38
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Item 4.
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Controls and Procedures
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38-39
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PART II. OTHER INFORMATION
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Item 1A.
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Risk Factors
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40
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Item 6.
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Exhibits
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40
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
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June 30,
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December 31,
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2011
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2010
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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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317,134,739
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362,360,920
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Restricted cash
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28,141,052
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39,088,853
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Total cash
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345,275,791
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401,449,773
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Net unrealized gain on open contracts (MS&Co.)
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778,208
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19,046,952
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Net unrealized gain (loss) on open contracts (MSIP)
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(1,139,532)
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756,215
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Total net unrealized gain (loss) on open contracts
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(361,324)
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19,803,167
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Total Trading Equity
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344,914,467
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421,252,940
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Interest receivable (MSSB)
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3,318
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26,871
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Total Assets
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344,917,785
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421,279,811
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LIABILITIES AND PARTNERS’ CAPITAL
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Liabilities:
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Redemptions payable
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4,096,562
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7,999,594
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Accrued brokerage fees (MS&Co.)
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1,790,495
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1,972,489
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Accrued management fees
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648,878
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751,806
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Accrued incentive fee
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–
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1,305,062
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Total Liabilities
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6,535,935
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12,028,951
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Partners’ Capital:
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Limited Partners (9,842,280.038 and 10,646,418.942 Units, respectively)
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334,886,507
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404,921,242
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General Partner (102,727.769 and 113,836.769 Units, respectively)
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3,495,343
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4,329,618
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Total Partners’ Capital
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338,381,850
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409,250,860
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Total Liabilities and Partners’ Capital
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344,917,785
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421,279,811
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NET ASSET VALUE PER UNIT
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34.03
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38.03
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The accompanying notes are an integral part of these financial statements.
- 2 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
CONDENSED SCHEDULE OF INVESTMENTS
June 30, 2011 (Unaudited)
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Futures and Forward Contracts Purchased
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Net unrealized gain/(loss) on
open contracts
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% of
Partners’ Capital
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$
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Commodity
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(1,698,537)
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(0.50)
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Equity
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1,214,685
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0.36
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Foreign currency
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907,433
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0.27
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Interest rate
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379,193
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0.11
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Total Futures and Forward Contracts Purchased
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802,774
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0.24
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Futures and Forward Contracts Sold
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Commodity
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224,630
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0.07
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Equity
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(566,744)
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(0.17)
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Foreign currency
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181,302
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0.05
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Interest rate
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43,533
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0.01
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Total Futures and Forward Contracts Sold
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(117,279)
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(0.04)
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Unrealized Currency Loss
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(1,046,819)
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(0.31)
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Net fair value
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(361,324)
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(0.11)
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The accompanying notes are an integral part of these financial statements.
- 3 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
CONDENSED SCHEDULE OF INVESTMENTS
December 31, 2010
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Futures and Forward Contracts Purchased
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Net unrealized
gain/(loss) on
open contracts
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% of
Partners’ Capital
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$
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Commodity
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11,952,037
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2.92
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Equity
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262,033
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0.06
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Foreign currency
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5,866,583
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1.43
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Interest rate
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604,598
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0.15
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Total Futures and Forward Contracts Purchased
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18,685,251
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4.56
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Futures and Forward Contracts Sold
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Commodity
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(1,310,915)
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(0.32)
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Equity
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234,676
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0.05
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Foreign currency
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3,432,514
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0.84
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Interest rate
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(502,535)
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(0.12)
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Total Futures and Forward Contracts Sold
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1,853,740
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0.45
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Unrealized Currency Loss
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(735,824)
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(0.18)
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Net fair value
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19,803,167
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4.83
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The accompanying notes are an integral part of these financial statements.
- 4 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
STATEMENTS OF INCOME AND EXPENSES
(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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2011
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2010
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2011
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2010
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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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17,330
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110,199
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109,830
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159,363
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EXPENSES
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Brokerage fees (MS&Co.)
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5,689,893
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6,309,281
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11,737,218
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12,898,787
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Management fees
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2,058,895
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2,433,723
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4,277,549
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4,973,408
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Incentive fees
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1,089,436
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–
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2,034,158
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–
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Total Expenses
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8,838,224
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8,743,004
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18,048,925
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17,872,195
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NET INVESTMENT LOSS
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(8,820,894)
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(8,632,805)
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(17,939,095)
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(17,712,832)
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TRADING RESULTS
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Trading profit (loss):
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Realized
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(8,012,979)
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(6,453,313)
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(3,053,102)
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(23,505,750)
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Net change in unrealized
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(7,482,089)
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(16,202,436)
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(20,164,491)
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(11,457,504)
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Total Trading Results
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(15,495,068)
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(22,655,749)
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(23,217,593)
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(34,963,254)
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NET LOSS
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(24,315,962)
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(31,288,554)
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(41,156,688)
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(52,676,086)
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NET LOSS ALLOCATION
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Limited Partners
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(24,062,669)
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(30,972,726)
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(40,722,391)
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(52,141,069)
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General Partner
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(253,293)
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(315,828)
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(434,297)
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(535,017)
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NET LOSS PER UNIT *
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Limited Partners
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(2.41)
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(2.65)
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(4.00)
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(4.39)
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General Partner
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(2.41)
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(2.65)
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(4.00)
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(4.39)
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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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10,280,190.455
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11,829,977.274
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10,468,291.652
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11,992,221.105
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* Based on change in net asset value per Unit.
The accompanying notes are an integral part of these financial statements.
– 5 –
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
For the Six Months Ended June 30, 2011 and 2010
(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, 2010
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10,760,255.711
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404,921,242
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4,329,618
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409,250,860
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Net Loss
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–
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(40,722,391)
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(434,297)
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(41,156,688)
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Redemptions
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(815,247.904)
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(29,312,344)
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(399,978)
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(29,712,322)
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Partners’ Capital,
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June 30, 2011
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9,945,007.807
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334,886,507
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3,495,343
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338,381,850
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Partners’ Capital,
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December 31, 2009
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12,241,800.475
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459,902,047
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4,743,000
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464,645,047
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Net Loss
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–
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(52,141,069)
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(535,017)
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(52,676,086)
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Redemptions
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(689,867.698)
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(23,808,181)
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(308,698)
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(24,116,879)
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Partners’ Capital,
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June 30, 2010
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11,551,932.777
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383,952,797
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3,899,285
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387,852,082
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The accompanying notes are an integral part of these financial statements.
- 6 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
(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 Select 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, 2010.
1. Organization
Morgan Stanley Smith Barney Spectrum Select L.P. is a Delaware limited partnership organized in 1991 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 Global Balanced 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 SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership’s general partner is Ceres Managed Futures LLC (“Ceres” or the “General Partner”). The non-clearing commodity broker is Morgan Stanley Smith Barney LLC (“MSSB”). The clearing commodity brokers are Morgan Stanley & Co. 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”). Ceres is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”). MSSBH is majority-owned indirectly by Morgan Stanley and minority-owned indirectly by Citigroup Inc. MSSB is the principal subsidiary of MSSBH. MS&Co., MSIP, and MSCG are wholly-owned subsidiaries of Morgan Stanley. The trading advisors to the Partnership are Altis Partners (Jersey) Limited, EMC Capital Management, Inc. (“EMC”), Graham Capital Management, L.P., Northfield Trading L.P. (“Northfield”), Rabar Market Research, Inc. (“Rabar”), and Sunrise Capital Management, Inc., (each individually, a “Trading Advisor”, or collectively, the “Trading Advisors”).
- 8 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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2.
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Financial Highlights
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Changes in the net asset value per Unit for the three and six months ended June 30, 2011 and 2010 were as follows:
For the Three For the Six
Months Ended June 30, Months Ended June 30,
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2011
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2010
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2011
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2010
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Per Unit operating performance:
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Net asset value at the beginning of the period:
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$ 36.44
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$ 36.22
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$ 38.03
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$ 37.96
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Interest Income
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– (3)
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0.01
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0.01
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0.01
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Expenses
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(0.87)
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(0.74)
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(1.74)
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(1.50)
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Realized Loss (1)
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(0.81)
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(0.54)
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(0.33)
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(1.94)
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Unrealized Loss
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(0.73)
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(1.38)
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(1.94)
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(0.96)
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Net Loss
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(2.41)
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(2.65)
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(4.00)
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(4.39)
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Net asset value, June 30:
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$ 34.03
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$ 33.57
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$ 34.03
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$ 33.57
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Ratios to average net assets:
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Net Investment Loss (2)
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(8.8)%
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(8.5)%
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(9.0)%
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(8.6)%
|
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Expenses before Incentive Fees (2)
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8.5 %
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8.6 %
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8.5 %
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8.6 %
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Expenses after Incentive Fees (2)
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8.8 %
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8.6 %
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9.0 %
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8.6 %
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Net Loss (2)
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(25.8)%
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(30.9)%
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(21.3)%
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(25.5)%
|
|
Total return before incentive fees
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(6.3)%
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(7.3)%
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(10.0)%
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(11.6)%
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Total return after incentive fees
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(6.6)%
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(7.3)%
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(10.5)%
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(11.6)%
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(1) Realized Loss is a balancing amount necessary to reconcile the change in net asset value per Unit with the other per Unit information.
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(2) Annualized (except for incentive fees, if applicable).
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(3) Amounts less than $0.005 per Unit.
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3. Related Party Transactions
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The Partnership’s cash is on deposit with MSSB, MS&Co., and MSIP, in Futures Interests trading accounts to meet margin requirements as needed. MSSB pays the Partnership at each month end interest income on 80%
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- 9 -
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MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 retains any interest earned in excess of the interest paid by MSSB to the Partnership. For purposes of such interest payments, net assets do not include monies
owed to the Partnership on Futures Interests. The Partnership pays brokerage fees to MS&Co. MSCG acts as the counterparty on all trading of options on foreign currency forward contracts.
4. Financial Instruments
The Partnership trades Futures Interests. Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price. Futures Interests are open commitments until settlement date, at which time they are realized. They are valued at fair value, generally on a daily basis, and the unrealized gains and losses on open contracts (the difference between contract trade price and market price) are reported in the Statements of Financial Condition as a net unrealized gain or loss on open contracts. The resulting net change in unrealized gain and loss is reflected in the net change in unrealized trading profit (loss) on open contracts from one period to the next on the Statements of Income and Expenses. The fair value of exchange-traded futures, options and forward contracts is determined by the various futures exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period. The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) of the last business day of the reporting period from various exchanges. The fair value of non-exchange-traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as inputs, the
- 10 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period. Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts. There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility.
The fair value of exchange-traded contracts is based on the settlement price quoted by the exchange on the day with respect to which fair value is being determined. If an exchange-traded contract could not have been liquidated on such day due to the operation of daily limits or other rules of the exchange, the settlement price will be equal to the settlement price on the first subsequent day on which the contract could be liquidated. 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 described in Note 5. Derivatives and Hedging as required by the Financial Accounting Standards board (“FASB”) Accounting Standards Codification (“ASC” or the “Codification”). A derivative is defined as a financial instrument or other contract that has all three of the following characteristics:
|
1)
|
a) One or more “underlyings” and b) one or more “notional amounts” or payment provisions or both;
|
|
2)
|
Requires no initial net investment or a smaller initial net investment than would be required for other types of contracts that would be expected to have a similar response relative to changes in market factors; and
|
- 11 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
|
3)
|
Terms that require or permit net settlement.
|
Generally, derivatives include futures, forwards, swaps or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars.
The net unrealized gains (loss) 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 (Loss) on Open Contracts
|
Longest Maturities
|
||||
|
Date
|
Exchange-Traded
|
Off-Exchange-Traded
|
Total
|
Exchange-Traded
|
Off- Exchange-Traded
|
|
$
|
$
|
$
|
|||
|
Jun. 30, 2011
|
(272,071)
|
(89,253)
|
(361,324)
|
Jun. 2013
|
Sep. 2011
|
|
Dec. 31, 2010
|
16,772,924
|
3,030,243
|
19,803,167
|
Mar. 2015
|
Mar. 2011
|
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
options contracts, are required, pursuant to regulations of the Commodity Futures Trading Commission
- 12 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(“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 (losses) on all open exchange-traded futures, exchange-traded
forward, and exchange-traded futures-styled options contracts, which funds, in the aggregate, totaled $345,003,720 and $418,222,697 at June 30, 2011 and December 31, 2010,
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 MSSB for the benefit of MS&Co. With respect to those off-exchange-traded forward currency contracts, the Partnership is at risk to the
ability of MS&Co., the sole counterparty on all such contracts, to perform. 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.
Partnership’s credit risk in the event of MS&Co.’s or MSCG’s bankruptcy or insolvency.
- 13 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT 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 on an agreed-upon settlement date. However, the Partnership is required to meet margin requirements equal to the net unrealized loss on open forward currency contracts in the Partnership accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at MSSB for the benefit of MS&Co.
|
5. Derivatives and Hedging
|
The Partnership’s objective is to profit from speculative trading in Futures Interests. Therefore, the Trading 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.
- 14 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following tables summarize the valuation of the Partnership’s investments as of June 30, 2011 and December 31, 2010, respectively.
|
The Effect of Trading Activities on the Statements of Financial Condition as of June 30, 2011:
|
|
Futures and Forward Contracts
|
Long
Unrealized
Gain
|
Long
Unrealized
Loss
|
Short
Unrealized
Gain
|
Short
Unrealized
Loss
|
Net Unrealized
Gain/(Loss)
|
Average
number of
contracts
outstanding
for the
six months
(absolute
quantity)
|
|
$
|
$
|
$
|
$
|
$
|
||
|
Commodity
|
1,271,673
|
(2,970,210)
|
905,796
|
(681,166)
|
(1,473,907)
|
4,311
|
|
Equity
|
1,280,680
|
(65,995)
|
—
|
(566,744)
|
647,941
|
1,990
|
|
Foreign currency
|
1,711,995
|
(804,562)
|
589,936
|
(408,634)
|
1,088,735
|
9,274
|
|
Interest rate
|
1,567,317
|
(1,188,124)
|
44,910
|
(1,377)
|
422,726
|
8,295
|
|
Total
|
5,831,665
|
(5,028,891)
|
1,540,642
|
(1,657,921)
|
685,495
|
|
|
Unrealized currency loss
|
(1,046,819)
|
|||||
|
Total net unrealized loss on open contracts
|
(361,324)
|
|
The Effect of Trading Activities on the Statements of Financial Condition as of December 31, 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 the year
(absolute
quantity)
|
|
$
|
$
|
$
|
$
|
$
|
||
|
Commodity
|
13,583,270
|
(1,631,233)
|
—
|
(1,310,915)
|
10,641,122
|
5,409
|
|
Equity
|
762,962
|
(500,929)
|
239,908
|
(5,232)
|
496,709
|
2,069
|
|
Foreign currency
|
6,060,140
|
(193,557)
|
3,957,095
|
(524,581)
|
9,299,097
|
7,961
|
|
Interest rate
|
662,741
|
(58,143)
|
330,713
|
(833,248)
|
102,063
|
7,714
|
|
Total
|
21,069,113
|
(2,383,862)
|
4,527,716
|
(2,673,976)
|
20,538,991
|
|
|
Unrealized currency loss
|
(735,824)
|
|||||
|
Total net unrealized gain on open contracts
|
19,803,167
|
- 15 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following tables summarize the net trading results of the Partnership for the three and six months ended June 30, 2011 and 2010, respectively.
The Effect of Trading Activities on the Statements of Income and Expenses for the Three and Six Months Ended June 30, 2011 included in Total Trading Results:
|
For the Three Months
|
For the Six Months
|
||
|
Ended June 30, 2011
|
Ended June 30, 2011
|
||
|
Type of Instrument
|
$
|
$
|
|
|
Commodity
|
(18,360,323)
|
(4,684,465)
|
|
|
Equity
|
(11,098,993)
|
(17,330,260)
|
|
|
Foreign currency
|
8,155,318
|
(1,034,810)
|
|
|
Interest rate
|
5,956,209
|
142,936
|
|
|
Unrealized currency loss
|
(147,279)
|
(310,994)
|
|
|
Total
|
(15,495,068)
|
(23,217,593)
|
|
Line Items on the Statements of Income and Expenses for the Three and Six Months Ended June 30, 2011:
|
|
For the Three Months
|
For the Six Months
|
||
|
Ended June 30, 2011
|
Ended June 30, 2011
|
||
|
Trading Results
|
$
|
$
|
|
|
Realized
|
(8,012,979)
|
(3,053,102)
|
|
|
Net change in unrealized
|
(7,482,089)
|
(20,164,491)
|
|
|
Total Trading Results
|
(15,495,068)
|
(23,217,593)
|
The Effect of Trading Activities on the Statements of Income and Expenses 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
|
(22,885,835)
|
(30,770,151)
|
|
|
Equity
|
(17,062,188)
|
(22,711,997)
|
|
|
Foreign currency
|
(1,343,377)
|
(4,305,624)
|
|
|
Interest rate
|
20,094,063
|
24,537,746
|
|
|
Unrealized currency loss
|
(1,458,412)
|
(1,713,228)
|
|
|
Total
|
(22,655,749)
|
(34,963,254)
|
- 16 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
|
Line Items on the Statements of Income and Expenses 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
|
(6,453,313)
|
(23,505,750)
|
|
|
Net change in unrealized
|
(16,202,436)
|
(11,457,504)
|
|
|
Total Trading Results
|
(22,655,749)
|
(34,963,254)
|
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 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.
- 17 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
|
June 30, 2011
|
Unadjusted
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Total
|
|
|
$
|
$
|
$
|
$
|
||
|
Assets
|
|||||
|
Futures
|
6,493,072
|
–
|
n/a
|
6,493,072
|
|
|
Forwards
|
–
|
879,235
|
n/a
|
879,235
|
|
|
Total Assets
|
6,493,072
|
879,235
|
n/a
|
7,372,307
|
|
|
Liabilities
|
|||||
|
Futures
|
5,718,324
|
–
|
n/a
|
5,718,324
|
|
|
Forwards
|
–
|
968,488
|
n/a
|
968,488
|
|
|
Total Liabilities
|
5,718,324
|
968,488
|
n/a
|
6,686,812
|
|
|
Unrealized currency loss
|
(1,046,819)
|
||||
|
* Net fair value
|
774,748
|
(89,253)
|
n/a
|
(361,324)
|
|
|
December 31, 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
|
|||||
|
Futures
|
22,348,537
|
–
|
n/a
|
22,348,537
|
|
|
Forwards
|
–
|
3,248,292
|
n/a
|
3,248,292
|
|
|
Total Assets
|
22,348,537
|
3,248,292
|
n/a
|
25,596,829
|
|
|
Liabilities
|
|||||
|
Futures
|
4,839,789
|
–
|
n/a
|
4,839,789
|
|
|
Forwards
|
–
|
218,049
|
n/a
|
218,049
|
|
|
Total Liabilities
|
4,839,789
|
218,049
|
n/a
|
5,057,838
|
|
|
Unrealized currency loss
|
(735,824)
|
||||
|
* Net fair value
|
17,508,748
|
3,030,243
|
n/a
|
19,803,167
|
|
* This amount comprises the “Total net unrealized gain (loss) on open contracts” on the Statements of Financial Condition.
- 18 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Other Pronouncements
In May 2011, FASB issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in accounting principles generally accepted in the United States of America (“U.S. GAAP”) and International Financial Reporting Standards (“IFRSs”).” The amendments within this ASU change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. However, some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The ASU is effective for annual and interim periods beginning after December 15, 2011 for public entities. This new guidance is not expected to have a material impact on the Partnership’s financial statements.
8. Restricted and Unrestricted Cash
As reflected on the Partnership’s Statements of Financial Condition, restricted cash equals the cash portion of assets on deposit to meet margin requirements plus the cash required to offset unrealized losses on foreign currency forwards and options and offset losses on only offset LME positions. All of these amounts are maintained separately. Cash that is not classified as restricted cash is therefore classified as unrestricted cash.
- 19 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
|
9. Income Taxes
|
No provision for income taxes has been made in the accompanying financial statements, as partners are individually responsible for reporting income or loss based upon their respective share of the Partnership’s revenues or expenses for income tax purposes. The Partnership files U.S. federal and state tax returns.
The guidance issued by the FASB on income taxes, clarifies the accounting for uncertainty in income taxes recognized in the Partnership's financial statements, and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement 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, 2011. If applicable, the Partnership recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statements of Income and Expenses. Generally, the 2007 through 2010 tax years remain subject to examination by U.S. federal and most state tax authorities. No income tax returns are currently under examination.
|
10. Subsequent Events
|
Management of Ceres performed its evaluation of subsequent events through the date of filing, and has determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements other than these disclosed below.
- 20 -
MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
Effective July 1, 2011, the monthly management fee rate payable to EMC was reduced from a monthly management fee rate equal to 5/24 of 1.00% (a 2.50% annual rate) to a monthly
management fee rate equal to 1/12 of 2.00% (a 2.00% annual rate) and the monthly incentive fee rate payable to EMC was increased from a monthly incentive fee rate equal to 17.5% to a
monthly incentive fee rate equal to 20%.
Effective July 1, 2011, the monthly management fee rate payable to Northfield was reduced from a monthly management fee rate equal to 1/12 of 3.00% (a 3.00% annual rate) to a monthly
management fee rate equal to 1/12 of 2.00% (a 2.00% annual rate) and the monthly incentive fee rate payable to Northfield was increased from a monthly incentive fee rate equal to 15% of a
monthly incentive fee rate equal to 20%.
Effective July 1, 2011, the monthly management fee rate payable to Rabar was reduced from a monthly management fee rate equal to 5/24 of 1.00% (a 2.50% annual rate) to a monthly
management fee rate equal to 1/12% of 2.00% (a 2.00% annual rate) and the monthly incentive fee rate was increased from 17.5% to a monthly incentive fee rate equal to 20%.
- 21 -
|
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
|
RESULTS OF OPERATIONS
Liquidity. The Partnership deposits its assets with MSSB as non-clearing commodity broker and MS&Co. and MSIP as clearing commodity brokers in separate futures, forward and options trading accounts established for 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
- 22 -
unfavorable positions in such markets, subjecting it to substantial losses. Either of these market conditions could result in restrictions on redemptions. For the periods covered by this report, illiquidity has not materially affected the Partnership’s assets.
There are no known material trends, demands, commitments, events, or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.
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.
- 23 -
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, 2011 and 2010, and a general discussion of its trading activities during each period. It is important to note, however, that the Trading Advisors trade in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Advisors or will be profitable in the future. Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisors’ trading activities on behalf of the Partnership during the period in question. Past performance is no guarantee of future results.
The Partnership’s results of operations set forth in the financial statements on pages 2 through 21 of this report are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: the contracts the Partnership trades are accounted for on a trade-date basis and marked to market on a daily basis. The difference between their original contract value and market value is recorded on the Statements of Income and Expenses as “Net change in unrealized trading profit (loss)” for open 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.) the close of the business day. Interest income, as well as management fees, incentive fees, and brokerage fees of the Partnership are recorded on an accrual basis.
- 24 -
For the Three and Six Months Ended June 30, 2011
The Partnership recorded total trading results including interest income totaling $(15,477,738) and expenses totaling $8,838,224, resulting in a net loss of $24,315,962 for the three months ended June 30, 2011. The Partnership’s net asst value per Unit decreased from $36.44 at March 31, 2011, to $34.03 at June 30, 2011.
The most significant trading losses were incurred within the global stock index markets, primarily during May, from long positions in European and U.S. equity index futures as prices moved lower on concerns the global economic recovery is faltering. Additional losses were incurred in this sector during June from long positions in European, U.S., and Pacific Rim equity index futures as prices continued to move lower. Within the agricultural markets, losses were incurred primarily during April from long positions in cotton futures as prices declined to a three-month low on concern that demand may slow from China, the world’s biggest buyer of the fiber. Within the energy markets, losses were experienced from short positions in natural gas futures as prices rose on forecasts of above-average temperatures in the U.S., boosting demand for the fuel. Within the metals markets, losses were incurred from long futures positions in base metals, primarily aluminum, as prices fell after China restricted bank lending, spurring speculation anti-inflation policies may slow growth in the world’s second-biggest economy and biggest purchaser of base metals. A portion of the Partnership’s losses for the quarter was offset by gains achieved within the currency markets, primarily during April, from long futures positions in the Swiss franc, Australian dollar, and Brazilian real versus the U.S. dollar as the value of these currencies rose against the U.S. dollar after better-than-expected corporate earnings reports and signs of global growth spurred demand for higher-yielding currencies. Within the global interest rate markets, gains were achieved primarily during May from long positions in U.S. fixed-income futures as prices increased following reports that showed the U.S. economy grew less than forecast and U.S. jobless claims unexpectedly rose.
- 25 -
The Partnership recorded total trading results including interest income totaling $(23,107,763) and expenses totaling $18,048,925, resulting in a net loss of $41,156,688 for the six months ended June 30, 2011. The Partnership’s net asset value per Unit decreased from $38.03 at December 31, 2010 to $34.03 at June 30, 2011.
The most significant trading losses were incurred in the global stock index markets, primarily during March, from long positions in European, U.S., and Pacific Rim equity index futures as prices reversed lower amid concern that heightened tensions in the Middle East, as well as the natural disaster and subsequent nuclear crisis in Japan, would possibly threaten the global economic recovery. Additional losses were incurred from long positions in this sector during May and June. Within the agricultural markets, losses were incurred primarily during March from long positions in cocoa as prices fell on signs that the political turmoil that hampered exports may be easing in the Ivory Coast, the world’s biggest producer of cocoa. Within the metals markets, losses were incurred from long positions in base metals, primarily aluminum, as prices fell after China restricted bank lending, spurring speculation anti-inflation policies may slow growth in the world’s second-biggest economy and biggest purchaser of base metals. Within the currency markets, losses were incurred from short positions in the British pound and euro versus the Australian dollar and Japanese yen as the value of the pound and euro rose on speculation European officials should take additional measures to counter the sovereign debt crisis. Additional losses were incurred primarily during May from long positions in the euro and British pound versus the U.S. dollar as the value of these currencies moved lower against the U.S. dollar after Standard & Poor’s downgraded Greece’s credit rating. Within the global interest rate markets, losses were incurred primarily in February from long positions in U.S. fixed-income futures as prices fell on speculation the U.S. Federal Reserve may withdraw monetary stimulus as the U.S. economy shows signs of a sustained recovery. A portion of the Partnership’s losses for the first half of the year was offset by gains achieved within the energy markets, primarily during
- 26 -
February, from long positions in RBOB (unleaded) gas, gas oil, and heating oil as prices rose after protests in Egypt and Libya turned violent, causing concern that crude oil supplies may be disrupted.
For the Three and Six Months Ended June 30, 2010
The Partnership recorded total trading results including interest income totaling $(22,545,550) and expenses totaling $8,743,004, resulting in a net loss of $31,288,554 for the three months ended June 30, 2010. The Partnership’s net asset value per Unit decreased from $36.22 at March 31, 2010 to $33.57 at June 30, 2010.
The most significant trading losses of approximately 4.0% were incurred in the global stock index sector throughout the quarter from long positions in European, U.S., and Pacific Rim equity-index futures as prices declined on growing concerns that Greece’s sovereign debt crisis might spread throughout Europe. Prices also fell due to concerns over weakening growth in China and a slump in U.S. consumer confidence. Within the energy markets, losses of approximately 2.9% were recorded primarily during May and June. In May, long futures positions in crude oil and its related products resulted in losses as prices declined on continued worries that Europe’s debt troubles might slow down the global economic recovery and thereby weaken energy demand. During June, newly established short futures positions in crude oil and its related products incurred losses as prices moved higher following news that crude inventories dropped the most in six months. Losses of approximately 1.3% were incurred within the metals complex, primarily during May, from long futures positions in nickel, copper, and aluminum as prices were pressured lower on concern that demand for base metals might be slipping. Within the agricultural complex, losses of approximately 1.2% were experienced primarily during May from long positions in cotton futures as prices dropped after a U.S. Department of Agriculture report revealed a decline in sales. Lastly, losses of approximately 0.4% were
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recorded within the currency markets, primarily during June, from short positions in the Swiss franc versus the U.S. dollar as the value of the Swiss franc climbed higher against the U.S. dollar after a report revealed industrial production in the Euro-Zone was up 9.5% in April from a year ago. Elsewhere, short positions in the British pound versus the Australian dollar, Canadian dollar, and U.S. dollar incurred losses in June as the value of the British pound increased relative to these currencies after the U.K. government predicted that real GDP in the region may be better than previously estimated. A portion of the Partnership’s losses for the quarter was offset by gains of approximately 4.8% in the global interest rate sector throughout the quarter from long positions in European, U.S., and Japanese fixed-income futures as prices moved higher due to increased “safe haven” demand as investors remained concerned about the stability of the economic recovery. Prices also rose as the European Central Bank left interest rates at a record low after Europe’s sovereign debt crisis forced it to start buying government bonds.
The Partnership recorded total trading results including interest income totaling $(34,803,891) and expenses totaling $17,872,195, resulting in a net loss of $52,676,086 for the six months ended June 30, 2010. The Partnership’s net asset value per Unit decreased from $37.96 at December 31, 2009, to $33.57 at June 30, 2010.
The most significant trading losses of approximately 5.1% were recorded in the global stock index sector, primarily during January, from long positions in European, U.S., and Pacific Rim equity index futures 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, further losses were incurred from long positions in European, U.S., and Japanese equity-index futures as prices moved lower on
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growing concerns that Greece’s sovereign debt crisis might spread throughout Europe. Within the energy markets, losses of approximately 3.5% were incurred 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. Throughout 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. Additional losses of approximately 1.9% were experienced in the agricultural complex, primarily during January, from long futures positions in the soybean complex as prices fell after rains improved crop yields in Brazil and Argentina, two of the world’s biggest growers and exporters of soybeans. Further losses were experienced within the agricultural complex in May from long positions in cotton futures as prices dropped after a U.S. Department of Agriculture report revealed a decline in sales. Within the metals complex, losses of approximately 1.6% were experienced primarily during January from long futures positions in copper, aluminum, and zinc as prices fell sharply on speculation that demand for base metals may wane after Chinese banks begin to restrict lending. Additional losses were incurred during May from long futures positions in nickel, copper, and aluminum as prices were pressured lower on concern that demand for base metals might be slipping. Smaller losses of approximately 1.0% were experienced within the currency markets, primarily during January and June. In January, short positions in the U.S. dollar versus the Swiss franc, British pound, and Canadian dollar resulted in losses as the value of the U.S. dollar moved higher relative to these currencies after a drop in the global equity markets diminished demand for higher-yielding currency assets, thereby causing the U.S. dollar to benefit as a “safe haven” currency. During June, short positions in the Swiss franc versus the U.S. dollar resulted in losses as the value of the Swiss franc climbed higher against the U.S. dollar after a report revealed industrial production in the Euro-Zone was up
- 29 -
9.5% in April from a year ago. A portion of the Partnership’s losses for the first six months of the year was offset by gains of approximately 5.8% experienced within 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.
|
Item 3.
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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 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
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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 accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at MSSB for the benefit of MS&Co.
The Partnership’s total market risk may increase or decrease as it is influenced by a wide variety of factors, including, but not limited to, the diversification among the Partnership’s open positions, the volatility present within the markets, and the liquidity of the markets.
The face value of the market sector instruments held by the Partnership is typically many times the applicable margin requirements. Margin requirements generally range between 2% and 15% of contract face value. Additionally, the use of leverage causes the face value of the market sector instruments held by the Partnership typically to be many times the total capitalization of the Partnership.
The Partnership’s past performance is no guarantee of its future results. Any attempt to numerically quantify the Partnership’s market risk is limited by the uncertainty of its speculative trading. The Partnership’s
speculative trading and use of leverage may cause future losses and volatility (i.e., “risk of ruin”) that far exceed the Partnership’s experiences 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.
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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.
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. Ceres uses approximately four years of daily market data (1,000 observations) and re-values its portfolio (using delta-gamma approximations) for each of
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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 Ceres’ 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 Ceres or 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, 2011 and December 31, 2010. At June 30, 2011 and December 31, 2010, the Partnership’s total capitalization was approximately $338 million and $409 million, respectively.
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|
Primary Market
|
June 30, 2011
|
December 31, 2010
|
|
Risk Category
|
Value at Risk
|
Value at Risk
|
|
Currency
|
(1.25)%
|
(1.01)%
|
|
Equity
|
(0.80)
|
(1.48)
|
|
Interest Rate
|
(0.69)
|
(0.25)
|
|
Commodity
|
(0.50)
|
(3.93)
|
|
Aggregate Value at Risk
|
(1.85)%
|
(5.76)%
|
The VaR for a market category represents the one-day downside risk for the aggregate exposures associated with this market category. The Aggregate Value at Risk listed above represents the VaR of the Partnership’s open positions across all the market categories, and is less than the sum of the VaRs for all such market categories due to the diversification benefit across asset classes.
Because the business of the Partnership is the speculative trading of futures, forwards and options on such contracts, the composition of its trading portfolio can change significantly over any given time period, or even within a single trading day. Such 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, 2010 through June 30, 2011 and January 1, 2010 through December 31, 2010, respectively.
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|
June 30, 2011
|
|||
|
Primary Market Risk Category
|
High
|
Low
|
Average
|
|
Currency
|
(1.56)%
|
(1.01)%
|
(1.24)%
|
|
Equity
|
(2.66)
|
(0.74)
|
(1.42)
|
|
Interest Rate
|
(0.79)
|
(0.25)
|
(0.61)
|
|
Commodity
|
(3.93)
|
(0.50)
|
(2.28)
|
|
Aggregate Value at Risk
|
(5.76)%
|
(1.85)%
|
(4.13)%
|
|
December 31, 2010
|
|||
|
Primary Market Risk Category
|
High
|
Low
|
Average
|
|
Currency
|
(1.12)%
|
(0.39)%
|
(0.81)%
|
|
Equity
|
(3.01)
|
(0.46)
|
(1.90)
|
|
Interest Rate
|
(0.97)
|
(0.25)
|
(0.67)
|
|
Commodity
|
(3.93)
|
(0.94)
|
(2.28)
|
|
Aggregate Value at Risk
|
(5.76)%
|
(1.55)%
|
(4.19)%
|
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:
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|
·
|
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.
|
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, 2011 and December 31, 2010, and for the four quarter-end reporting periods from July 1, 2010 through June 30, 2011 and from January 1, 2010 through December 31, 2010, respectively. VaR is not necessarily representative of the Partnership’s historic risk, nor should it be used to predict the Partnership’s future financial performance or its ability to manage or monitor risk. There can be no assurance that the Partnership’s actual losses on a particular day will not exceed the VaR amounts indicated above or that such losses will not occur more than once in 100 trading days.
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Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash balances not needed for margin. These balances and any market risk they may represent are immaterial.
The Partnership also maintains a substantial portion of its available assets in cash at MSSB; as of June 30, 2011, such amount was equal to approximately 93% of the Partnership’s net asset value. A decline in short-term interest rates would result in a decline in the Partnership’s cash management income. This cash flow risk is not considered to be material.
Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality, and multiplier features of the Partnership’s market-sensitive instruments, in relation to the Partnership’s net assets.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership’s market risk exposures - except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership’s primary market risk exposures, as well as the strategies used and to be used by Ceres and the Trading 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
- 37 -
upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership. Investors must be prepared to lose all or substantially all of their investment in the Partnership.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to manage the risk of the Partnership’s open positions in essentially the same manner in all market categories traded. Ceres attempts to manage market exposure by diversifying the Partnership’s assets among different market sectors and trading approaches through the selection of the 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.
Ceres monitors and controls the risk of the Partnership’s non-trading instrument, cash. Cash is the only Partnership investment directed by Ceres, rather than the Trading Advisors.
|
Item 4.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of Ceres, at the time this quarterly report was filed, Ceres’ President (Ceres’ principal executive officer) and Chief Financial Officer (Ceres’ principal financial officer) have evaluated the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2011. The Partnership’s disclosure controls and procedures are designed to
- 38 -
provide reasonable assurance that information the Partnership is required to disclose in the reports that the Partnership files or submits under the Exchange Act are recorded, processed and summarized and reported within the time period specified in the applicable rules and forms. Based on this evaluation, the President and Chief Financial Officer of Ceres have concluded that the disclosure controls and procedures of the Partnership were effective at June 30, 2011.
Changes in Internal Control over Financial Reporting
There have been no significant changes during the period covered by this quarterly report in the Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect the Partnership’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
Any control system, no matter how well designed and operated, can provide reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
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PART II. OTHER INFORMATION
|
Item 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, 2010.
|
Item 6.
|
EXHIBITS
|
|
10.01(b)
|
Amendment No. 2 to Amended and Restated Management Agreement among the Partnership, the General Partner, and Rabar Market Research, Inc., dated as of May 9, 2011, is filed herewith.
|
|
10.02(b)
|
Amendment No. 2 to Amended and Restated Management Agreement among the Partnership, the General Partner, and EMC Capital Management, Inc., dated as of May 9, 2011, is filed herewith.
|
|
10.16(a)
|
Amendment No. 1 to Amended and Restated Management Agreement among the Partnership, the General Partner, and Northfield Trading L.P., dated as of May 9, 2011, is filed herewith.
|
|
31.01
|
Certification of President of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.02
|
Certification of Chief Financial Officer of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.01
|
Certification of President of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.02
|
Certification of Chief Financial Officer of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
– 40 –
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 Select L.P.
|
||
|
(Registrant)
|
||
|
By:
|
Ceres Managed Futures LLC
|
|
|
(General Partner)
|
||
|
August 12, 2011
|
By:
|
/s/Jennifer Magro
|
|
Jennifer Magro
|
||
|
Chief Financial Officer
|
||
The General Partner which signed the above is the only party authorized to act for the registrant. The registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors.
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