Morgan Stanley (MS) Smith Barney is reporting that five of its managed future funds sustained 9.5% in average losses—that’s $79.1 million—in the wake of client withdrawals last year. Only one of the funds was profitable. The largest fund by assets, Morgan Stanley Smith Barney Spectrum Select LP, faced $55.2 million in redemptions and lost $67.9 million.
Subsidiary Ceres Managed Futures LLC, the funds’ manager, had placed assets with outside trading advisers. In the wake of these losses, Ceres let go two underlying managers: John W. Henry & Co. and Sunrise Capital Partners. Spectrum Currency, which is the fund that they both managed, sustained losses of 9.8% in 2011. That fund is now called Spectrum Currency and Commodity.
Managed-future funds use futures or forwards contracts when betting on the declines or advance in securities, including bonds, commodities, stocks, and currencies. Some funds also invest in securities connected to certain events, such as changes in interest rates or the weather.
It’s been a tough time recently for Morgan Stanley. Last year, the financial firm had to give back approximately $700 million to investors in its flagship global real-estate fund. It also was forced to cut fees (both the fee charged on investments and management fees) to get them to stay. The fund’s size was also cut by $4 billion, resulting in investors getting some of their money back.
Over two-thirds of investors have consented to give Msref VII until June 2013 to invest rather than having billions of dollars returned to them sooner. Morgan Stanley’s earlier fund, which closed in 2007, suffered losses of 62% through March despite a 23% net return during that period’s last 12 months.
Also last December, media sources reported that Zynga stock purchased by Morgan Stanley’s mutual funds for $75 million in the late-stage round dropped in price from $14/share to $9/share, even as the financial firm cashed in two times: on private placement fees (if there were fees) and on fees for the IPO underwriting.
There was also the huge loss sustained by Morgan Stanley in the settlement it reached with bond insurance company MBIA. The two entities had sued one another over insurance sold on mortgage-backed securities. For a $1.1 billion payment by MBIA, Morgan Stanley agreed to give up insurance claims over guarantees on mortgage bonds. However, as a result, the financial firm took a pretax $1.8 billion charge in the fourth quarter of 2011. Morgan Stanley had purchased the insurance against bond defaults.
Meantime, MBIA dismissed its complaint against Morgan Stanley over the quality of the mortgage bonds. The insurer had accused the financial firm of misrepresenting these, which was what the insurance company was supposed to guarantee. (As MBIA’s credit-default swap bets started to falter at the start of the financial crisis, regulators were forced to divide the insurance company into a structured finance unit and a municipal guarantee business.)
Morgan Stanley Settles MBIA Suits, Will Take $1.8B Hit, Forbes, December 13, 2011
Morgan Stanley Brokerage Managed-Futures Funds Lose 9.5%, Bloomberg/Businessweek, March 28, 2012
MBIA and Morgan Stanley Settle Bond Fight, The Wall Street Journal, December 14, 2011
Morgan Stanley Managed Futures Funds Fall In ’11, FINalternative, March 29, 2012
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Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Fraud, September 17, 2011
Morgan Stanley Smith Barney Employee Fined and Suspended by FINRA Over Unauthorized Signatures, Stockbroker Fraud Blog, September 19, 2011
$63 Million Mortgage-Backed Securities Lawsuit Against Bank of America is Second One Filed by Western and Southern Life Insurance Co. Against the Financial Firm, Institutional Investor Securities Fraud, August 29, 2011