MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LP - FORM 10-Q - May 14, 2012

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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 March 31, 2012 or

o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________to__________________

Commission file number: 0-26280

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

 
Delaware
  
13-3782225
 
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
       
Ceres Managed Futures LLC
    
522 Fifth Avenue, 14th Floor
    
New York, NY
  
10036
(Address of principal executive offices)
  
(Zip Code)

Registrant’s telephone number, including area code
  
(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 STRATEGIC L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2012


 
PART I. FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements (Unaudited)
  
     
 
Statements of Financial Condition as of March 31, 2012 and December 31, 2011
2
     
 
Condensed Schedules of Investments as of March 31, 2012 and December 31, 2011
3
     
 
Statements of Income and Expenses for the Quarters Ended March 31, 2012 and 2011
4
     
 
Statements of Changes in Partners’ Capital for the Quarters Ended March 31, 2012 and 2011
5
     
 
Notes to Financial Statements
  6-19
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20-27
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27-34
     
Item 4.
Controls and Procedures
35-36
     
 
PART II. OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
37
     
Item 1A.
Risk Factors
37
     
Item 4.
Mine Safety Disclosures
37
     
Item 6.
Exhibits
37-38



 
 
 

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

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

 
(Unaudited)
    
 
March 31,
  
December 31,
 
2012
  
2011
ASSETS
$
  
$
       
Investments:
      
Investment in BHM I, LLC (cost $44,936,526 and $55,017,097, respectively)
95,252,738
  
101,259,072
Investment in MB Master Fund (cost $8,787,826 and $8,952,411, respectively)
8,773,633
  
8,832,023
Investment in PGR Master Fund (cost $8,754,957 and $8,952,411 respectively)
8,592,050
  
9,193,011
       
Total Investments
112,618,421
  
119,284,106
       
Interest receivable (MSSB)
6,157
  
328
       
Total Assets
112,624,578
  
119,284,434
       
LIABILITIES AND PARTNERS’ CAPITAL
      
       
Liabilities:
      
       
Redemptions payable
1,617,982
  
1,603,104
Accrued brokerage fees (MS&Co.)
577,883
  
596,827
Accrued management fees
263,346
  
272,302
Accrued incentive fee
–
  
37,676
       
Total Liabilities
2,459,211
  
2,509,909
       
Partners’ Capital:
      
       
Limited Partners (6,739,285.242 and 7,211,352.161 Units, respectively)
108,898,285
  
115,518,403
General Partner (78,414.692 and 78,414.692 Units, respectively)
1,267,082
  
1,256,122
       
Total Partners’ Capital
110,165,367
  
116,774,525
       
Total Liabilities and Partners’ Capital
112,624,578
  
119,284,434
       
NET ASSET VALUE PER UNIT
16.16
  
16.02










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

- 2 -

 
 
 

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



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














































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

- 3 -

 
 
 

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


 
For the Quarters Ended March 31,
       
 
2012
  
2011
 
$
  
$
INVESTMENT INCOME
      
Interest income (MSSB)
12,233
  
39,749
       
EXPENSES
      
Brokerage fees (MS&Co.)
1,753,078
  
2,687,088
Management fees
798,985
  
1,208,441
Incentive fee
–
  
1,200,403
       
Total Expenses
2,552,063
  
5,095,932
       
NET INVESTMENT LOSS
(2,539,830)
  
(5,056,183)
       
TRADING RESULTS
      
Trading profit (loss):
      
Net realized
–
  
3,689,641
Net change in unrealized
–
  
(9,963,175)
Realized gain (loss) on investment in BHM I, LLC
(34,924)
  
25,527
Realized gain on investment in MB Master Fund
664
  
–
Realized loss on investment in PGR Master Fund
(3,014)
  
–
Unrealized appreciation on investment in BHM I, LLC
4,074,237
  
2,467,018
Unrealized appreciation on investment in MB Master Fund
106,195
  
–
Unrealized depreciation on investment in PGR Master Fund
(403,507)
  
–
       
Total Trading Results
3,739,651
  
(3,780,989)
       
NET INCOME (LOSS)
1,199,821
  
(8,837,172)
       
NET INCOME (LOSS) ALLOCATION
      
       
Limited Partners
1,188,861
  
(8,741,010)
General Partner
10,960
  
(96,162)
       
NET INCOME (LOSS) PER UNIT*
      
       
Limited Partners
0.14
  
(1.08)
General Partner
0.14
  
(1.08)
       
 
Units
  
Units
WEIGHTED AVERAGE NUMBER
      
OF UNITS OUTSTANDING
7,138,967.965
  
8,279,540.640

* Based on change in net asset value per Unit.

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

- 4 -

 
 
 

MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
For the Quarters Ended March 31, 2012 and 2011
(Unaudited)



 
Units of
            
 
Partnership
  
Limited
  
General
    
 
Interest
  
Partners
  
Partner
  
Total
     
$
  
$
  
$
               
Partners’ Capital,
              
December 31, 2011
7,289,766.853
  
115,518,403
  
1,256,122
  
116,774,525
               
Net Income
–
  
1,188,861
  
10,960
  
1,199,821
               
Redemptions
(472,066.919)
  
(7,808,979)
  
–
  
(7,808,979)
               
Partners’ Capital,
              
March 31, 2012
6,817,699.934
  
108,898,285
  
1,267,082
  
110,165,367
               
               
               
               
               
Partners’ Capital,
              
December 31, 2010
8,352,365.929
  
177,594,148
  
1,916,408
  
179,510,556
               
Net Loss
–
  
(8,741,010)
  
(96,162)
  
(8,837,172)
               
Redemptions
(224,124.248)
  
(4,745,573)
  
–
  
(4,745,573)
               
Partners’ Capital,
              
March 31, 2011
8,128,241.681
  
164,107,565
  
1,820,246
  
165,927,811
               


















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

- 5 -

 
 
 

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

March 31, 2012

(Unaudited)

The unaudited financial statements contained herein include, in the opinion of management, all adjustments necessary for a fair presentation of the financial condition and results of operations of Morgan Stanley Smith Barney Spectrum Strategic L.P. (the “Partnership”).  The financial statements and condensed notes herein should be read in conjunction with the Partnership’s Annual Report on Form 10-K for the fiscal year ending December 31, 2011.

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

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

- 6 -

 
 
 

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

brokers are Morgan Stanley & Co. LLC (“MS&Co.”) and Morgan Stanley & Co. International plc (“MSIP”).  MS&Co. also acts as the counterparty on all trading of foreign currency forward contracts. Morgan Stanley Capital Group Inc. (“MSCG”) acts as the counterparty on all trading of options on foreign currency forward contracts. MSIP serves as the commodity broker for trades on the London Metal Exchange (“LME”). 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 Blenheim Capital Management, L.L.C. (“Blenheim”), Aventis Asset Management, LLC (“Aventis”) and PGR Capital L.P. (“PGR”) (each individually, a “Trading Advisor”, or collectively, the “Trading Advisors”).

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

The current term of the Management Agreement with Blenheim will expire on November 30, 2012 and will renew annually unless terminated by the General Partner or the Trading Advisor.  The current term of the Management Agreement with PGR will expire on June 30, 2012 and will renew annually unless terminated by the General Partner or the Trading Advisor.  The current term of the Management Agreement

- 7 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)




with Aventis will expire on June 30, 2012 and will renew annually unless terminated by the General Partner or the Trading Advisor.  In general, each Management Agreement may be terminated upon notice by either party.


2.  
Financial Highlights
Financial Highlights for the three months ended March 31, 2012 and 2011 were as follows:
                                            For the Quarters Ended March 31,

 
2012
2011
         Per Unit Operating Performance:
    
         Net asset value, January 1:
$     16.02
$     21.49
     
                     Interest Income
         –      (3)
         –      (3)
                     Expenses
       (0.36)
       (0.62)
                     Realized/Unrealized Income (Loss) (1)
        0.50
       (0.46) (4)
                     Net Income (Loss)
        0.14
       (1.08)
     
         Net asset value, March 31:
$    16.16
$     20.41
     
         Ratios to average net assets:
    
                     Net Investment Loss (2)
       (8.9)%
      (9.6)%
                     Expenses before  Incentive Fees (2)
        9.0%
       9.0 %
                     Expenses after Incentive Fees (2)
        9.0%
       9.7 %
                     Net Income (Loss) (2)
      4.2%
    (18.4) %
         Total return before incentive fees
        0.9%
      (4.3)%
         Total return after incentive fees
        0.9%
      (5.0)%

   (1) Realized/Unrealized Income (Loss) is a balancing amount necessary to reconcile the change in net asset value per Unit
       with the other per Unit information.
 
   (2) Annualized (except for incentive fees, if applicable).

   (3) Amounts less than $0.005 per Unit.

   (4) These amounts have been reclassified from the prior year financial statements to conform to the current year presentation.
       Specifically, realized and unrealized income (loss) per Unit amounts were combined in 2011 Financial Highlights
       presentation.






- 8 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
 
3.  Related Party Transactions
The Partnership’s cash is on deposit with 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% 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.  Subsequent to December 1, 2011, the Partnership trades futures and forwards through its investment in the Funds.  Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price.  Futures Interests are open commitments until settlement date, at which time they are realized.  They are valued at fair value, generally on a daily basis, and the unrealized gains and losses on open contracts (the difference between contract trade price and market price) are reported in the Statements of Financial Condition as a net unrealized gain or loss on open contracts.  The resulting net change in unrealized gains and losses is reflected in the net change in unrealized trading profit (loss) on open contracts from one period to the next on the Statements of Income and Expenses.  The fair value of exchange-traded futures, options and forward contracts is determined by the various futures exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period.
- 9 -

 
 
 

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

The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) of the last business day of the reporting period from various exchanges.  The fair value of non-exchange-traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as input the spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period.  Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts.  There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility.

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




- 10 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

The Partnership’s contracts are accounted for on a trade-date basis and marked to market on a daily basis.  The Partnership accounts for its derivative investments as described in Note 5, Derivatives and Hedging as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” 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.





- 11 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

The futures, forwards and options traded by the Partnership involve varying degrees of related market risk.  Market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates, and prices of financial instruments and commodities, factors that result in frequent changes in the fair value of the Partnership’s open positions, and consequently in its earnings, whether realized or unrealized, and cash flow.  Gains and losses on open positions of exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts are settled daily through variation margin.  Gains and losses on off-exchange-traded forward currency contracts are settled on termination of the contract.  Gains and losses on off-exchange-traded forward currency options contracts are settled upon an agreed-upon settlement date.  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
As of March 31, 2012 and December 31, 2011, the Partnership held no futures and forward contracts; therefore, there were no net unrealized gains or losses on futures or forward contracts.




- 12 -
 
 
 
 

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





The following tables summarize the net trading results of the Partnership for the quarters ended March 31, 2012 and 2011, respectively.

The Effect of Trading Activities on the Statements of Income and Expenses for the Quarter Ended March 31, 2012 included in Total Trading Results:


Type of Instrument
                    $
   
Commodity
3,569,631
Equity
420,783
Foreign currency
251,783
Interest rate
      (502,546)
Total
  3,739,651

Line Item on the Statements of Income and Expenses for the Quarter Ended March 31, 2012:
Trading Results
                $
   
Realized loss on investments in BHM I, LLC
(34,924) 
Realized gain on investment in MB Master Fund
664  
Realized loss on investment in PGR Master Fund
(3,014) 
Unrealized appreciation on investment in BHM I, LLC
4,074,237  
Unrealized appreciation on investment in MB Master Fund
106,195 
Unrealized depreciation on investment in PGR Master Fund
      (403,507) 
Total Trading Results
     3,739,651 


The Effect of Trading Activities on the Statements of Income and Expenses for the Quarter Ended March 31, 2011 included in Total Trading Results:


Type of Instrument
                $
   
Commodity
5,039,816
Equity
1,907,733
Foreign currency
(6,534,295)
Interest rate
(4,247,639)
Unrealized currency loss
        53,396
Total
  (3,780,989)




- 13 -
 
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


Line Item on the Statements of Income and Expenses for the Quarter Ended March 31, 2011:
Trading Results
             $
   
Net realized
3,689,641
Net change in unrealized
(9,963,175)
Realized gain on investment in BHM I, LLC
25,527
Unrealized appreciation on investment in
   BHM I, LLC
 
     2,467,018
Total Trading Results
   (3,780,989)

6.  Fair Value Measurements and Disclosures
Effective January 1, 2012, the Partnership adopted ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.”  The amendments within this ASU change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between U.S. GAAP and IFRS.  However, some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  This new guidance did not have a significant impact on the Partnership’s financial statements.

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

- 14 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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.

 
 
 
 
 
March 31, 2012
Unadjusted
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
    Significant
    Other
    Observable
    Inputs
    (Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
 
 
 
 
 
    Total
 
         $
    $
$
    $
Assets
        
Investment in BHM I, LLC
                  –     
95,252,738
n/a
95,252,738
Investment in PGR Master Fund
                  –     
8,592,050
n/a
8,592,050
Investment in MB Master Fund
                  –     
    8,773,633
n/a
    8,773,633
Total Assets
                  –     
112,618,421
n/a
112,618,421


 
 
 
 
 
December 31, 2011
Unadjusted
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
    Significant
    Other
    Observable
    Inputs
    (Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
 
 
 
 
 
Total
 
        $
    $
$
$
Assets
        
Investment in BHM I, LLC
              –     
101,259,072
n/a
101,259,072
Investment in PGR Master Fund
              –     
9,193,011
n/a
9,193,011
Investment in MB Master Fund
              –     
    8,832,023
n/a
   8,832,023
Total Assets
              –     
119,284,106
n/a
119,284,106



- 15 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


During the period January 1, 2012 to March 31, 2012, there were no Level 3 assets and liabilities and there were no transfers of assets or liabilities between Level 1 and Level 2.

Investment in BHM I, LLC, MB Master Fund and PGR Master Fund
The Partnership’s investment represents approximately 86.5% and 86.7%, for BHM I, LLC, 8.0% and 7.6% for MB Master Fund, and 7.8% and 7.9% for PGR Master Fund respectively, of the net asset value of the Partnership at March 31, 2012 and December 31, 2011, respectively.



The tables below represent summarized Income Statement information for BHM I, LLC for the three months ended March 31, 2012 and 2011, respectively, and MB Master Fund and PGR Master Fund for the three months ended March 31, 2012, respectively in accordance with Rule 3-09 of Regulation S-X as follows:
For the Three Months
Ended March 31, 2012
 
 
 Investment
Income (Loss)
Net
  Investment Loss
 
Total Trading Results
 
 Net
Income/(Loss)
 
 
$
$
$
$
 BHM I, LLC
(10,662)
(2,179,897)
18,150,632
15,970,735
MB Master Fund
2,611
(129,291)
471,064
341,773
PGR Master Fund
4,912
(26,356)
(2,266,066)
(2,292,422)


For the Three Months
Ended March 31, 2011
 
 
 Investment
Income
Net
  Investment Loss
 
Total Trading Results
 
 Net
Income
 
 
$
$
$
$
 BHM I, LLC
649
(1,206,174)
4,212,767
3,006,593






- 16 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.  Other Pronouncements
In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, “Disclosures about Offsetting Assets and Liabilities”, which creates a new disclosure requirement about the nature of an entity’s rights of setoff and the related arrangements associated with its financial instruments and derivative instruments. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”) and those entities that prepare their financial statements on the basis of International Financial Reporting Standards (“IFRS”). The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership should also provide the disclosures retrospectively for all comparative periods presented.  The Partnership is currently evaluating the impact that the pronouncement would have on the financial statements. 

In October 2011, the FASB issued a proposed ASU intended to improve and converge financial reporting by setting forth consistent criteria for determining whether an entity is an investment company.  Under longstanding U.S. GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company.  The primary changes being proposed by the FASB relate to which entities would be considered investment companies as well as certain disclosure and presentation

- 17 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


requirements.  In addition to the changes to the criteria for determining whether an entity is an investment company, the FASB also proposes that an investment company be required to consolidate another investment company if it holds a controlling financial interest in the entity.  The Partnership will evaluate the impact that this proposed update would have on the financial statements once the pronouncement is issued.

8.  Income Taxes
No provision for income taxes has been made in the accompanying financial statements, as partners are individually responsible for reporting income or loss based upon their respective share of the Partnership’s revenues or expenses for income tax purposes. The Partnership files U.S. federal and state tax returns.

The guidance issued by the FASB on income taxes clarifies the accounting for uncertainty in income taxes recognized in the Partnership's financial statements, and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken.  The Partnership has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements as of March 31, 2012 and December 31, 2011.  If applicable, the Partnership recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statements of Income and Expenses.  Generally, the 2008 through 2011 tax years remain subject to examination by U.S. federal and most state tax authorities.  No income tax returns are currently under examination.


- 18 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)


9.  Subsequent Events

Management of Ceres performed its evaluation of subsequent events through the date of filing, and has determined that there were no subsequent events requiring adjustments of or disclosure in the financial statements.

















- 19 -
 
 
 
 
Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS


As of March 31, 2012, the percentage of assets allocated to each market sector was approximately as follows: Interest Rate 12.16%, Currency 21.02%; Equity 5.47%; and Commodity 61.36%.
 
 
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.


- 20 -
 
 
 
 
There is no limitation on daily price moves in trading forward contracts on foreign currencies.  The markets for some world currencies have low trading volume and are illiquid, which may prevent the Partnership from trading in potentially profitable markets or prevent the Partnership from promptly liquidating unfavorable positions in such markets, subjecting it to substantial losses.  Either of these market conditions could result in restrictions on redemptions.  For the periods covered by this report, illiquidity has not materially affected the Partnership’s assets.

There are no known material trends, demands, commitments, events, or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.

As of March 31, 2012, approximately 83.93% of the Partnership’s total investments through investments in underlying funds are futures contracts which are exchange-traded while approximately 16.07% are forward contracts which are off-exchange traded.

Capital Resources.  The Partnership does not have, nor does it expect to have, any capital assets.  Redemptions of units of limited partnership interest (“Unit(s)”) in the future will affect the amount of funds available for investments in futures, forwards and options in subsequent periods.  It is not possible to estimate the amount, and therefore the impact, of future outflows of Units.

There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership’s capital resource arrangements at the present time.


- 21 -
 
 
 
 
Off-Balance Sheet Arrangements and Contractual Obligations.  The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments that would affect its liquidity or capital resources.

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

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


- 22 -
 
 
 
 
PGR trades its PGR Mayfair Program on behalf of the Partnership.  PGR’s futures investment program seeks to profit over the medium term by exploiting inefficiencies in futures and forward markets across a broad range of asset classes and geographic regions. Proprietary models developed by the founding partners are implemented in an in-house trading system which systematically processes real-time data and executes trades automatically on electronic future exchanges and foreign exchange trading platforms.

The following chart sets forth the percentage and the amount of the Partnership’s net assets allocated to each Trading Advisor for the period ending March 31, 2012, and March 31, 2011, respectively, and the change during the applicable period.
Trading Advisor
        Allocations as of
         March 31,
            2012 (%)
Allocations as of March 31,
    2011 (%)
Allocations as of March 31,
     2012($)
  Allocations as of March 31,
2011 ($)
Change during the period
           
Blenheim
84.72
52.00
93,327,778
86,282,462
8.17%
Eclipse
–
18.50
–
30,696,645
  
PGR
7.56
–
8,329,812
–
  
Aventis
7.72
–
8,507,777
–
  
DKR
–
29.50
–
48,948,704
  

The following presents a summary of the Partnership’s operations for the quarters ended March 31, 2012 and 2011, and a general discussion of its trading activities during each period.  It is important to note, however, that the Trading Advisors trade in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Advisors or will be profitable in the future.  Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisors’ trading activities on behalf of the Partnership during the period in question.  Past performance is no guarantee of future results.



- 23 -
 
 
 
 
The Partnership’s results of operations set forth in the financial statements on pages 2 through 19 of this report are prepared in accordance with U.S. GAAP, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: the contracts the Funds trade are accounted for on a trade-date basis and marked to market on a daily basis.  The difference between their original contract value and fair value is recorded on the Statements of Income and Expenses as “Net change in unrealized gain (loss)” for open contracts, and recorded as “Net realized trading gain (loss)” when open positions are closed out.  The sum of these amounts constitutes the Funds’ trading results.  The market value of a futures contract is the settlement price on the exchange on which that futures contract is traded on a particular day.  The value of a foreign currency forward contract is based on the spot rate as of approximately 3:00 P.M. (E.T.) the close of the business day. Interest income, as well as management fees, incentive fees, and brokerage fees of the Partnership are recorded on an accrual basis.

Ceres believes that, based on the nature of the operations of the Partnership, no assumptions relating to the application of critical accounting policies other than those presently used could reasonably affect reported amounts.

For the Quarter Ended March 31, 2012
The Partnership recorded total trading results including interest income totaling $3,751,884 and expenses totaling $2,552,063, resulting in net income of $1,199,821 for the quarter ended March 31, 2012.  The



 
 
- 24 -
 

 
 
 
 
Partnership’s net asset value per Unit increased from $16.02 at December 31, 2011, to $16.16 at March 31, 2012.  The most significant gains were recorded within the metals sector, primarily during January, from long positions in aluminum, tin, and platinum as prices advanced on speculation metals demand will be supported by economic expansion in the U.S. and an easing credit policy in China. Within the energy markets, gains were recorded primarily during February from long futures positions in crude oil and its related products as prices increased after Iran denied nuclear inspectors access to a military base, adding to concern that global oil supplies may be disrupted. Within the global stock index sector, gains were recorded during February and March from long positions in U.S. equity index futures as prices rose amid positive economic news, including a better-than-expected U.S. employment report and an expansion in manufacturing in China, Europe, and the U.S. Within the agricultural markets, gains were achieved primarily during February from long positions in the soybean complex as prices advanced on speculation reduced production in South America due to hot, dry weather will result in increased demand for supplies from the U.S., the world’s biggest producer of soybeans. Within the global interest rate sector, gains were recorded primarily in March from short positions in U.S. fixed income futures as prices fell after U.S. Federal Reserve policy makers raised their assessment of the U.S. economy, reducing demand for the relative “safety” of government debt.

A portion of the Partnership’s gains for the quarter was offset by losses incurred within the currency sector, primarily during March, from long positions in the Brazilian real versus the U.S. dollar as concern over earnings in China reduced demand for higher-yielding currency assets.




- 25 -
 
 
 
 
For the Quarter Ended March 31, 2011
The Partnership recorded total trading results including interest income totaling $(3,741,240) and expenses totaling $5,095,932, resulting in a net loss of $8,837,172 for the quarter ended March 31, 2011.  The Partnership’s net asset value per Unit decreased from $21.49 at December 31, 2010, to $20.41 at March 31, 2011.

The most significant trading losses were incurred within the currency markets, primarily during March, from long positions in the Japanese yen versus the U.S. dollar and short positions in the euro versus the Japanese yen as the value of the Japanese yen moved lower relative to these currencies amid speculation that fires and aftershocks from the major earthquake and tsunami in Japan might hamper efforts to contain radiation at crippled nuclear power plants. Within the global interest rate markets, losses were experienced primarily in March from short positions in European fixed-income futures as prices moved higher mid-month after Japan’s Prime Minister said the danger of further leaks from a damaged nuclear power station may be increasing, thereby boosting demand for the relative “safety” of government bonds. Within the metals markets, losses were experienced primarily during March from long positions in copper, nickel, and zinc futures as prices moved lower amid concern that rising energy costs associated with mounting unrest in the Middle East may slow the global economy.

A portion of the Partnership’s losses for the quarter was offset by gains achieved within the energy markets, primarily during March, from long positions in crude oil and its related products as prices rose after allied airstrikes in Libya threatened to delay supply distribution in Africa’s third-largest oil producer and on concern that escalating turmoil may curtail shipments from the Middle East. Within the global stock index

- 26 -
 
 
 
 
markets, gains were achieved primarily during February from long positions in U.S. and Japanese equity index futures as prices were supported higher throughout the first half of the month amid positive economic reports out of the U.S. and Asia. Within the agricultural markets, gains were achieved primarily in January from long positions in cotton futures as prices advanced higher on signs that global output may fail to keep pace with rising demand in China, the world’s biggest buyer of the fiber.

 
Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

- 27 -
 
 
 
 
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 as discussed under the “Partnership’s Value at Risk in Different Market Sectors” section and significantly exceed the Value at Risk (“VaR”) tables disclosed.

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


- 28 -
 
 
 
 
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.  Please note that the VaR model is used to numerically quantify market risk for historic reporting purposes only and is not utilized by either Ceres or the Trading Advisors in their daily risk management activities.

VaR is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector.  However, the inherent uncertainty of the Partnership’s speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated VaR of the Partnership’s experience


- 29 -
 
 
 
 
to date (i.e., “risk of ruin”).  In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Partnership’s losses in any market sector will be limited to VaR or by the Partnership’s attempts to manage its market risk.

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

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 March 31, 2012 and the highest, lowest and average values during the quarter ended March 31, 2012.  All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below.  There has been no material change in the trading VaR information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011.  As of March 31, 2012, the Partnership’s total capitalization was approximately $110 million.











- 30 -
 
 
 
 

Primary Market
  
% of Total
Risk Category
VaR
Capitalization
     
Currency
$2,455,526
2.23%
     
Interest Rate
1,418,721
1.29%
     
Equity
 633,544
0.58%
     
Commodity
  7,169,164
6.51%
     
Total
$11,676,955
 10.61%
 

 
                                Three Months Ended March 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$2,897,812
$1,213,321
$2,244,413
Interest Rate
$1,770,555
 $532,836
$1,072,779
Equity
$1,137,390
  $363,557
  $758,395
Commodity
$8,236,768
$6,338,562
$7,308,047
* Average of month-end VaR

The following tables indicate the trading VaR associated with the Partnership’s open positions by market category as of December 31, 2011 and the highest, lowest and average values during the twelve months ended December 31, 2011.  All open position trading risk exposure of the Partnership have been included in calculating the figures set forth below.  As of December 31, 2011 the Partnership’s total capitalization was approximately $117 million.



- 31 -
 
 
 
 

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




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


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;

- 32 -
 
 
 
 
·  
changes in portfolio value caused by market movements may differ from those of the VaR model;
·  
VaR results reflect past market fluctuations applied to current trading positions while future risk depends on future positions;
·  
VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and
·  
the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements.

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

Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality, and multiplier features of the Partnership’s market-sensitive instruments, in relation to the Partnership’s net assets.

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

- 33 -
 
 
 
 
Advisors for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies.  Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership.  Investors must be prepared to lose all or substantially all of their investment in the Partnership.



Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to manage the risk of the Partnership’s open positions in essentially the same manner in all market categories traded. Ceres attempts to manage market exposure by diversifying the Partnership’s assets among different market sectors and trading approaches through the selection of the commodity trading advisors and by daily monitoring of their performance.  In addition, the Trading Advisors establish diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument.

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.










- 34 -
 
 
 
 
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 March 31, 2012.  The Partnership’s disclosure controls and procedures are designed to provide reasonable assurance that information the Partnership is required to disclose in the reports that the Partnership files or submits under the Exchange Act are recorded, processed and summarized and reported within the time period specified in the applicable rules and forms.  Based on this evaluation, the President and Chief Financial Officer of Ceres have concluded that the disclosure controls and procedures of the Partnership were effective at March 31, 2012.

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











- 35 -
 
 
 
 
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.




 








- 36 -
 
 
 
 
PART II.  OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS
There were no additional information to supplement or amend the discussion set forth under Part I, Item 3, “Legal Proceedings” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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, 2011.

Item 4.  MINE SAFETY DISCLOSURES
Not applicable.


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
 
 
- 37 -
 
 
 
 
 
101.LAB*
XBRL Taxonomy Extension Label Document
 
101.PRE*
XBRL Taxonomy Extension Presentation Document
 
101.DEF*
XBRL Taxonomy Extension Definition Document
 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
- 38 -
 

 

 

 
 
 
 

 

 
SIGNATURE



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




 
Morgan Stanley Smith Barney Spectrum Strategic L.P.
 
 (Registrant)
     
 
By:
Ceres Managed Futures LLC
   
(General Partner)
     
May 14, 2012
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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MORGAN STANLEY SMITH BARNEY SPECTRUM STRATEGIC LP Reports