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EX-31.01 - EXHIBIT - MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED LPdwsbex3101.htm
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EX-32.02 - EXHIBIT - MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED LPdwsbex3202.htm

 
 
 

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

FORM 10-Q

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 0-26340

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

 
Delaware
 
13-3782232
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
       
Ceres Managed Futures LLC
   
522 Fifth Avenue, 14th Floor
   
New York, NY
 
10036
(Address of principal executive offices)
 
(Zip Code)

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


(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes 0  No T


 
 

 




MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2011


 
PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited)
 
     
 
Statements of Financial Condition as of September 30, 2011 and December 31, 2010
2
     
 
Condensed Schedule of Investments as of September 30, 2011
3
     
 
Condensed Schedule of Investments as of December 31, 2010
4
     
 
Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2011 and 2010
5
     
 
Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2011 and 2010
6
     
 
Notes to Financial Statements
  7-21
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22-31
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
31-40
     
Item 4.
Controls and Procedures
40-41
     
 
PART II. OTHER INFORMATION
 
     
Item 1A.
Risk Factors
42
     
Item 6.
Exhibits
42-43



 
 

 

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
 
September 30,
 
December 31,
 
2011
 
2010
ASSETS
$
 
$
       
Trading Equity:
     
       
Unrestricted cash
13,565,837
 
16,507,962
Restricted cash
798,057
 
1,670,616
       
Total cash
14,363,894
 
18,178,578
       
Net unrealized gain on open contracts (MS&Co.)
1,221,506
 
1,625,744
Net unrealized gain (loss) on open contracts (MSIP)
75,398
 
(68,187)
       
Total net unrealized gain on open contracts
1,296,904
 
1,557,557
       
Options purchased (premiums paid $3,245 and $1,356, respectively)
402
 
2,701
       
Total Trading Equity
15,661,200
 
19,738,836
       
Interest receivable (MSSB)
13
 
1,592
       
Total Assets
15,661,213
 
19,740,428
       
LIABILITIES AND PARTNERS’ CAPITAL
     
       
Liabilities:
     
       
Redemptions payable
222,497
 
202,690
Accrued brokerage fees (MS&Co.)
60,259
 
73,533
Accrued management fees
19,421
 
23,698
       
Total Liabilities
302,177
 
299,921
       
Partners’ Capital:
     
       
Limited Partners (990,194.781 and 1,123,253.035 Units, respectively)
15,172,825
 
19,232,434
General Partner (12,152.331 and 12,152.331 Units, respectively)
186,211
 
208,073
       
Total Partners’ Capital
15,359,036
 
19,440,507
       
Total Liabilities and Partners’ Capital
15,661,213
 
19,740,428
       
NET ASSET VALUE PER UNIT
15.32
 
17.12


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

- 2 -

 
 

 

MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
CONDENSED SCHEDULE OF INVESTMENTS
September 30, 2011 (Unaudited)



Futures and Forward Contracts Purchased
Net unrealized
gain/(loss) on
open contracts
% of
Partners’ Capital
 
$
 
Commodity
     (95,883)
(0.62)                               
Equity
    (36,765)
(0.24)
Foreign currency
(10,503)
(0.07)                               
Interest rate
                                                          157,616
  1.02                                 
     
Total Futures and Forward Contracts Purchased
       14,465
   0.09                                
     
     
Futures and Forward Contracts Sold
   
     
Commodity
366,658
  2.38        
Equity
10,565
  0.07       
Foreign currency
1,786
  0.01       
Interest rate
             969
         0.01     
     
Total Futures and Forward Contracts Sold
        379,978
       2.47       
     
Unrealized Currency Gain
                                                        902,461
                                    5.88
     
Net fair value
          1,296,904
                                    8.44
     

 
Options Contracts
Fair Value
% of                             
Partners’ Capital                            
 
                                                                  $
 
Options purchased on Forward Contracts
                                                 402
 -
     
















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

- 3 -

 
 

 

MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
CONDENSED SCHEDULE OF INVESTMENTS
December 31, 2010



Futures and Forward Contracts Purchased
Net unrealized
gain/(loss) on
open contracts
% of
Partners’ Capital
 
$
 
Commodity
     497,614
   2.56                            
Equity
    3,491
         0.02
Foreign currency
171,443
0.88                            
Interest rate
                                                             47,762
  0.25                           
     
Total Futures and Forward Contracts Purchased
     720,310
   3.71                           
     

Futures and Forward Contracts Sold
   
     
Commodity
(280,791)
  (1.45)
Equity
4,962
  0.03
Foreign currency
182,777
  0.94
Interest rate
    (27,407)
        (0.14)
     
Total Futures and Forward Contracts Sold
      (120,459)
        (0.62)
     
Unrealized Currency Gain
                                                       957,706
                                       4.92
     
Net fair value
          1,557,557
                                       8.01
     
     
     
 
Option Contracts
Fair Value
% of                        
Partners’ Capital                      
 
$
 
Options purchased on Forward Contracts
2,701
0.01                     
















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

- 4 -

 
 

 

 MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF INCOME AND EXPENSES
(Unaudited)

       
 
For the Three Months
Ended September  30,
 
For the Nine Months
Ended September 30,
               
 
2011
 
2010
 
2011
 
2010
 
$
 
$
 
$
 
$
INVESTMENT INCOME
             
Interest income (MSSB)
692
 
7,025
 
7,074
 
16,335
               
EXPENSES
             
Brokerage fees (MS&Co.)
182,410
 
226,118
 
594,618
 
680,044
Management fees
58,697
 
73,855
 
191,433
 
222,035
               
Total Expenses
241,107
 
299,973
 
786,051
 
902,079
               
NET INVESTMENT LOSS
(240,415)
 
(292,948)
 
(778,977)
 
(885,744)
               
TRADING RESULTS
             
Trading profit (loss):
             
Realized
274,656
 
1,206,271
 
(949,204)
 
2,714,456
Net change in unrealized
249,341
 
1,829
 
(264,841)
 
(84,508)
 
523,997
 
1,208,100
 
(1,214,045)
 
2,629,948
               
Proceeds from Litigation Settlement
 
29,602
 
 
29,602
               
Total Trading Results
523,997
 
1,237,702
 
(1,214,045)
 
2,659,550
               
NET INCOME (LOSS)
283,582
 
944,754
 
(1,993,022)
 
1,773,806
               
NET INCOME (LOSS) ALLOCATION
             
               
Limited Partners
280,417
 
935,116
 
(1,971,160)
 
1,755,855
General Partner
3,165
 
9,638
 
(21,862)
 
17,951
               
NET INCOME (LOSS) PER UNIT *
             
               
Limited Partners
0.26
 
0.78
 
(1.80)
 
1.43
General Partner
0.26
 
0.78
 
(1.80)
 
1.43
               
 
Units
 
Units
 
Units
 
Units
WEIGHTED AVERAGE NUMBER
             
OF UNITS OUTSTANDING
1,033,292.482
 
1,222,737.735
 
1,080,349.632
 
1,255,940.559
               
               
               


* 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 GLOBAL BALANCED L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
For the Nine Months Ended September 30, 2011 and 2010
(Unaudited)





 
Units of
           
 
Partnership
 
Limited
 
General
   
 
Interest
 
Partners
 
Partner
 
Total
     
$
 
$
 
$
Partners’ Capital,
             
December 31, 2010
1,135,405.366
 
19,232,434
 
208,073
 
19,440,507
               
Net Loss
 
(1,971,160)
 
(21,862)
 
(1,993,022)
               
Redemptions
(133,058.254)
 
(2,088,449)
 
 
(2,088,449)
               
Partners’ Capital,
             
September 30, 2011
1,002,347.112
 
15,172,825
 
186,211
 
15,359,036
               
               
Partners’ Capital,
             
December 31, 2009
1,300,346.582
 
19,608,456
 
200,894
 
19,809,350
               
Net Income
 
1,755,855
 
17,951
 
1,773,806
               
Redemptions
(91,503.037)
 
(1,431,062)
 
(16,424)
 
(1,447,486)
               
Partners’ Capital,
             
September 30, 2010
1,208,843.545
 
19,933,249
 
202,421
 
20,135,670
               




















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

- 6 -

 
 

 

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

September 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 Global Balanced L.P. (the “Partnership”).  The financial statements and condensed notes herein should be read in conjunction with the Partnership’s Annual Report on Form 10-K for the fiscal year ending December 31, 2010.

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







- 7 -

 
 

 

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


The Partnership’s general partner is Ceres Managed Futures LLC (“Ceres” or the “General Partner”).  The non-clearing commodity broker is Morgan Stanley Smith Barney LLC (“MSSB”).  The clearing commodity brokers are Morgan Stanley & Co. LLC (“MS&Co.”) (formerly, Morgan Stanley & Co. Incorporated) 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 SSARIS Advisors, LLC, Altis Partners (Jersey) Limited, and C-View International Limited (each individually, a “Trading Advisor”, or collectively, the “Trading Advisors”).









- 8 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.  
Financial Highlights
     Changes in the net asset value per Unit for the three and nine months ended September 30, 2011 and 2010 were as follows:
 
                                                                                                      For the Three Months                                                               For the Nine Months
                                                                                               Ended September 30,                                                                  Ended September 30,

 
                        2011
                       2010
                                2011
                 2010
         Per Unit operating performance:
       
         Net asset value at the beginning of the period:
$     15.06
$     15.88
$     17.12
$     15.23
         
                     Interest Income
     –  (3)
0.01
0.01
0.01
                     Expenses
(0.24)
(0.25)
(0.73)
(0.72)
                     Realized/Unrealized Gain/(Loss) (1)
           0.50
           1.02
           (1.08)
           2.14
                     Net Gain/(Loss)
           0.26
           0.78
           (1.80)
           1.43
         
         Net asset value, September 30:
$     15.32
$     16.66
$      15.32
$    16.66
         
         Ratios to average net assets:
       
                     Net Investment Loss  (2)
   (6.1)%
   (5.8)%
                                       (6.2)%
                                     (6.0)%
                     Expenses before Incentive Fees (2)
6.1%
6.0%
6.3%
6.1%
                     Expenses after Incentive Fees (2)
6.1%
6.0%
6.3%
6.1%
                     Net Gain/(Loss) (2)
7.2%
18.9%
(15.9)%
12.0%
         Total return before incentive fees
1.7%
4.9%
(10.5)%
9.4%
         Total return after incentive fees
1.7%
4.9%
(10.5)%
9.4%
         

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






- 9 -
 
 
 

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

3.  Related Party Transactions
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 100% 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.

4.  Financial Instruments
The Partnership trades Futures Interests.  Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price.  Futures Interests are open commitments until settlement date, at which time they are realized.  They are valued at fair value, generally on a daily basis, and the unrealized gains and losses on open contracts (the difference between contract trade price and market price) are reported in the Statements of Financial Condition as a net unrealized gain or loss on open contracts.  The resulting net change in unrealized gains and losses is reflected in the net change in unrealized trading profit (loss) on open contracts from one period to the next on the Statements of Income and Expenses.  The fair value of exchange-traded futures, options and forward contracts is 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


- 10 -
 
 
 

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



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 spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period.  Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts.  There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility.

The Partnership may buy or write put and call options through listed exchanges and the over-the-counter market.  The buyer of an option has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of a specific Futures Interest on the underlying assets at a specified price prior to or on a specified expiration date.  The writer of an option is exposed to the risk of loss if the fair value of the Futures Interest on the underlying asset declines (in the case of a put option) or increases (in the case of a call option).  The writer of an option can never profit by more than the premium paid by the buyer but can potentially lose an unlimited amount.

Premiums received/premiums paid from writing/purchasing options are recorded as liabilities/assets on the Statements of Financial Condition and are subsequently adjusted to fair values.  The difference between the fair value of the option and the premiums received/premiums paid is treated as an unrealized gain or loss.









- 11 -
 
 
 

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


The fair value of exchange-traded contracts is based on the settlement price quoted by the exchange on the day with respect to which fair value is being determined.  If an exchange-traded contract could not have been liquidated on such day due to the operation of daily limits or other rules of the exchange, the settlement price will be equal to the settlement price on the first subsequent day on which the contract could be liquidated.

The Partnership’s contracts are accounted for on a trade-date basis and marked to market on a daily basis.  The Partnership accounts for its derivative investments as described in Note 5.  Derivatives and Hedging as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or the “Codification”).  A derivative is defined as a financial instrument or other contract that has all three of the following characteristics:


1)  
a) One or more “underlyings” and b) one or more “notional amounts” or payment provisions or both;
2)  
Requires no initial net investment or a smaller initial net investment than would be required for other types of contracts that would be expected to have a similar response relative to changes in market factors; and
3)  
Terms that require or permit net settlement.

Generally, derivatives include futures, forwards, swaps or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars.


- 12 -
 
 
 

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

The net unrealized gains on open contracts, reported as a component of “Trading Equity” on the Statements of Financial Condition, and their longest contract maturities were as follows:

 
Net Unrealized Gains  on Open Contracts
Longest Maturities
Date
Exchange-Traded
Off-Exchange-Traded
Total
Exchange-Traded
Off-Exchange-Traded
 
$
$
$
   
Sep. 30, 2011
1,282,218
14,686
1,296,904
Sep. 2013
Oct. 2011
Dec. 31, 2010
1,494,155
63,402
1,557,557
Dec. 2012
Apr. 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 (“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-
 
 
- 13 -

 
 

 

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


traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, which funds, in the aggregate, totaled $15,646,112 and $19,672,733 at September 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.

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

- 14 -
 
 
 

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


forward, and exchange-traded futures-styled options contracts are settled daily through variation margin.  Gains and losses on off-exchange-traded forward currency contracts are settled upon termination of the contract.  Gains and losses on off-exchange-traded forward currency options contracts are settled on an agreed-upon settlement date.  However, the Partnership is required to meet margin requirements equal to the net unrealized loss on open forward currency contracts in the Partnership’s accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at MSSB for the benefit of MS&Co.

5.  Derivatives and Hedging
The Partnership’s objective is to profit from speculative trading in Futures Interests.  Therefore, the Trading 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 with regard to  foreign currency forward trades, each notional quantity amount has been converted to an equivalent contract based upon an industry convention.

The following tables summarize the valuation of the Partnership’s investments as of September 30, 2011 and December 31, 2010, respectively.













- 15 -
 
 
 

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


The Effect of Trading Activities on the Statements of Financial Condition as of September 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 nine months  
 (absolute quantity)
 
$
$
$
$
$
 
             
Commodity
52,679
(148,562)
      381,123
(14,465)
270,775
 244
Equity
1,232
(37,997)
        12,894
(2,329)
(26,200)
44
Foreign currency
44,462
(54,965)
        43,085
(41,299)
(8,717)
2,083
Interest rate
  184,686
  (27,070)
                  2,240  
   (1,271)
   158,585
317
Total
 283,059
(268,594)
      439,342
(59,364)
394,443
 
             
Unrealized currency gain
       
   902,461
 
Total net unrealized gain on open contracts
       
 
  1,296,904
 


   
Average number of
contracts outstanding
   
for the nine months
   
(absolute quantity)
Option Contracts at Fair Value
$
 
Options purchased
402
1
Options written
-
1

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
Average number
 of contracts
outstanding for the year (absolute quantity)
 
               $
                       $
$
                     $
$
 
             
Commodity
572,508
(74,894)
       1,700
(282,491)
216,823
   364
Equity
19,806
(16,315)
     14,244
(9,282)
8,453
   54
Foreign currency
202,991
(31,548)
    222,394
(39,617)
354,220
 1,998
Interest rate
   61,518
  (13,756)
                1,842  
   (29,249)
    20,355
   417
Total
 856,823
(136,513)
    240,180
(360,639)
599,851
 
             
Unrealized currency gain
       
   957,706
 
Total net unrealized gain on open contracts
       
 
  1,557,557
 






- 16 -
 
 
 

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

   
Average number of
   
contracts outstanding
   
for the year
   
(absolute quantity)
Option Contracts at Fair Value
$
 
Options purchased
  2,701
2
Options written
1

The following tables summarize the net trading results of the Partnership for the three and nine months ended September 30, 2011 and 2010, respectively.

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

 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2011
 
Ended September 30, 2011
Type of Instrument
$
 
$
       
Commodity
(116,970)
 
(782,105)
Equity
 (294,906)
 
(978,044)
Foreign currency
(132,530)
 
   (659,597)
Interest rate
  1,089,024
 
1,259,883
Unrealized currency loss
       (20,621)
 
     (54,182)
Total
       523,997
 
(1,214,045)


Line Items on the Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2011:
 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2011
 
  Ended September 30, 2011
Trading Results
$
 
$
       
Realized
           274,656
 
           (949,204)
Net change in unrealized
       249,341
 
      (264,841)
Total Trading Results
       523,997
 
   (1,214,045)

The Effect of Trading Activities on the Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2010 included in Total Trading Results:

 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2010
 
Ended September 30, 2010
Type of Instrument
$
 
$
       
Commodity
 37,221
 
(428,214)
Equity
42,790
 
(403,859)
Foreign currency
 20,145
 
924,651
Interest rate
944,678
 
2,603,299
Unrealized currency gain/(loss)
  163,266
 
(65,929)
Proceeds from Litigation Settlement
        29,602
 
     29,602
Total
   1,237,702
 
2,659,550

- 17 -
 
 
 

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

Line Items on the Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2010:
 
 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2010
 
  Ended September 30, 2010
Trading Results
$
 
$
       
Realized
1,206,271
 
2,714,456
Net change in unrealized
           1,829
 
           (84,508)
Proceeds from Litigation Settlement
         29,602
 
         29,602
Total Trading Results
    1,237,702
 
    2,659,550

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.

- 18 -

 
 

 

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

September 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
670,462
n/a
 
670,462
Forwards
                                      –       
51,939
n/a
 
 51,939
    Options Purchased
                                      –     
            402
n/a
 
   402
           
  Total Assets
    670,462
       52,341
n/a
 
           722,803
           
     Liabilities
         
 Futures
290,705
n/a
 
 290,705       
     Forwards
                                       –      
    37,253
n/a
 
          37,253
 
         
 
   290,705
     37,253
n/a
 
          327,958
  Total Liabilities
         
         
         902,461
Unrealized currency gain
         
 
   379,757
      15,088
n/a
 
         1,297,306
  *Net fair value
         


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
980,403
n/a
 
 980,403
Forwards
                                       –       
116,589
n/a
 
 116,589
    Options Purchased
                                       –     
          2,701
n/a
 
      2,701    
           
  Total Assets
    980,403
    119,290
n/a
 
           1,099,693
           
    Liabilities
         
Futures
443,954
n/a
 
443,954
    Forwards
                                        –      
    53,187
n/a
 
               53,187
           
  Total Liabilities
   443,954
     53,187
n/a
 
           497,141
           
Unrealized currency gain
       
         957,706
           
  *Net fair value
   536,449
      66,103
n/a
 
              1,560,258
           

* This amount comprises the “Total net unrealized gain on open contracts” and “Options purchased” on the Statements of Financial Condition.
- 19 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY SPECTRUM GLOBAL BALANCED 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.




- 20 -
 
 
 

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

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 September 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 2008 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.



- 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 unfavorable positions in such markets, subjecting it to substantial losses.  Either of these market conditions could result in restrictions on

- 22 -

 
 

 

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.

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 nine month periods ended

- 23 -

 
 

 

September 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 U.S. GAAP, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: the contracts the Partnership trades are accounted for on a trade-date basis and marked to market on a daily basis.  The difference between their original contract value and market value is recorded on the Statements of Income and Expenses as “Net change in unrealized trading profit (loss)” for open 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 Nine Months Ended September 30, 2011
The Partnership recorded total trading results including interest income totaling $524,689 and expenses totaling $241,107 resulting in net income of $283,582 for the three months ended September 30, 2011.  The Partnership’s net asset value per Unit increased from $15.06 at June 30, 2011, to $15.32 at September 30, 2011.

The most significant trading gains were achieved within the global interest rate sector from long positions in European and U.S. fixed income futures as prices advanced higher throughout the majority of the quarter due to concern about the European sovereign debt crisis and a faltering global economy. Within the metals markets, gains were experienced primarily during September from short futures positions in copper, nickel, and zinc futures as prices fell after continued fears of a “double dip” recession in the U.S. and Europe, along with inflationary pressures in China, spurred speculation global demand for metals may weaken. A portion of the Partnership’s gains for the quarter was offset by losses incurred within the global stock index sector due to long positions in U.S. and European equity index futures as prices dropped amid Standard & Poor’s downgrade of the United States’ sovereign credit rating, worse-than-expected economic reports, and concern about the European sovereign debt crisis. Within the agricultural complex, losses were incurred primarily during August and September due to long futures positions in corn and soybeans as prices declined on speculation that Europe’s sovereign debt crisis may hinder the global economy thus reducing demand for the grains. Additionally, prices of corn futures continued to decline after a U.S. government report revealed bigger-than-expected U.S. inventories. Within the currency sector, losses were incurred primarily during September due to long positions in the New Zealand dollar versus the U.S. dollar, short positions in the British pound versus the Australian dollar, and long positions in the Australian dollar versus the Canadian dollar as the value of the New Zealand dollar and Australian dollar moved lower in tandem with declining

- 25 -
 
 
 

 
commodity prices. During August, short positions in the British pound and euro versus the Australian dollar resulted in additional losses. Within the energy sector, losses were incurred primarily during August due to long futures positions in crude oil and its related products at the beginning of the month as prices fell on concern energy demand may falter amid slowing economic growth in the U.S. and a deepening debt crisis in Europe.

The Partnership recorded total trading results including interest income totaling $(1,206,971) and expenses totaling $786,051, resulting in a net loss of $1,993,022 for the nine months ended September 30, 2011.  The Partnership’s net asset value per Unit decreased from $17.12 on December 31, 2010 to $15.32 at September 30, 2011.

The most significant trading losses were incurred within the global stock index markets, primarily during June, from long positions in European and U.S. equity index futures as prices moved lower on concern about the overall pace of the global economic recovery. Within the agricultural markets, losses were experienced primarily during March from long positions in corn futures as prices fell after a U.S. Department of Agriculture report revealed increasing world stockpiles and declining U.S. exports of the crop. Further losses were recorded in long cocoa futures positions as prices dropped on signs that the political turmoil in the Ivory Coast that had hampered exports would possibly be easing. Within the currency markets, losses were experienced primarily in January from short positions in the British pound and euro versus the Japanese yen as the value of the British pound and euro moved higher against the yen on speculation European officials would take additional measures to counter the sovereign debt crisis, while the S&P reduced Japan’s credit rating over elevated fiscal deficits. Within the energy markets, losses were experienced primarily during May

- 26 -
 
 
 

 
from long futures positions in refined oil products as prices moved lower on speculation that a weakening global economy and the European debt crisis may lead to reduced energy demand. Losses were also incurred in the metals complex, primarily during March, due to long positions in nickel, copper, and zinc futures as prices moved lower amid concern that rising energy costs associated with mounting unrest in the Middle East would potentially slow the global economy and demand for industrial products. A portion of the Partnership’s losses during the first nine months of the year was offset by gains recorded in the global interest rate sector from long positions in European and U.S. fixed income futures as prices rose throughout the third quarter on increased demand for the relative “safety” of government bonds due to concern about a faltering global economic recovery.

For the Three and Nine Months Ended September 30, 2010
The Partnership recorded total trading results including interest income totaling $1,244,727 and expenses totaling $299,973, resulting in net income of $944,754 for the three months ended September 30, 2010.  The Partnership’s net asset value per Unit increased from $15.88 at June 30, 2010, to $16.66 at September 30, 2010.

The most significant trading gains of approximately 4.7% were recorded within the global interest rate sector, primarily during July and August. In July, gains were experienced from long positions in U.S. fixed-income futures as prices moved higher after the U.S. Federal Reserve’s Beige Book indicated stalled or slower U.S. economic growth, thereby boosting demand for the relative “safety” of government debt. Prices continued to climb higher on speculation that the U.S. Federal Reserve might resume purchases of U.S. Treasuries if economic growth slows. Gains were achieved during August from long positions in European, U.S., and Australian fixed-income futures as prices climbed higher due to concern that European governments may

- 27 -
 
 
 

 
struggle to repay their debt, while reports added to evidence that Chinese economic growth might be slowing. Prices continued to move higher after reports on manufacturing in the New York region, U.S. home-builder confidence, and Japanese Gross Domestic Product fueled worries over the global economic recovery. Within the currency markets, gains of approximately 1.0% were recorded primarily during August from long positions in the Japanese yen versus the British pound, Swiss franc, and U.S. dollar as the value of the Japanese yen increased relative to these currencies on speculation that reports might show U.S. expansion decelerated, thereby spurring investors to unwind existing carry trades. Within the agricultural complex, gains of approximately 0.9% were experienced primarily during September from long positions in cotton futures as prices increased on signs that global demand may outpace limited supplies. Meanwhile, long futures positions in the soybean complex achieved gains as prices rose amid concern that reduced rains in Brazil and Argentina may diminish crop yields. Smaller gains of approximately 0.2% were achieved within the global stock index markets, primarily during September, from long positions in European and U.S. equity index futures as prices rose after higher-than-estimated U.S. wholesale inventories and China’s better-than-
expected industrial production data raised confidence in the global economic recovery. A portion of the Partnership’s gains for the quarter was offset by losses of approximately 0.5% experienced within the energy sector, primarily during July and September from short futures positions in crude oil and its related products. During July, prices rose after the U.S. Department of Energy estimated production might trail demand while Tropical Storm Bonnie headed for the Gulf of Mexico, thereby spurring concerns of a supply disruption. In September, prices continued to increase after positive economic indicators from the U.S., Asia, and Europe restored confidence that the economic recovery may stimulate energy demand. Within the metals markets, losses of approximately 0.2% were incurred primarily during July from long positions in gold and silver futures as prices declined amid waning European debt concerns, which reduced demand for precious metals as a relative “safe haven.”
- 28 -
 
 
 

 
The Partnership recorded total trading results including interest income totaling $2,675,885 and expenses totaling $902,079, resulting in net income of $1,773,806 for the nine months ended September 30, 2010.  The Partnership’s net asset value per Unit increased from $15.23 at December 31, 2009, to $16.66 at September 30, 2010.

The most significant trading gains of approximately 13.8% were experienced in the global interest rate sector throughout a majority of the first nine months of the year from long positions in European, U.S., and
Japanese fixed-income futures. In this sector, prices increased during the first quarter on concerns that lending restrictions in China, possible reductions in U.S. stimulus measures, and Greece’s fiscal struggles might stifle the global economic rebound, thereby boosting demand for the relative “safety” of government bonds. Prices were then pressured higher during the second quarter amid an unexpected drop in U.S. consumer confidence, increased regulatory scrutiny of the financial industry, and the growing European debt crisis. During the third quarter, prices continued to climb higher due to concern that European governments might struggle to repay their debt and Chinese economic growth may be slowing. Within the currency markets, gains of approximately 5.3% were achieved primarily during February, March, and April from short positions in the euro versus the U.S. dollar as the value of the euro declined against the U.S. dollar amid concerns that Greece’s mounting debt burden might spread to other European nations. During March and April, additional gains were recorded from long positions in the Mexican peso versus the U.S. dollar as the value of the Mexican peso moved higher against the U.S. dollar after U.S. retail sales unexpectedly increased and a U.S. report showed jobs increased the most in three years, diminishing “safe haven” demand for the U.S. dollar. In August, further gains were achieved from long positions in the Japanese yen versus the British pound, Swiss franc, and U.S. dollar as the value of the Japanese yen increased relative to these currencies on

- 29 -
 
 
 

 
speculation that reports might show U.S. expansion decelerated, thereby spurring investors to unwind existing carry trades. Within the agricultural complex, gains of approximately 0.2% were recorded primarily during March and September. During March, long futures positions in live cattle and feeder cattle resulted in gains as prices rose after a U.S. Department of Agriculture report showed demand might increase as supplies shrink. In September, gains were achieved from long positions in cotton futures as prices increased on signs that global demand may outpace limited supplies. A portion of the Partnership’s gains for the first nine months of the year was offset by losses of approximately 2.0% within the global stock index sector, primarily during January, May, June, and August. In January, long positions in European, U.S., and Pacific Rim equity index futures resulted in losses as prices moved lower amid disappointing U.S. corporate earnings reports and mounting concerns over sovereign debt defaults from a number of European countries. During May and June, losses were incurred from long positions in European, U.S., and Japanese equity-index futures as prices moved lower on growing concerns that Greece’s sovereign debt crisis might spread throughout Europe. In August, losses were incurred from long positions in U.S. and European equity index futures as prices fell after the U.S. Federal Reserve said the pace of economic recovery is likely to be “more modest” than forecast and a report revealed U.S. productivity unexpectedly fell in the second quarter. Losses of approximately 1.8% were recorded in the energy markets, primarily during January, from long futures positions in crude oil and its related products as prices declined amid speculation that China’s economic activity and energy demand may ease. During May, long futures positions in crude oil and its related products resulted in additional losses as prices declined on worries that Europe’s debt troubles might slow down the global economic recovery and thereby weaken energy demand. In September, losses were recorded due to short futures positions in crude oil and its related products as prices rose after positive economic indicators from the U.S., Asia, and Europe restored confidence that the economic recovery may stimulate energy demand.

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Lastly, losses of approximately 0.6% were experienced within the metals sector, primarily during January, from long futures positions in copper and nickel as prices fell sharply on speculation that demand for base metals may wane after Chinese banks begin to restrict lending. Further losses were incurred during May from long positions in nickel futures as prices were pressured lower on concern that demand for base metals might be slipping. In July, losses were experienced from long positions in gold and silver futures as prices declined amid waning European debt concerns, which reduced demand for precious metals as a relative “safe haven.”

 
Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Introduction
The Partnership is a commodity pool engaged primarily in the speculative trading of futures, forwards and options.  The market-sensitive instruments held by the Partnership are acquired for speculative trading purposes only and, as a result, all or substantially all of the Partnership’s assets are at risk of trading loss.  Unlike an operating company, the risk of market-sensitive instruments is inherent to the primary business activity of the Partnership.

The futures, forwards and options on such contracts traded by the Partnership involve varying degrees of related market risk.  Market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates, and prices of financial instruments and commodities, factors that result in frequent changes in the fair value of the Partnership’s open positions, and consequently in its earnings, whether realized or unrealized, and cash flow.  Gains and losses on open positions of exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts are settled daily through variation margin.  Gains and losses on off-exchange-traded forward currency contracts and forward currency options contracts

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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 experience to date under the “Partnership’s Value at Risk in Different Market Sectors” section and significantly exceed the Value at Risk (“VaR”) tables disclosed.

Limited partners will not be liable for losses exceeding the current net asset value of their investment.

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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 fair value accounting principles.  Any loss in the market value of the Partnership’s open positions is directly reflected in the Partnership’s earnings and cash flow.

The Partnership’s risk exposure in the market sectors traded by the Trading Advisors is estimated below in terms of VaR.  Prior to June 30, 2011, the Partnership estimated VaR using a model based upon historical simulation (with a confidence level of 99%) which involved constructing a distribution of hypothetical daily changes in the value of a trading portfolio.  The VaR model took 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 were based on daily percentage changes observed in key market indices or other market factors (“market risk factors”) to which the portfolio was sensitive.  The one-day 99% confidence level of the Partnership’s VaR corresponded 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 used approximately four years of daily market data (1,000 observations) and re-valued its portfolio (using delta-gamma approximations) for each of the historical market moves that occurred over this time period.  This generated a probability distribution of daily “simulated
 
 
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profit and loss” outcomes.  The VaR was 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 were based on the risk representation of the underlying benchmark for each instrument or contract and did not distinguish between exchange and non-exchange dealer-based instruments.  They were 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.

Starting with the third quarter 2011, exchange maintenance margin requirements have been used by the Partnership as the measure of its use.  Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95% - 99% of any one-day interval.  Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to VaR.

The Partnership’s Value at Risk in Different Market Sectors
The following tables indicate the trading VaR associated with the Partnership’s open positions by market category as of September 30, 2011 and the highest, lowest and average values during the three months ended September 30, 2011.  All open position trading risk exposures of the Partnership have been included in

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calculating the figures set forth below.  As of September 30, 2011, the Partnership’s total capitalization was $15 million.
   
% of Total
Market Sector
VaR
Capitalization
     
Currency
$622,013
4.05%
     
Interest Rate
   $282,564
  1.84%
     
Equity
   $119,809
   0.78%
     
Commodity
    $420,627
  2.74%
     
Total
$1,445,013
9.41%


Three Months Ended September 30, 2011
 
High
Low
Average
Market Sector
VaR
VaR
VaR*
       
Currency
$1,897,024
$306,675
$1,030,938
       
Interest Rate
      $449,659
   $252,925
     $341,257
       
Equity
      $432,915
   $47,306
    $146,196
       
Commodity
     $578,250
   $301,049
    $445,361

* Average of month-end VaR.

The following table indicates the VaR associated with the Partnership’s open positions as a percentage of total Partner’s Capital by primary market risk category at December 31, 2010.  At December 31, 2010, the Partnership’s total capitalization was approximately $19 million.







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Primary Market
December 31, 2010
Risk Category
VaR
   
Currency
(0.73)%
   
Interest Rate
(0.37)
   
Equity
(0.23)
   
Commodity
(1.83)
   
Aggregate Value at Risk
 (2.08)%

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 can be 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, 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 table below supplements the quarter-end VaR set forth above by presenting the Partnership’s high, low, and average VaR, as a percentage of total net assets for the four quarter-end reporting period from January 1, 2010 through December 31, 2010.




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December 31, 2010
     
Primary Market Risk Category
High
Low
Average
Interest Rate
(1.56)%
(0.37)%
(1.00)%
Currency
(0.96)
(0.30)
(0.68)
Equity
(1.31)
(0.23)
(0.80)
Commodity
(1.83)
(0.51)
(1.24)
Aggregate Value at Risk
 (2.40)%
 (1.73)%
(2.01)%

Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio’s aggregate market risk exposure, incorporating a range of varied market risks, reflect risk reduction due to portfolio diversification or hedging activities, and can cover a wide range of portfolio assets. However, VaR risk measures should be viewed in light of the methodology’s limitations, which include, but may not be limited to the following:
·  
past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements;
·  
changes in portfolio value caused by market movements may differ from those of the VaR model;
·  
VaR results reflect past market fluctuations applied to current trading positions while future risk depends on future positions;
·  
VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and
·  
the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements.

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In addition, the VaR tables above, as well as the past performance of the Partnership, give no indication of the Partnership’s potential “risk of ruin.”

The VaR tables provided present the results of the Partnership’s VaR for each of the Partnership’s market risk exposures at September 30, 2011 and market risk exposures and on an aggregate basis at December 31, 2010, and for the three months from July 1, 2011 through September 30, 2011 and twelve months from January 1, 2010 through December 31, 2010.  VaR is not necessarily representative of the Partnership’s historic risk, nor should it be used to predict the Partnership’s future financial performance or its ability to manage or monitor risk.  There can be no assurance that the Partnership’s actual losses on a particular day will not exceed the VaR amounts indicated above or that such losses will not occur more than once in 100 trading days.

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

The Partnership also maintains a substantial portion of its available assets in unrestricted cash at MSSB; as of September 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.
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Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership’s market risk exposures - except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership’s primary market risk exposures, as well as the strategies used and to be used by Ceres and the Trading Advisors for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies.  Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership.  Investors must be prepared to lose all or substantially all of their investment in the Partnership.

Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to manage the risk of the Partnership’s open positions in essentially the same manner in all market categories traded. Ceres attempts to manage market exposure by diversifying the Partnership’s assets among different market sectors and trading approaches through the selection of the 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.


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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 September 30, 2011.  The Partnership’s disclosure controls and procedures are designed to provide reasonable assurance that information the Partnership is required to disclose in the reports that the Partnership files or submits under the Exchange Act are recorded, processed and summarized and reported within the time period specified in the applicable rules and forms.  Based on this evaluation, the President and Chief Financial Officer of Ceres have concluded that the disclosure controls and procedures of the Partnership were effective at September 30, 2011.

Changes in Internal Control over Financial Reporting
There have been no changes during the period covered by this quarterly report in the Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect the Partnership’s internal control over financial reporting.



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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

31.01*
Certification of President of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.02*
Certification of Chief Financial Officer of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.01*
Certification of President of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.02*
Certification of Chief Financial Officer of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS*
XBRL Instance Document
 
101.SCH*
XBRL Taxonomy Extension Schema Document
 
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.LAB*
XBRL Taxonomy Extension Label Document
 
101.PRE*
XBRL Taxonomy Extension Presentation Document
 
101.DEF*
XBRL Taxonomy Extension Definition Document
 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
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SIGNATURE



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




 
Morgan Stanley Smith Barney Spectrum Global Balanced L.P.
 
 (Registrant)
     
 
By:
Ceres Managed Futures LLC
   
(General Partner)
     
November 10, 2011
By:
/s/Brian Centner
   
Brian Centner
   
Chief Financial Officer




The General Partner which signed the above is the only party authorized to act for the registrant.  The registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors.























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