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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 June 30, 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: 0-25603

 
MANAGED FUTURES CHARTER GRAHAM L.P.
 
 
(Exact name of registrant as specified in its charter)
 

 
Delaware
 
13-4018068
 
(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
 
(855) 672-4468


(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


 
 

 




MANAGED FUTURES CHARTER GRAHAM L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2012



 
PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited)
 
     
 
Statements of Financial Condition as of June 30, 2012 and December 31, 2011
2
     
 
Condensed Schedule of Investments as of June 30, 2012
3
     
 
Condensed Schedule of Investments as of December 31, 2011
4
     
 
Statements of Income and Expenses for the Three and Six Months Ended June 30, 2012 and 2011
5
     
 
Statements of Changes in Partners’ Capital for the Six Months Ended June 30, 2012 and 2011
6
     
 
Notes to Financial Statements
  7-23
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24-33
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33-41
     
Item 4.
Controls and Procedures
41-42
     
 
PART II. OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
43-51
     
Item 1A.
Risk Factors
51-53
     
Item 2.
Unregistered Sales of Securities and Use of Proceeds
53-54
     
Item 4.
Mine Safety Disclosures
54
     
Item 6.
Exhibits
54-55



 
 

 

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

MANAGED FUTURES CHARTER GRAHAM L.P.
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
       
 
June 30,
 
December 31,
 
2012
 
2011
ASSETS
$
 
$
       
Trading Equity:
     
       
Unrestricted cash
218,237,526
 
233,838,381
Restricted cash
37,885,031
 
49,210,558
       
Total cash
256,122,557
 
283,048,939
       
Net unrealized gain (loss) on open contracts (MS&Co.)
(1,282,303)
 
4,459,890
Net unrealized gain on open contracts (MSIP)
250,708
 
712,190
       
Total net unrealized gain (loss) on open contracts
(1,031,595)
 
5,172,080
       
Total Trading Equity
255,090,962
 
288,221,019
       
Interest receivable (MSSB)
5,026
 
          – 
       
Total Assets
255,095,988
 
288,221,019
       
LIABILITIES AND PARTNERS’ CAPITAL
     
       
Liabilities:
     
       
Redemptions payable
6,240,088
 
6,926,802
Accrued placement agent fees
748,548
 
799,278
Accrued brokerage fees (MS&Co.)
443,584
 
473,647
Accrued management fees
443,584
 
473,647
Interest payable (MSSB)
 
1,358
       
Total Liabilities
7,875,804
 
8,674,732
       
Partners’ Capital:
     
       
Limited Partners (11,460,103.049 and 12,354,601.303 Units, respectively)
244,462,632
 
276,443,739
General Partner (129,280.441 and 138,656.441 Units, respectively)
2,757,552
 
3,102,548
       
Total Partners’ Capital
247,220,184
 
279,546,287
       
Total Liabilities and Partners’ Capital
255,095,988
 
288,221,019
       
NET ASSET VALUE PER UNIT
21.33
 
22.38




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

- 2 -

 
 

 

MANAGED FUTURES CHARTER GRAHAM L.P.
CONDENSED SCHEDULE OF INVESTMENTS
June 30, 2012 (Unaudited)



Futures and Forward Contracts Purchased
Net unrealized
gain/(loss) on
open contracts
% of
Partners’ Capital
 
$
 
Commodity
   2,479,960   
1.00
Equity
4,113,131
       1.66
Foreign currency
678,061
 0.27   
Interest rate
  (100,162)  
(0.04)
     
Total Futures and Forward Contracts Purchased
 7,170,990
             2.89
     
Futures and Forward Contracts Sold
   
     
     
Commodity
(4,658,098)
(1.88)
Equity
(2,394,560)
(0.97)
Foreign currency
(773,951)
(0.31)
Interest rate
  (105,878)
(0.04)
     
Total Futures and Forward Contracts Sold
  (7,932,487)
   (3.20)
     
Unrealized Currency Loss
    (270,098)                        
   (0.11)
     
Net fair value
  (1,031,595)
  (0.42)
     






















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

- 3 -

 
 

 

MANAGED FUTURES CHARTER GRAHAM L.P.
CONDENSED SCHEDULE OF INVESTMENTS
December 31, 2011




Futures and Forward Contracts Purchased
Net unrealized
gain/(loss) on
open contracts
% of
Partners’ Capital
 
$
 
Commodity
217,166
0.07
Equity
   1,070,461  
0.38
Foreign currency
109,099
0.04
Interest rate
  4,437,884   
  1.59
     
Total Futures and Forward Contracts Purchased
  5,834,610
   2.08
     
Futures and Forward Contracts Sold
   
     
Commodity
 (2,184,976)
  (0.78)             
Equity
(176,378)
  (0.06)             
Foreign currency
2,383,928
  0.85              
Interest rate
    (338,900)
     (0.12)             
     
Total Futures and Forward Contracts Sold
     (316,326)
       (0.11)             
     
Unrealized Currency Loss
     (346,204)
      (0.12)               
     
Net fair value
     5,172,080
         1.85                
     
























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

- 4 -

 
 

 

MANAGED FUTURES CHARTER GRAHAM L.P.
STATEMENTS OF INCOME AND EXPENSES
(Unaudited)


       
 
  For the Three Months
Ended June  30,
 
For the Six Months
 Ended June 30,
               
 
2012       
 
2011       
 
2012      
 
2011    
 
$            
 
$           
 
$         
 
$      
INVESTMENT INCOME
             
Interest income (MSSB)
19,098
 
3,183
 
52,895
 
95,295
               
EXPENSES
             
Placement agent fee
2,295,736
 
 
4,667,750
 
Brokerage fees (MS&Co.)
1,360,435
 
4,969,876
 
2,766,074
 
9,892,216
Management fees
1,360,435
 
1,849,257
 
2,766,074
 
3,680,826
               
Total Expenses
5,016,606
 
6,819,133
 
10,199,898
 
13,573,042
               
NET INVESTMENT LOSS
(4,997,508)
 
(6,815,950)
 
(10,147,003)
 
(13,477,747)
               
TRADING RESULTS
             
Trading profit (loss):
             
Net realized
(8,513,507)
 
(4,459,247)
 
4,101,268
 
(5,198,318)
Net change in unrealized
(1,478,096)
 
(6,714,983)
 
(6,203,675)
 
(10,723,166)
               
Total Trading Results
(9,991,603)
 
(11,174,230)
 
(2,102,407)
 
(15,921,484)
               
NET LOSS
(14,989,111)
 
(17,990,180)
 
(12,249,410)
 
(29,399,231)
               
NET LOSS ALLOCATION
             
               
Limited Partners
(14,814,338)
 
(17,805,871)
 
(12,104,404)
 
(29,101,168)
General Partner
(174,773)
 
(184,309)
 
(145,006)
 
(298,063)
               
NET LOSS PER UNIT *
             
               
Limited Partners
(1.26)
 
(1.36)
 
(1.05)
 
(2.25)
General Partner
(1.26)
 
(1.36)
 
(1.05)
 
(2.25)
               
 
Units
 
Units
 
Units
 
Units
WEIGHTED AVERAGE NUMBER  OF UNITS OUTSTANDING
 
12,062,681.916
 
 
13,033,204.699
 
 
12,246,469.388
 
 
12,847,465.986
               


* Based on change in net asset value per Unit.


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




- 5 -

 
 

 

MANAGED FUTURES CHARTER GRAHAM L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
For the Six Months Ended June 30, 2012 and 2011
(Unaudited)



 
Units of
           
 
Partnership
 
Limited
 
General
   
 
Interest
 
Partners
 
Partner
 
Total
     
$
 
$
 
$
Partners’ Capital,
             
December 31, 2011
12,493,257.744
 
276,443,739
 
3,102,548
 
279,546,287
               
Subscriptions
492,077.804
 
11,125,530
 
 
11,125,530
               
Net Loss
 
(12,104,404)
 
(145,006)
 
(12,249,410)
               
Redemptions
(1,395,952.058)
 
(31,002,233)
 
(199,990)
 
(31,202,223)
               
Partners’ Capital,
             
June 30, 2012
11,589,383.490
 
244,462,632
 
2,757,552
 
247,220,184
               
               
               
               
Partners’ Capital,
             
December 31, 2010
12,523,668.457
 
357,913,170
 
3,688,624
 
361,601,794
               
Subscriptions
1,116,015.999
 
31,496,588
 
300,000
 
31,796,588
               
Net Loss
 
(29,101,168)
 
(298,063)
 
(29,399,231)
               
Redemptions
(547,181.786)
 
(15,522,250)
 
 
(15,522,250)
               
Partners’ Capital,
             
June 30, 2011
13,092,502.670
 
344,786,340
 
3,690,561
 
348,476,901

















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

- 6 -

 
 

 

MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS

June 30, 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 Managed Futures Charter Graham 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 (the “Form 10-K”).

1.  Organization
Managed Futures Charter Graham L.P. is a Delaware limited partnership organized in 1998 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’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.”) and Morgan Stanley & Co. International plc (“MSIP”).   MS&Co. also acts as the counterparty on all trading of foreign currency forward contracts. MSIP serves as the commodity broker for trades on the London Metal Exchange (“LME”). 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.


- 7 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)



MSSB is the principal subsidiary of MSSBH.  MS&Co. and MSIP are wholly-owned subsidiaries of Morgan Stanley.  Graham Capital Management, L.P. (“Graham” or the “Trading Advisor”) is the trading advisor to the Partnership and manages the assets of the Partnership pursuant to its K4D-15V Program, the Trading Advisor’s proprietary, trend-following trading program.  A description of the trading activities and focus of the Trading Advisor is included on page 26 under “Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Units of limited partnership interest (“Unit(s)”) of the Partnership are being offered in two share classes (each a “Class” or collectively the “Classes”).  The Class of Units that a limited partner receives depends on aggregate subscription amount made by such limited partner in the Partnership.
  Class of Units                                   Aggregate Investment
A                                           Up to $4,999,999
D                                           $5,000,000 and above


As of June 30, 2012, all Units are considered Class A Units.  The General Partner may, in its discretion, offer additional Classes of Units.
 
 






- 8 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2.  
Financial Highlights
Financial Highlights for the three and six months ended June 30, 2012 and 2011 were as follows:
 
                           For the Three                                                     For the Six
                 Months Ended June 30,                                     Months Ended June 30,

 
2012
2011
2012
2011
         Per Unit operating performance:
       
         Net asset value at the beginning of the period:
$     22.59
$     27.98
$     22.38
$     28.87
         
                     Interest Income
–    (3)
–       (3)
–    (3)
0.01
                     Expenses
       (0.42)
       (0.53)
       (0.84)
       (1.07)
                     Realized/Unrealized Loss (1)
       (0.84)
       (0.83) (4)
       (0.21)
       (1.19)  (4)
                     Net Loss
       (1.26)
       (1.36)
       (1.05)
       (2.25)
         
         Net asset value, June 30:
 $    21.33
 $    26.62
 $    21.33
 $    26.62
         
         Ratios to average net assets:
       
                     Net Investment Loss  (2)
      (7.7)%
      (7.6)%
      (7.6)%
      (7.5)%
                     Expenses before Incentive Fees (2)
       7.7 %
       7.6 %
       7.6 %
       7.6 %
                     Expenses after Incentive Fees (2)
       7.7 %
       7.6 %
       7.6 %
       7.6 %
                     Net Loss  (2)
    (23.0)%
    (20.0)%
    (9.1)%
    (16.4)%
         Total return before incentive fees
      (5.6)%
      (4.9)%
      (4.7)%
      (7.8)%
         Total return after incentive fees
      (5.6)%
      (4.9)%
      (4.7)%
      (7.8)%



(1)
 
Realized/Unrealized 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 Units.

(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 the 2011 Financial Highlights presentation.
     







- 9 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.  Related Party Transactions
The Partnership’s cash may be on deposit with MSSB, MS&Co., and/or MSIP in Futures Interests trading accounts to meet margin requirements as needed.  Monthly, MSSB credits the Partnership with interest income received from MSSB, MS&Co. and MSIP.  Such amount is based on 100% of its average daily funds held at MSSB, MS&Co. and MSIP to meet margin requirements at a rate approximately equivalent to what the commodity brokers pay or charge other similar customers on margin deposits.  In addition, MSSB credits the Partnership at each month end with interest income on 100% of the Partnership’s assets not deposited as margin at a rate equal to the monthly average 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 forward contracts and other Futures Interests.  The Partnership pays a flat rate brokerage fee to MS&Co.  The Partnership pays MSSB ongoing compensation on a monthly basis equal to a percentage of the net asset value of a limited partner’s Unit as of the beginning of each month.  The applicable rate payable by each limited partner is determined by the Class of Units held by such limited partner.  The Partnership pays the Placement Agent the following percentage in accordance with the following schedule.
   Class of Units                          Annualized Rate (%)
A                                           3.375%
D                                           0.75%

MSSB pays a portion of the ongoing Placement Agent fees it received from the Partnership to the MSSB Financial Advisor or Private Wealth Advisor responsible for selling the Units to the limited partner.


- 10 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

There was no change in total fees for existing limited partners as all Units outstanding at June 30, 2012 were Class A Units.

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) for open contracts from one period to the next on the Statements of Income and Expenses.  The fair value of exchange-traded futures, options and forward contracts is determined by the various futures exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period.  The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) of the last business day of the reporting period from various exchanges.  The fair value of non-exchange-traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as 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

- 11 -

 
 

 

MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

of counterparties to perform under the terms of the contracts.  There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility.

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

The 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”).  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.



- 12 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

The net unrealized gains (losses) on open contracts, reported as a component of “Trading Equity” on the Statements of Financial Condition, and their longest contract maturities were as follows:
 
  Net Unrealized Gains (Losses) on Open Contracts
Longest Maturities
Date
Exchange-Traded
Off-Exchange-Traded
Total
Exchange-Traded
Off-Exchange-Traded
 
$
$
$
   
Jun. 30, 2012
(1,147,769)
116,174
(1,031,595)
Sep. 2016
Sep. 2012
Dec. 31, 2011
2,825,771
2,346,309
5,172,080
Mar. 2016
Mar. 2012

In general, the risks associated with off-exchange-traded contracts are greater than those associated with exchange-traded contracts because of the greater risk of default by the counterparty to an off-exchange-traded contract.  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 gains (losses) amounts reflected in the Partnership’s Statements of Financial Condition.  The net unrealized gains (losses) on open contracts is further disclosed gross by type of contract and corresponding fair value level in Note 6, Fair Value Measurements and Disclosures.

The Partnership also has credit risk because MS&Co. and MSIP act as the futures commission merchants or the counterparties, with respect to most of the Partnership’s assets. Exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts are fair valued on a daily basis, with

- 13 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

variations in value settled on a daily basis. MS&Co. and MSIP, each acting as a commodity futures 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, total cash held by them with respect to exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, including an amount equal to the net unrealized gains (losses) on all open exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, which funds, in the aggregate, totaled $254,974,788 and $285,874,710 at June 30, 2012, and December 31, 2011, respectively.  With respect to the Partnership’s off-exchange-traded forward currency 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. The Partnership has a netting agreement with MS&Co.  The primary terms are based on industry standard master agreements.  This agreement, which seeks to reduce both the Partnership’s and MS&Co.’s exposure on off-exchange-traded forward currency contracts, should materially decrease the Partnership’s credit risk in the event of MS&Co.’s bankruptcy or insolvency.

- 14 -

 
 

 

MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The General Partner monitors and attempts to control the Partnership’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership may be subject.  These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics.  In addition, online monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

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 upon termination of the contract.  Gains and losses on off-exchange-traded forward currency options contracts are settled on an agreed-upon settlement date.





- 15 -

 
 

 

MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


5.  Derivatives and Hedging
The Partnership’s objective is to profit from speculative trading in Futures Interests.  Therefore, the Trading Advisor for the Partnership will take speculative positions in Futures Interests where it feels the best profit opportunities exist for its trading strategy.  As such, the 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 June 30, 2012 and December 31, 2011, respectively.

The Effect of Trading Activities on the Statements of Financial Condition as of June 30, 2012:
Futures and Forward Contracts
Long Unrealized
Gain
Long Unrealized
Loss
 Short
Unrealized
Gain
  Short Unrealized
Loss
Net   Unrealized
 Gain/(Loss)
Average number
of contracts
outstanding for
the six months 
 (absolute quantity)
 
$
$
$
$
$
 
Commodity
2,521,435
(41,475)
    849,059
(5,507,157)
(2,178,138)
4,178
Equity
4,113,131
           –
(2,394,560)
1,718,571
3,682
Foreign currency
948,064
(270,003)
212,318
(986,269)
(95,890)
 20,960
Interest rate
  1,217,114
   (1,317,276)
     6,808
 (112,686)         
     (206,040)
 13,697
Total
  8,799,744
   (1,628,754)
1,068,185
(9,000,672)
(761,497)
 
             
Unrealized currency loss
       
    (270,098)
 
Total net unrealized loss on open contracts
       
 
  (1,031,595)
 



- 16 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


The Effect of Trading Activities on the Statements of Financial Condition as of December 31, 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 year (absolute quantity)
 
$
$
$
$
$
 
Commodity
460,330
(243,164)
 2,195,043
(4,380,019)
(1,967,810)
3,139
Equity
1,099,211
(28,750)
   26,530              
(202,908)
894,083
2,372
Foreign currency
450,444
(341,345)
 2,978,910                
(594,982)
2,493,027
 23,365
Interest rate
  4,507,072
       (69,188)
      20,422
 (359,322)        
     4,098,984
 10,389
Total
  6,517,057
     (682,447)
 5,220,905
(5,537,231)
5,518,284
 
             
Unrealized currency loss
       
    (346,204)
 
Total net unrealized gain on open contracts
       
 
   5,172,080
 

The following tables summarize the net trading results of the Partnership for the three and six months ended June 30, 2012 and 2011, respectively.

The Effect of Trading Activities on the Statements of Income and Expenses for the Three and Six Months Ended June 30, 2012 included in Total Trading Results:

 
For the Three Months
 
For the Six Months
 
Ended June 30, 2012
 
Ended June 30, 2012
Type of Instrument
$
 
$
       
Commodity
(8,227,123)
 
(4,141,526)
Equity
(20,177,578)
 
839,773
Foreign currency
(5,205,353)
 
(11,393,871)
Interest rate
23,535,346
 
12,517,095
Unrealized currency gain
             83,105
 
             76,122
Total
     (9,991,603)
 
     (2,102,407)

Line Items on the Statements of Income and Expenses for the Three and Six Months Ended June 30, 2012:
 
 
For the Three Months
 
For the Six Months
 
Ended June 30, 2012
 
Ended June 30, 2012
Trading Results
$
 
$
       
Net realized
(8,513,507)
 
4,101,268
Net change in unrealized
     (1,478,096)                 
 
   (6,203,675)
Total Trading Results
    (9,991,603)
 
    (2,102,407)
- 17 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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

 
For the Three Months
 
For the Six Months
 
Ended June 30, 2011
 
Ended June 30, 2011
Type of Instrument
$
 
$
       
Commodity
(12,734,993)
 
(4,619,104)
Equity
(5,634,716)               
 
(10,582,165)
Foreign currency
 2,096,255                
 
(2,836,128)
Interest rate
5,067,122
 
2,346,398
Unrealized currency gain (loss)
         32,102
 
       (230,485)
Total
(11,174,230)               
 
   (15,921,484)

Line Items on the Statements of Income and Expenses for the Three and Six Months Ended June 30, 2011:
 
 
For the Three Months
 
For the Six Months
 
Ended June 30, 2011
 
Ended June 30, 2011
Trading Results
$
 
$
       
Net realized
(4,459,247)
 
(5,198,318)
Net change in unrealized
     (6,714,983)                 
 
   (10,723,166)
Total Trading Results
    (11,174,230)
 
  (15,921,484)

6.  Fair Value Measurements and Disclosures
Effective January 1, 2012, the Partnership adopted Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in the accounting principles generally accepted in the United States of America  (“U.S. GAAP”) and International Financial Reporting Standards (“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


- 18 -

 
 

 

MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 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.
- 19 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 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
         
Futures
8,798,154
            –      
n/a
 
8,798,154
    Forwards
         –      
  1,069,775
n/a
 
1,069,775
           
  Total Assets
       8,798,154
            1,069,775      
n/a
 
  9,867,929                   
           
    Liabilities
         
Futures
    9,675,825
            –      
n/a
 
   9,675,825
    Forwards
            –       
   953,601
n/a
 
        953,601                            
           
  Total Liabilities
       9,675,825
        953,601
n/a
 
  10,629,426                
           
Unrealized currency loss
       
   (270,098)                      
           
  *Net fair value
   (877,671)
     116,174       
n/a
 
(1,031,595)                


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
         
 Futures
8,457,018
            –      
n/a
 
8,457,018
     Forwards
         –      
  3,280,944
n/a
 
    3,280,944       
           
  Total Assets
       8,457,018
           3,280,944      
n/a
 
         11,737,962
           
     Liabilities
         
 Futures
    5,285,043
            –      
n/a
 
      5,285,043
     Forwards
            –       
    934,635
n/a
 
        934,635      
           
  Total Liabilities
        5,285,043
        934,635
n/a
 
          6,219,678
           
Unrealized currency loss
       
              (346,204)
           
  *Net fair value
   3,171,975
     2,346,309
n/a
 
         5,172,080



* This amount comprises the “Total net unrealized gain (loss) on open contracts” on the Statements of Financial Condition.

- 20 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

During the period January 1, 2012 to June 30, 2012, there were no Level 3 assets and liabilities and there were no transfers of assets or liabilities between Level 1 and Level 2.

7.  Other Pronouncements
In December 2011, the FASB issued 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 U.S. GAAP and those entities that prepare their financial statements on the basis of 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. 





- 21 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 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.  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 contracts and offset unrealized losses on offset LME positions.  All of these amounts are maintained separately.  Cash that is not classified as restricted cash is therefore classified as unrestricted cash.




- 22 -
 
 
 

 
MANAGED FUTURES CHARTER GRAHAM 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 June 30, 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.

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.


- 23 -

 
 

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


As of June 30, 2012, the percentage of assets allocated to each market sector was approximately as follows:  Interest Rate 26.00%; Currency 14.38%; Equity 23.73%; and Commodity 35.89%.

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 the Trading Advisor.  Such assets are used as margin to engage in trading and may be used as margin solely for the Partnership’s trading. The assets are held in either non-interest bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds.  Since the Partnership’s sole purpose is to trade in futures, forwards and options, it is expected that the Partnership will continue to own such liquid assets for margin purposes.

The Partnership’s investment in futures, forwards and options may, from time to time, be illiquid.  Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as “daily price 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.

- 24 -
 
 
 

 
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 June 30, 2012, approximately 87.33% of the Partnership’s total investments are futures contracts which are exchange-traded while approximately 12.67% 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, exchanges, and sales of Units 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 inflows and 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.

- 25 -
 
 
 

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

Results of Operations
General.  The Partnership’s results depend on the Trading Advisor and the ability of the Trading Advisor’s trading program to take advantage of price movements in the futures, forward and options markets.

The K4D quantitative investment program has its origin in Graham’s legacy trend-following trading systems, dating as far back as 1995.  Graham’s trend systems are designed to participate selectively in potential profit opportunities that can occur during periods of price trends in a diverse number of U.S. and international markets.  The trend systems establish positions in markets where the price action of a particular market signals the computerized systems used by Graham that a potential trend in prices is occurring.  The trend systems also employ proprietary risk management and trade filter strategies that seek to benefit from sustained price trends while reducing risk and volatility exposure.  Each K4D program trades the same quantitative models in the same proportion, and differs only with respect to the annual volatility range targeted (with the K4D-10V Program targeting an annual volatility range of 8% to 12%; the K4D-15V Program targeting an annual volatility range of 12% to 18%; and the K4D-20V Program targeting an annual volatility range of 16% to 24%).



- 26 -
 
 
 

 
The following presents a summary of the Partnership’s operations for the three and six months ended June 30, 2012 and 2011, and a general discussion of its trading activities during each period.  It is important to note, however, that the Trading Advisor trades in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Advisor or will be profitable in the future.  Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisor’s trading activities on behalf of the Partnership during the period in question.  Past performance is no guarantee of future results.

The Partnership’s results of operations set forth in the financial statements on pages 2 through 23 of this report are prepared in accordance with U.S. GAAP, which requires the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: the contracts the Partnership trades are accounted for on a trade-date basis and marked to market on a daily basis.  The difference between their original contract value and market value is recorded on the Statements of Income and Expenses as “Net change in unrealized trading profit (loss)” for open contracts, and recorded as “Net 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.


- 27 -
 
 
 

 
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 Three and Six Months Ended June 30, 2012
The Partnership recorded total trading results including interest income totaling $(9,972,505) and expenses totaling $5,016,606, resulting in a net loss of $14,989,111 for the three months ended June 30, 2012.  The Partnership’s net asset value per Unit decreased from $22.59 at March 31, 2012 to $21.33 at June 30, 2012.

The most significant trading losses were incurred within the global stock index markets during April and May from long positions in U.S., European, and Pacific Rim equity index futures as prices declined amid an unexpected rise in the U.S. unemployment rate and weakening economic data from China and Europe. Within the energy sector, losses were recorded during April and May from long positions in RBOB (unleaded) gasoline, gas oil, and Brent crude futures as prices fell on signs that manufacturing is slowing in China and Europe, spurring concern fuel demand may decline. Additional energy losses were experienced in June from short positions in natural gas futures as prices advanced to the highest level since January on forecasts of above-normal temperatures across the U.S. Within the currency markets, losses were incurred during June from short positions in the euro and Swiss franc versus the U.S. dollar as the value of these European currencies increased against the U.S. dollar after European Union leaders eased terms on Spanish bank loans and moved towards resolving the region’s debt crisis. A portion of the Partnership’s losses for the quarter was offset by gains achieved within the

- 28 -
 
 
 

 
global interest rate sector during April and May from long positions in European, U.S., and Australian fixed income futures as prices advanced after Standard & Poor’s cut Spain’s credit rating and Greece failed to form a unified government, adding to concern central banks and politicians are failing to contain the European debt crisis. Within the metals markets, gains were recorded during May from short positions in aluminum and zinc futures as prices fell on concern that Europe’s worsening debt crisis and a slowing U.S. recovery signal weaker demand for the metals. Meanwhile, short positions in silver and gold futures resulted in additional gains during May as prices declined amid a rise in the value of the U.S. dollar, which diminished demand for the precious metals. Additional gains were achieved within the agricultural complex during April from short positions in wheat futures as prices dropped after warm weather boosted crop expectations.

The Partnership recorded total trading results including interest income totaling $(2,049,512) and expenses totaling $10,199,898, resulting in a net loss of $12,249,410 for the six months ended June 30, 2012.  The Partnership’s net asset value per Unit decreased from $22.38 at December 31, 2011 to $21.33 at June 30, 2012.

The most significant trading losses were incurred within the currency markets during January from short positions in the British pound and Swiss franc versus the U.S. dollar as the value of these currencies reversed higher against the U.S. dollar. During March, long positions in the Australian dollar and New Zealand dollar versus the U.S. dollar resulted in losses as the value of these commodity-linked currencies fell against the U.S. dollar after concern over earnings in China reduced demand for higher-yielding currency assets. Additional currency losses were recorded during June

- 29 -
 
 
 

 
from short positions in the euro and Swiss franc versus the U.S. dollar as the value of these European currencies increased against the U.S. dollar after European Union leaders eased terms on Spanish bank loans and moved towards resolving the region’s debt crisis. Within the agricultural complex, losses were experienced during January from short positions in cocoa futures as prices advanced on concern supplies from the Ivory Coast, the world’s largest cocoa growing country, may weaken. Additional agricultural losses were incurred during May from long futures positions in the soybean complex as prices fell amid favorable growing conditions in the U.S. Within the metals markets, losses were experienced primarily during January from short positions in zinc, aluminum, and copper futures as prices advanced on speculation metals demand will be supported by economic expansion in the U.S. and an easing credit policy in China. Meanwhile, losses were incurred within the global stock index markets during April and May from long positions in U.S., European, and Pacific Rim equity index futures as prices declined amid an unexpected rise in the U.S. unemployment rate and weakening economic data from China and Europe. Elsewhere, losses were recorded within the energy complex during April and May from long positions in RBOB (unleaded) gasoline, gas oil, and Brent crude futures as prices declined on signs that manufacturing is slowing in China and Europe, spurring concern fuel demand may decline. Additional energy losses were experienced in June from short positions in natural gas futures as prices advanced to the highest level since January on forecasts of above-normal temperatures across the U.S. A portion of the Partnership’s losses during the first half of the year was offset by gains achieved within the global interest rate sector during April and May from long positions in European, U.S., and Australian fixed income futures as prices advanced after Standard & Poor’s cut Spain’s credit rating and Greece failed to form a unified government, adding to concern central banks and politicians are failing to contain the European debt crisis.

- 30 -
 
 
 

 
For the Three and Six Months Ended June 30, 2011
The Partnership recorded total trading results including interest income totaling $(11,171,047) and expenses totaling $6,819,133, resulting in a net loss of $17,990,180 for the three months ended June 30, 2011.  The Partnership’s net asset value per Unit decreased from $27.98 at March 31, 2011 to $26.62 at June 30, 2011.

The most significant trading losses were incurred in the energy markets, primarily during May and June, from long futures positions in crude oil and its related products as prices moved lower on signs the global economic recovery is slowing. Within the agricultural complex, losses were recorded primarily during April due to long positions in cotton futures as prices declined to a three-month low on concern that demand may slow from China, the world’s biggest buyer of the fiber. Elsewhere during April, long futures positions in the soybean complex resulted in losses as prices fell on speculation that U.S. exports may slow. Losses were also experienced within the global stock index markets, primarily during May, from long positions in U.S., European, and Pacific Rim equity index futures as prices declined after worse-than-expected economic reports and mounting worries over the European debt crisis stoked concern the global economic recovery is faltering. Lastly, smaller losses were incurred within the metals sector, primarily during May, due to long positions in silver futures as prices fell sharply from a 31-year high. A portion of the Partnership’s losses for the quarter was offset by gains achieved within the global interest rate sector, primarily during May, from long positions in U.S. fixed-income futures as prices increased following reports that showed the U.S. economy grew less than forecast and U.S. jobless claims unexpectedly rose. Within the currency markets, gains were recorded primarily during April from long positions in the Australian dollar, Canadian dollar, and

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British pound versus the U.S. dollar as the value of these currencies rose against the U.S. dollar after better-than-expected corporate earnings reports and signs of global growth spurred demand for higher-yielding currencies.

The Partnership recorded total trading results including interest income totaling $(15,826,189) and expenses totaling $13,573,042, resulting in a net loss of $29,399,231 for the six months ended June 30, 2011.  The Partnership’s net asset value per Unit decreased from $28.87 at December 31, 2010, to $26.62 at June 30, 2011.

The most significant trading losses were incurred within the global stock index markets, primarily during March, from long positions in European, U.S., and Pacific Rim equity index futures as prices moved sharply lower after the disaster in Japan spurred concern about global economic growth. Additional losses were experienced within this sector during May from long positions in U.S., European, and Pacific Rim equity index futures as prices declined after worse-than-expected economic reports and mounting worries over the European debt crisis stoked concern the global economic recovery is faltering. Within the currency sector, losses were recorded primarily during January from long positions in the Japanese yen, Australian dollar, South African rand, and Canadian dollar versus the U.S. dollar as the value of these currencies declined against the U.S. dollar on optimism about the U.S. economy. Further losses were incurred during May from long positions in the Australian dollar, Canadian dollar, and South African rand versus the U.S. dollar as the value of these “commodity currencies” fell in tandem with declining commodity prices. Losses were also experienced within the energy markets, primarily during May and June, from long futures positions in crude oil and its related

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products as prices moved lower amid signs the global economic recovery is slowing. Lastly, losses were incurred within the agricultural complex, primarily during April, due to long positions in cotton futures as prices declined on concern that demand may slow from China, the world’s biggest buyer of the fiber. A portion of the Partnership’s losses during the first half of the year was offset by gains achieved within the metals sector, primarily during February, from long positions in silver futures as prices extended a rally to a 30-year high. Additional gains were recorded within this sector during April due to long futures positions in silver and gold as silver futures prices advanced to a 31-year high and gold futures prices reached an all-time high. Within the global interest rate sector, gains were experienced primarily during May from long positions in U.S. fixed-income futures as prices increased following reports that showed the U.S. economy grew less than forecast and U.S. jobless claims unexpectedly rose.

 
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

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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 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

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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.

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 Advisor 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 Advisor in their daily risk management activities.
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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 or the Partnership’s experience 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 June 30, 2012 and December 31, 2011, and the highest, lowest and average values during the three months ended June 30, 2012 and for the twelve months ended December 31, 2011.  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 Form 10-K.


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As of June 30, 2012, the Partnership’s total capitalization was approximately $247 million.
                         June 30, 2012
Primary Market
 
% of Total
Risk Category
VaR
Capitalization
     
Currency
$6,238,329
2.52%
     
Interest Rate
 11,278,698
4.56%
     
Equity
 10,294,232
4.16%
     
Commodity
 15,569,794
6.30%
     
Total
$43,381,053
17.54%


                         Three Months Ended June 30, 2012
Market Sector
High VaR
$
Low VaR
$
Average VaR*
$
Currency
10,083,836
4,626,231
6,883,155
Interest Rate
17,584,033
10,890,124
13,816,282
Equity
16,498,906
8,787,105
12,504,969
Commodity
18,325,307
9,847,326
13,742,372
*Average of month-end VaR


As of December 31, 2011, the Partnership’s total capitalization was approximately $280 million.





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                         December 31, 2011
Primary Market
 
% of
Risk Category
VaR
Total Capitalization
     
Currency
$14,674,961
5.25%
     
Interest Rate
 17,427,276
6.23%
     
Equity
 11,744,133
4.20%
     
Commodity
 18,504,511
6.62%
     
Total
$62,350,881
22.30%

                         Twelve Months Ended December 31, 2011
Market Sector
High VaR
$
Low VaR
$
Average VaR*
$
Currency
30,536,383
3,927,145
10,555,409
Interest Rate
17,693,704
2,776,605
5,662,832
Equity
20,093,626
1,659,106
5,304,603
Commodity
18,582,106
3,768,786
8,334,303
*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;

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·  
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.

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 Advisor for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies.  Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership.  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 Advisor, 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 through the selection of a commodity trading advisor and by daily monitoring of its performance.  In addition, the Trading Advisor establishes diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument.

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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 Advisor.



Item 4CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of Ceres, Ceres’ President (Ceres’ principal executive officer) and Chief Financial Officer (Ceres’ principal financial officer) have evaluated the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 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 June 30, 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.



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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 1.  LEGAL PROCEEDINGS
Unless the context otherwise requires, for purposes of this section, the terms the “Company,” “we,” “us” and “our” mean Morgan Stanley and its consolidated subsidiaries. In addition to the matters described in the Form 10-K and those described below, in the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or in financial distress.


The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company’s business, including, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.


The Company contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the condensed consolidated financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the estimated loss by a charge to income.

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In many proceedings, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. The Company cannot predict with certainty if, how or when such proceedings will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for proceedings that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for any proceeding. Subject to the foregoing, the Company believes, based on current knowledge and after consultation with counsel, that the outcome of such proceedings will not have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such proceedings could be material to the Company’s operating results and cash flows for a particular period depending on, among other things, the level of the Company’s revenues or income for such period.

Over the last several years, the level of litigation and investigatory activity focused on residential mortgage and credit crisis related matters has increased materially in the financial services industry. As a result, the Company expects that it may become the subject of increased claims for damages and other relief regarding residential mortgages and related securities in the future and, while the Company has identified below certain proceedings that the Company believes to be material, individually or collectively, there can be no assurance that additional material losses will not be incurred from residential mortgage claims that have not yet been notified to the Company or are not yet determined to be material.
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The following developments have occurred with respect to certain matters previously reported in the Form 10-K or concern new actions that have been filed since December 31, 2011:

The Company
Residential Mortgage and Credit Crisis Related Matters.
Class Actions.
On March 26, 2012, defendants filed a renewed motion to dismiss the complaint in In re Morgan Stanley ERISA Litigation.

On April 24, 2012, the court presiding in In re Morgan Stanley Pass-Through Certificate Litigation denied defendants’ motion for reconsideration of its denial-in-part of defendants’ motion to dismiss the second amended complaint. On July 16, 2012, the court denied defendants’ motion to dismiss the third amended complaint.


Other Litigation.
On February 29, 2012, U.S. Bank National Association, in its capacity as Trustee (“U.S. Bank”), filed a summons with notice on behalf of Morgan Stanley Mortgage Loan Trust 2006-4SL and Mortgage Pass-Through Certificates, Series 2006-4SL (together, the “Trust”) against the Company. The summons with notice is styled Morgan Stanley Mortgage Loan Trust 2006-4SL, et al. v. Morgan Stanley Mortgage Capital Inc. and is pending in New York Supreme Court, New York County. The notice asserts claims for breach of contract and alleges, among other things, that the loans in the Trust, which had an original principal balance of approximately $303 million, breached various

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representations and warranties. The notice seeks, among other relief, an order requiring the Company to comply with the loan breach remedy procedures in the transaction documents, unspecified damages, and interest.

On March 5, 2012, the plaintiff in The Charles Schwab Corp. v. BNP Paribas Securities Corp., et al. filed a second amended complaint. On April 10, 2012, the Company filed a demurrer to certain causes of action in the amended complaint.


On March 12, 2012, the court presiding in Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc. et al. denied defendants’ motion to dismiss with respect to plaintiff’s standing to bring suit. Defendants sought interlocutory appeal from that decision on April 11, 2012. On April 26, 2012, the Company and other defendants filed a second motion to dismiss the amended complaints.

On March 9, 2012, in Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al., the United States District Court for the District of Massachusetts denied plaintiff’s motion to remand the case to state court.

On March 20, 2012, the Company filed answers to the complaints in both cases styled Federal Deposit Insurance Corporation, as Receiver for Franklin Bank S.S.B v. Morgan Stanley & Company LLC F/K/A Morgan Stanley & Co. Inc., denying their allegations. On June 13, 2012, the Company removed Federal Deposit Insurance Corporation, as Receiver for Franklin Bank S.S.B v. Morgan

- 46 -
 
 
 

 
Stanley & Company LLC F/K/A Morgan Stanley & Co. Inc. to the United States District Court for the Southern District of Texas. On June 21, 2012, the Company moved to transfer the action to the United States District Court for the Southern District of New York (the “SDNY”). On July 12, 2012, plaintiff moved to remand the action to Texas state court.

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against the Company and certain affiliates in the Superior Court of the State of New Jersey styled The Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. The complaint alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company was approximately $1 billion. The complaint raises claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud and tortious interference with contract and seeks, among other things, compensatory damages, punitive damages, rescission and rescissionary damages associated with plaintiffs’ purchases of such certificates.

On April 25, 2012, Metropolitan Life Insurance Company and certain affiliates filed a complaint against the Company and certain affiliates in the Supreme Court of the State of New York styled Metropolitan Life Insurance Company, et al. v. Morgan Stanley, et al. The complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass through certificates backed by securitization trusts containing residential mortgage

- 47 -
 
 
 

 
loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company was approximately $757 million. The complaint raises common law claims of fraud, fraudulent inducement, aiding and abetting fraud and negligent misrepresentation and seeks, among other things, rescission, compensatory and/or rescissionary damages, as well as punitive damages, associated with plaintiffs’ purchases of such certificates.

On May 1, 2012, Asset Management Fund d/b/a AMF Funds and certain of its affiliated funds filed a summons with notice against the Company in the Supreme Court of the State of New York, styled Asset Management Fund d/b/a AMF Funds et al v. Morgan Stanley et al. The notice alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company to plaintiffs was approximately $122 million. The notice identifies causes of action against the Company for, among other things, common-law fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation. The notice identifies the relief sought to include, among other things, monetary damages, punitive damages and rescission.

On May 4, 2012, the court in Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., et al. granted the Company’s motion to dismiss claims against the Company for breach of fiduciary duty and negligence, and denied the Company’s motion to dismiss claims against the Company for negligent misrepresentation. On July 2, 2012, plaintiffs filed supplemental disclosures with the Court alleging that they are seeking approximately $811 million in compensatory damages. Plaintiffs are also seeking punitive damages.
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On May 4, 2012, the court in King County, Washington, et al. v. IKB Deutsche Industriebank AG, et al., granted the Company’s motion to dismiss claims against the Company for breach of fiduciary duty and negligence, and denied the Company’s motion to dismiss claims against the Company for negligent misrepresentation.


On June 28, 2012, the court in Federal Home Loan Bank of Chicago v. Bank of America Securities LLC, et al. overruled defendants’ demurrer to plaintiff’s first amended complaint, which demurrer was limited to statute of limitations and statute of repose grounds.

On May 21, 2012, the Company filed a motion to dismiss the complaint in Western and Southern Life Insurance Company, et al. v, Morgan Stanley Mortgage Capital Inc., et al.


On July 13, 2012, the Company filed a motion to dismiss the complaint in Federal Housing Finance Agency, as Conservator v. Morgan Stanley et al. On May 11, 2012, plaintiff withdrew its motion to remand in that action as well as in Federal Housing Finance Agency as Conservator v. General Electric Company et al.


Other Matters.
On April 2, 2012, the Company entered into a Consent Order (“Order”) with the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) relating to the servicing of residential mortgage loans. The terms of the Order are substantially similar and, in many respects, identical to the orders entered into with the Federal Reserve Board by other large U.S. financial institutions. The

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Order, which is available on the Federal Reserve Board’s website, sets forth various allegations of improper conduct in servicing by Saxon, requires that the Company and its affiliates cease and desist such conduct, and requires that the Company, and its Board of Directors and affiliates, take various affirmative steps. The Order requires (i) the Company to engage an independent third-party consultant to conduct a review of certain foreclosure actions or proceedings that occurred or were pending between January 1, 2009 and December 31, 2010; (ii) the adoption of policies and procedures related to management of third parties used to outsource residential mortgage servicing, loss mitigation or foreclosure; (iii) a “validation report” from an independent third-party consultant regarding compliance with the Order for the first year; and (iv) submission of quarterly progress reports as to compliance with the Order by the Company’s Board of Directors. The Order also provides that the Company will be responsible for the payment of any civil money penalties or compensatory payments assessed by the Federal Reserve Board related to such alleged conduct, which penalties or payments have not yet been determined.


Commercial Mortgage Related Matter.
On January 25, 2011, the Company was named as a defendant in The Bank of New York Mellon Trust, National Association v. Morgan Stanley Mortgage Capital, Inc., a litigation pending in the SDNY. The suit, brought by a trustee of a series of commercial mortgage pass-through certificates, alleges that the Company breached certain representations and warranties with respect to an $81 million commercial mortgage loan that was originated and transferred to the trust by the Company. The complaint seeks, among other things, to have the Company repurchase the loan and pay additional monetary damages. On June 27, 2011, the court denied the Company’s motion to dismiss,

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but directed the filing of an amended complaint. On July 29, 2011, the Company filed its answer to the first amended complaint. Factual discovery concluded on June 18, 2012. The court has indicated that motions for summary judgment are due to be filed by September 21, 2012.

Shareholder Derivative Matter.
On March 22, 2012, the Appellate Division of the Supreme Court of the State of New York affirmed the dismissal of the complaint in Security, Police and Fire Professionals of America Retirement Fund, et al. v. John J. Mack et al.

China Matter.
As disclosed in February 2009, the Company uncovered actions initiated by an employee based in China in an overseas real estate subsidiary that appeared to have violated the Foreign Corrupt Practices Act. The Company terminated the employee, reported the activity to appropriate authorities and cooperated with the investigations by the United States Department of Justice (“DOJ”) and the United States Securities and Exchange Commission (“SEC”). On April 25, 2012, the DOJ announced that the former employee had pled guilty to certain criminal charges, and the SEC announced that it had brought certain civil charges against the former employee, which have been settled. On the same day, the DOJ and SEC announced that they will not take any action against the Company in connection with this matter.

Item 1A.  RISK FACTORS
In addition to the risk factors previously referenced in the Form 10-K , the risk factors below may also apply to an investment in the Partnership.

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Trading Swaps Creates Distinctive Risks.  Graham may trade in certain swaps.  Currently, swaps are not traded on exchanges and are not subject to the same type of government regulation as exchange markets.  As a result, many of the protections afforded to participants on organized exchanges and in a regulated environment are not available in connection with these transactions.  The swap markets are “principals’ markets,” in which performance with respect to a swap is the responsibility only of the counterparty to the contract, and not of any exchange or clearinghouse.  The Partnership is subject to the risk of the inability or refusal to perform with respect to swaps on the part of the counterparties, and until such time as these transactions are cleared or guaranteed by an exchange, the Partnership will be subject to the risk of counterparty default on its swaps.  In some swap transactions the counterparty may require the Partnership to deposit collateral to support the Partnership’s obligations under the swap agreement.  If the counterparty to such a swap defaults, the Partnership would lose the net amount of payments that the Partnership is contractually entitled to receive and could lose, in addition, any collateral deposits made with the counterparty.  There are no limitations on daily price movements in swaps.  Speculative position limits are not applicable to swaps.  Participants in the swap markets are not required to make continuous markets in the swaps they trade.


However, the regulation of swaps will be subject to substantial change under recently-enacted legislation and regulatory action.  These new requirements will alter the manner in which swaps will be traded.  Under the Dodd-Frank Act, many commodity swaps will be required to be cleared through clearing houses and executed on designated contract markets or swap execution facilities.  Security-based swaps will be subject to similar requirements as will apply to commodity swaps.  Additional regulatory requirements will apply to all swaps, whether subject to mandatory clearing or not.  These

- 52 -
 
 
 

 
include margin, collateral and capital requirements, reporting obligations, for certain swaps, speculative position limits, and other regulatory requirements.  Swaps which are not offered for clearing by a clearing house will continue to be able to be traded bi-laterally.  Such bi-lateral transactions will remain subject to many of the risks discussed in the preceding paragraph.


Partnership Performance May Be Hindered by Increased Competition for Positions.  Assets in managed futures have grown from an estimated $300 million in 1980 to over $291 billion in 2011.  This increase has occurred primarily among trend-following advisors like Graham.  This has resulted in increased trading competition.  Since futures are traded in an auction-like market, the more competition there is for some contracts, the more difficult it is for the Partnership’s trading advisor to obtain the best prices for the Partnership.  Graham is required to use an allocation methodology that is fair to all customers.


You Will Not Have Access to the Partnership’s Positions and Must Rely on the General Partner to Monitor the Trading Advisor.  As a Limited Partner, you will not have access to the Partnership’s trade positions.  Consequently, you will not know whether the trading advisor is adhering to the Partnership’s trading policies and must rely on the ability of the General Partner to monitor trading and protect your investment.

Item 2.
UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

 
 
Units of the Partnership are sold to persons and entities who are accredited investors as the term is defined
 
 
in Rule 501(a) of Regulation D.
 

 
 
- 53 -
 
 
 

 
The aggregate proceeds of unregistered securities sold to the limited partners through June 30, 2012 was $77,441,826.  The Partnership received $325,000 in consideration from the sale of Units to the General Partner.
 
 
The following chart sets forth the purchases of Units by the Partnership.

                           
(d) Maximum Number
 
                   
(c) Total Number
 
(or Approximate
 
                   
of Redeemable
 
Dollar Value) of
 
                   
Units Purchased as
 
Redeemable Units
 
   
(a) Total Number
 
(b) Average
 
Part of Publicly
 
That May Yet Be
 
   
of Redeemable
 
Price Paid per
 
Announced
 
Purchased Under the
 
Period
 
Units Purchased*
 
Redeemable Unit**
 
Plans or Programs
 
Plans or Programs
 
April  1, 2012 – April 30, 2012
 
156,493.867
 
22.68
 
N/A
 
N/A
 
May 1, 2012 – May 31, 2012
 
290,985.931
 
22.40
 
N/A
 
N/A
 
June 1, 2012 – June 30, 2012
 
292,549.836
 
21.33
 
N/A
 
N/A
 
                   
   
740,029.634
 
22.04
         
     
*
 
Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners.
     
**
 
Redemptions of Redeemable Units are effected as of the last day of each month at the net asset value per Redeemable Unit as of that day.


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.
 
 
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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
 

 
 
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.




 
Managed Futures Charter Graham L.P.
 
(Registrant)
     
 
By:
Ceres Managed Futures LLC
   
(General Partner)
     
August 13, 2012
By:
/s/Damian George
   
Damian George
   
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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