10-Q 1 dwsff.txt SPECTRUM SELECT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2006 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to__________________ Commission File Number 0-19511 MORGAN STANLEY SPECTRUM SELECT L.P. (Exact name of registrant as specified in its charter) Delaware 13-3619290 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Demeter Management Corporation 330 Madison Avenue, 8th Floor New York, NY 10017 (Address of principal executive offices) (Zip Code) Registrant?s telephone number, including area code (212) 905-2700 (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___________ Indicate by check-mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ?accelerated filer and large accelerated filer? in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer___Accelerated filer____Non-accelerated filer X Indicate by check-mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X MORGAN STANLEY SPECTRUM SELECT L.P. INDEX TO QUARTERLY REPORT ON FORM 10-Q March 31, 2006
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Financial Condition as of March 31, 2006 (Unaudited) and December 31, 2005 2 Statements of Operations for the Quarters Ended March 31, 2006 and 2005 (Unaudited) 3 Statements of Changes in Partners? Capital for the Quarters Ended March 31, 2006 and 2005 (Unaudited) 4 Statements of Cash Flows for the Quarters Ended March 31, 2006 and 2005 (Unaudited) 5 Notes to Financial Statements (Unaudited) 6-12 Item 2. Management?s Discussion and Analysis of Financial Condition and Results of Operations 13-22 Item 3. Quantitative and Qualitative Disclosures about Market Risk 23-36 Item 4. Controls and Procedures 37 PART II. OTHER INFORMATION Item 1A.Risk Factors 38-40 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41-42 Item 5. Other Information 42 Item 6. Exhibits 42-43
PART I. FINANCIAL INFORMATION Item 1. Financial Statements MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF FINANCIAL CONDITION
March 31, December 31, 2006 2005 $ $ (Unaudited) ASSETS Equity in futures interests trading accounts: Unrestricted cash 445,230,799 475,166,952 Restricted cash 75,518,212 51,242,347 Total cash 520,749,011 526,409,299 Net unrealized gain on open contracts (MS&Co.) 26,927,826 9,019,008 Net unrealized gain on open contracts (MSIL) 650,844 9,166,796 Total net unrealized gain on open contracts 27,578,670 18,185,804 Total Trading Equity 548,327,681 544,595,103 Subscriptions receivable 7,634,457 4,455,213 Interest receivable (Morgan Stanley DW) 1,616,762 1,417,447 Total Assets 557,578,900 550,467,763 LIABILITIES AND PARTNERS? CAPITAL Liabilities Redemptions payable 10,716,225 13,439,853 Accrued brokerage fees (Morgan Stanley DW) 2,637,061 2,730,072 Accrued management fees 1,254,213 1,295,496 Total Liabilities 14,607,499 17,465,421 Partners? Capital Limited Partners (18,852,892.812 and 19,209,338.858 Units, respectively) 536,948,763 527,198,790 General Partner (211,461.769 Units) 6,022,638 5,803,552 Total Partners? Capital 542,971,401 533,002,342 Total Liabilities and Partners? Capital 557,578,900 550,467,763 NET ASSET VALUE PER UNIT 28.48 27.45 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF OPERATIONS (Unaudited)
For the Quarters Ended March 31, 2006 2005 $ $ INVESTMENT INCOME Interest income (Morgan Stanley DW) 4,384,809 2,424,227 EXPENSES Brokerage fees (Morgan Stanley DW) 8,016,810 10,285,170 Management fees 3,812,789 4,009,258 Total Expenses 11,829,599 14,294,428 NET INVESTMENT LOSS (7,444,790) (11,870,201) TRADING RESULTS Trading profit (loss): Realized 18,024,678 (26,726,458) Net change in unrealized 9,392,866 (11,003,115) Total Trading Results 27,417,544 (37,729,573) NET INCOME (LOSS) 19,972,754 (49,599,774) NET INCOME (LOSS) ALLOCATION Limited Partners 19,753,668 (49,076,602) General Partner 219,086 (523,172) NET INCOME (LOSS) PER UNIT Limited Partners 1.03 (2.43) General Partner 1.03 (2.43) The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF CHANGES IN PARTNERS? CAPITAL For the Quarters Ended March 31, 2006 and 2005 (Unaudited)
Units of Partnership Limited General Interest Partners Partner Total $ $ $ Partners? Capital, December 31, 2004 20,263,823.593 579,155,164 6,150,961 585,306,125 Offering of Units 1,446,709.087 38,334,882 380,000 38,714,882 Net Loss ? (49,076,602) (523,172) (49,599,774) Redemptions (660,606.857) (17,673,211) ? (17,673,211) Partners? Capital, March 31, 2005 21,049,925.823 550,740,233 6,007,789 556,748,022 Partners? Capital, December 31, 2005 19,420,800.627 527,198,790 5,803,552 533,002,342 Offering of Units 689,035.900 19,337,299 ? 19,337,299 Net Income ? 19,753,668 219,086 19,972,754 Redemptions (1,045,481.946) (29,340,994) ? (29,340,994) Partners? Capital, March 31, 2006 19,064,354.581 536,948,763 6,022,638 542,971,401 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF CASH FLOWS (Unaudited)
For the Quarters Ended March 31, 2006 2005 $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) 19,972,754 (49,599,774) Noncash item included in net income (loss): Net change in unrealized (9,392,866) 11,003,115 (Increase) decrease in operating assets: Restricted cash (24,275,865) 89,418 Interest receivable (Morgan Stanley DW) (199,315) (215,577) Net option premiums ? 3,366,493 Decrease in operating liabilities: Accrued brokerage fees (Morgan Stanley DW) (93,011) (57,245) Accrued management fees (41,283) (24,546) Net cash used for operating activities (14,029,586) (35,438,116) CASH FLOWS FROM FINANCING ACTIVITIES Cash received from offering of Units 16,158,055 38,319,817 Cash paid for redemptions of Units (32,064,622) (16,018,293) Net cash provided by (used for) financing activities (15,906,567) 22,301,524 Net decrease in unrestricted cash (29,936,153) (13,136,592) Unrestricted cash at beginning of period 475,166,952 488,346,785 Unrestricted cash at end of period 445,230,799 475,210,193 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS March 31, 2006 (Unaudited) The unaudited financial statements contained herein include, in the opinion of management, all adjustments necessary for a fair presentation of the results of operations and financial condition of Morgan Stanley Spectrum Select L.P. (the ?Partnership?). The financial statements and condensed notes herein should be read in conjunction with the Partnership?s December 31, 2005 Annual Report on Form 10-K. Certain prior year amounts relating to cash balances were reclassified on the Statemetns of Financial Condition and the related Statements of Cash Flows to conform to 2006 presentation. Such reclassifications have no impact on the Partnership?s reported net income (loss). 1. Organization Morgan Stanley Spectrum Select L.P. is a Delaware limited partnership organized in 1991 to engage primarily in the speculative trading of futures contracts, options on futures 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. The Partnership is one of the Morgan Stanley Spectrum Series of funds, comprised of the Partnership, MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P. The Partnership?s general partner is Demeter Management Corporation (?Demeter?). The non-clearing commodity broker is Morgan Stanley DW Inc. (?Morgan Stanley DW?). The clearing commodity brokers are Morgan Stanley & Co. Incorporated (?MS & Co.?) and Morgan Stanley & Co. International Limited (?MSIL?). Demeter, Morgan Stanley DW, MS & Co., and MSIL are wholly-owned subsidiaries of Morgan Stanley. The trading advisors to the Partnership are EMC Capital Management, Inc., Northfield Trading L.P. (?Northfield?), Rabar Market Research, Inc., Sunrise Capital Management, Inc., and Graham Capital Management, L.P. (?Graham?) (individually, a ?Trading Advisor?, or collectively, the ?Trading Advisors?). 2. Related Party Transactions The Partnership?s cash is on deposit with Morgan Stanley DW, MS & Co., and MSIL in futures, forwards, and options trading accounts to meet margin requirements as needed. Monthly, Morgan Stanley DW pays the Partnership interest income equal to 80% of the month?s MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) average daily Net Assets at a rate equal to a prevailing rate on U.S. Treasury bills. The Partnership pays brokerage fees to Morgan Stanley DW. 3. Financial Instruments The Partnership trades futures contracts, options on futures 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. Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price. Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts. There are numerous factors which may significantly influence the market value of these contracts, including interest rate volatility. The market value of exchange-traded contracts is based on the settlement price quoted by the exchange on the day with respect to which market 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 shall be the settlement price on the first MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) subsequent day on which the contract could be liquidated. The market value of off-exchange-traded contracts is based on the fair market value quoted by the counterparty. The Partnership?s contracts are accounted for on a trade-date basis and marked to market on a daily basis. The Partnership accounts for its derivative investments in accordance with the provisions of Statement of Financial Accounting Standards No. 133, ?Accounting for Derivative Instruments and Hedging Activities? (?SFAS No. 133?). SFAS No. 133 defines a derivative as a financial instrument or other contract that has all three of the following characteristics: 1) One or more underlying notional amounts or payment provisions; 2) Requires no initial net investment or a smaller initial net investment than would be required relative to changes in market factors; 3) Terms require or permit net settlement. Generally, derivatives include futures, forward, swaps or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars. MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The net unrealized gains (losses) on open contracts, reported as a component of ?Equity in futures interests trading accounts? on the Statements of Financial Condition, and their longest contract maturities were as follows: Net Unrealized Gains/(Losses) on Open Contracts Longest Maturities Exchange- Off-Exchange- Exchange- Off-Exchange- Date Traded Traded Total Traded Traded $ $ $ Mar. 31, 2006 32,205,116 (4,626,446) 27,578,670 Sep. 2007 Jun. 2006 Dec. 31, 2005 16,351,481 1,834,323 18,185,804 Jun. 2007 Mar. 2006 The Partnership has credit risk associated with counterparty non- performance. As of the date of the financial statements, the credit risk associated with the instruments in which the Partnership trades is limited to the amounts reflected in the Partnership?s Statements of Financial Condition. The Partnership also has credit risk because Morgan Stanley DW, MS & Co., and MSIL act as the futures commission merchants or the counterparties, with respect to most of the Partnership?s assets. Exchange-traded futures, forward, and futures-styled options contracts are marked to market on a daily basis, with variations in value settled on a daily basis. Morgan Stanley DW, MS & Co., and MSIL, each as a futures commission merchant for the MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Partnership?s exchange-traded futures, forward, and futures-styled options contracts, are required, pursuant to regulations of the Commodity Futures Trading Commission (?CFTC?), to segregate from their own assets, and for the sole benefit of their commodity customers, all funds held by them with respect to exchange-traded futures, forward, and futures-styled options contracts, including an amount equal to the net unrealized gains (losses) on all open futures, forward, and futures-styled options contracts, which funds, in the aggregate, totaled $552,954,127 and $542,760,780 at March 31, 2006 and December 31, 2005, respectively. With respect to the Partnership?s off-exchange-traded forward currency contracts, there are no daily exchange-required settlements of variation in value, nor is there any requirement that an amount equal to the net unrealized gains (losses) on open forward contracts be segregated. However, the Partnership is required to meet margin requirements equal to the net unrealized loss on open contracts in the Partnership accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at Morgan Stanley DW 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. This MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONCLUDED) 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. Item 2. MANAGEMENT?S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity. The Partnership deposits its assets with Morgan Stanley DW as non-clearing broker, and MS & Co. and MSIL as clearing brokers in separate futures, forwards, and options trading accounts established for each Trading Advisor. Such assets are used as margin to engage in trading and may be used as margin solely for the Partnership?s trading. The assets are held in either non- interest bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds. Since the Partnership?s sole purpose is to trade in futures, forwards, and options, it is expected that the Partnership will continue to own such liquid assets for margin purposes. The Partnership?s investment in futures, forwards, and options may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as ?daily price fluctuations limits? or ?daily limits?. Trades may not be executed at prices beyond the daily limit. If the price for a particular futures or options contract has increased or decreased by an amount equal to the daily limit, positions in that futures or options contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. These market conditions could prevent the Partnership from promptly liquidating its futures or options contracts and result in restrictions on redemptions. There is no limitation on daily price moves in trading forward contracts on foreign currencies. The markets for some world currencies have low trading volume and are illiquid, which may prevent the Partnership from trading in potentially profitable markets or prevent the Partnership from promptly liquidating unfavorable positions in such markets, subjecting it to substantial losses. Either of these market conditions could result in restrictions on redemptions. For the periods covered by this report, illiquidity has not materially affected the Partnership?s assets. There are no known material trends, demands, commitments, events, or uncertainties at the present time that are reasonably likely to result in the Partnership?s liquidity increasing or decreasing in any material way. Capital Resources. The Partnership does not have, nor expects to have, any capital assets. Redemptions, exchanges, and sales of units of limited partnership interest (?Unit(s)?) in the future will affect the amount of funds available for investments in futures, forwards, and options in subsequent periods. It is not possible to estimate the amount, and therefore the impact, of future 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. Off-Balance Sheet Arrangements and Contractual Obligations. The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments that would affect its liquidity or capital resources. Results of Operations General. The Partnership?s results depend on the Trading Advisors and the ability of each Trading Advisor?s trading program(s) to take advantage of price movements in the futures, forwards, and options markets. The following presents a summary of the Partnership?s operations for the three month periods ended March 31, 2006 and 2005, and a general discussion of its trading activities during each period. It is important to note, however, that the Trading Advisors trade in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Advisors or will be profitable in the future. Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisors? trading activities on behalf of the Partnership during the period in question. Past performance is no guarantee of future results. The Partnership?s results of operations set forth in the financial statements on pages 2 through 12 of this report are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: The contracts the Partnership trades are accounted for on a trade- date basis and marked to market on a daily basis. The difference between their cost and market value is recorded on the Statements of Operations as ?Net change in unrealized trading profit (loss)? for open (unrealized) contracts, and recorded as ?Realized trading profit (loss)? when open positions are closed out. The sum of these amounts constitutes the Partnership?s trading results. The market value of a futures contract is the settlement price on the exchange on which that futures contract is traded on a particular day. The value of foreign currency forward contracts is based on the spot rate as of the close of business. Interest income, as well as management fees, incentive fees, and brokerage fees expenses of the Partnership are recorded on an accrual basis. Demeter believes that, based on the nature of the operations of the Partnership, no assumptions relating to the application of critical accounting policies other than those presently used could reasonably affect reported amounts. For the Quarter Ended March 31, 2006 The Partnership recorded total trading results including interest income totaling $31,802,353 and expenses totaling $11,829,599, resulting in net income of $19,972,754 for the quarter ended March 31, 2006. The Partnership?s net asset value per Unit increased from $27.45 at December 31, 2005 to $28.48 at March 31, 2006. The most significant trading gains of approximately 3.2% were recorded in the global interest rate futures markets, primarily during March, from short positions in U.S., European, and Japanese interest rate futures as global bond prices trended lower amid strength in regional equity markets and investor sentiment that interest rates in the United States, the European Union, and Japan will rise. Additional gains of approximately 2.8% were experienced in the metals markets during January and March from long futures positions in copper, zinc, and aluminum as prices strengthened amid news of weak supplies, forecasts for continued buying by China, and acceleration in demand from Japan, Europe, and the U.S. Elsewhere in the metals markets, gains were recorded from long futures positions in silver and gold as precious metals prices moved higher on persistent demand from foreign central banks. Silver prices were also pressured higher after news that a silver-backed Exchange Traded Fund would soon launch and create greater investment interest in the metal. Within the global stock index futures markets, gains of approximatly 2.3% were experienced from long positions in European and Australian stock index futures as global equity markets trended higher during the quarter on strong corporate earnings and solid economic data. A portion of the Partnership?s overall gains for the quarter was offset by losses of approximatly 2.8% in the currency sector from long U.S. dollar positions versus the Swiss franc, euro, and Japanese yen as the value of the U.S. dollar moved lower during January on expectations that a string of increases in interest rates by the U.S. Federal Reserve could possible come to an end. Also pushing the value of the U.S. dollar lower against its rivals was speculation that China might move to diversify some of its U.S. dollar based assets into other currencies. Further losses were experienced during February from short positions in the Japanese yen relative to the U.S. dollar as the value of the yen increased on the release of better-than-expected Japanese machinery orders data and speculation that the Bank of Japan may move to tighten monetary policy in Japan. Additional losses during February were recorded from short positions in the Swiss franc versus the U.S. dollar as the value of the U.S. dollar weakened amid investor concern regarding the massive U.S. trade deficit. Currency losses were also incurred during March from long positions in the British pound relative to the U.S. dollar as the value of the pound finished lower after news that Gross Domestic Product in the United Kingdom for 2005 was weaker-than-expected. Smaller losses were experienced during March from short positions in the euro and the Swiss franc relative to the U.S. dollar as the value of these European currencies moved higher after the release of generally positive economic data from the euro-zone reinforced expectations that European interest rates would continue to rise. Losses of approximatly 0.6% were experienced in the energy markets during February from long futures positions in crude oil and its related products as prices declined after Chinese government authorities announced that China would place an emphasis on prospecting alternative energy sources in the future, reports of larger-than-expected supplies from the International Energy Agency, and mild weather in the U.S. Northeast. Further losses in the energy markets were recorded during March from short positions in the aforementioned markets as prices strengthened early in the month on supply fears fueled by news of geopolitical tensions in Nigeria and Iran. For the Quarter Ended March 31, 2005 The Partnership recorded total trading results including interest income totaling $(35,305,346) and expenses totaling $14,294,428, resulting in a net loss of $49,599,774 for the quarter ended March 31, 2005. The Partnership?s net asset value per Unit decreased from $28.88 at December 31, 2004 to $26.45 at March 31, 2005. The most significant trading losses of approximately 6.8% resulted in the currency sector throughout the quarter from positions in foreign currencies versus the U.S. dollar. During January, long positions in Swiss franc and euro versus the U.S. dollar incurred losses after the U.S. dollar?s value reversed sharply higher amid conflicting economic data, improvements in U.S. trade deficit numbers, and speculation for higher U.S. interest rates. The U.S. dollar?s value also advanced in response to expectations that the Chinese government would announce postponement of Chinese yuan re- valuation for the foreseeable future. Additional losses were recorded during February from short positions in the Swiss franc and euro versus the U.S. dollar as the U.S. dollar weakened in response to concern for the considerable U.S. Current-Account deficit expressed by U.S. Federal Reserve Chairman Alan Greenspan. The value of the U.S. dollar was further weakened during the remainder of the month by a larger-than-expected drop in January leading economic indicators and news that South Korea?s Central Bank would be reducing its U.S. dollar currency reserves. Long European currency positions versus the U.S. dollar also recorded losses during March after the value of the U.S. dollar reversed sharply higher benefiting from higher U.S. interest rates and consumer prices. Additional Partnership losses of approximately 1.5% were recorded in the global stock index sector, primarily during January and March, from long positions in U.S. and Pacific Rim stock index futures. During January, long U.S. index positions experienced losses after prices declined amid weak consumer confidence data, concerns about higher U.S. interest rates, and the potential for slower corporate profit growth. Additional losses were incurred from long positions in Japanese equity index futures as prices declined in the wake of lower U.S. equity markets and weaker-than-expected earnings in the Japanese technology sector. During March, long positions in U.S. and Pacific Rim stock index futures incurred losses after equity prices moved lower amid concerns for the growing U.S. trade deficit, weakness in the U.S. dollar early in the month, inflation fears, and a surge in crude oil prices. Prices continued to weaken throughout the month on higher U.S. interest rates and fears that consistently rising energy prices would negatively impact economic growth in the U.S. and Pacific Rim region. Smaller Partnership losses of approximately 0.1% resulted in the metals markets from long futures positions in gold as prices declined during January amid strength in the U.S. dollar. A portion of the Partnership?s overall losses for the quarter was offset by gains of approximately 1.1% recorded in the agricultural markets during February from long futures positions in coffee as prices increased amid news of strong demand and expectations for smaller world crops. Long positions in the soybeans complex were also profitable after prices trended higher on news of extremely cold weather in U.S. growing regions and rumors of a reduction on world output during 2005. Additional Partnership gains of approximately 0.8% were achieved in the energy markets, primarily during March, from long futures positions in crude oil and its related products as rising energy prices advanced after OPEC oil ministers announced that there were no plans to raise output and the U.S. Energy Information Administration reported that U.S. inventories of gasoline and heating oil measured significantly lower-than-expected. The weaker U.S. dollar value also triggered crude oil demand early in the month from countries such as Japan and China. Finally, prices soared at the end of the month after Goldman Sachs analysts warned oil prices could reach $105 a barrel in the future. Smaller Partnership gains of approximately 0.1% were achieved in the global interest rate sector during January and March from positions in U.S. interest rate futures. During January, long positions benefited after prices trended higher due to uncertainty in the equity markets and the release of conflicting international economic data. During March, short positions benefited as prices moved lower amid an increase in U.S. interest rates and speculation for further increases in the future. 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 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, forwards, and options are settled daily through variation margin. Gains and losses on off-exchange-traded forward currency contracts are settled upon termination of the contract, however, the Partnership is required to meet margin requirements equal to the net unrealized loss on open contracts in Partnership accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at Morgan Stanley DW 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 to typically be many times the total capitalization of the Partnership. The Partnership?s past performance is no guarantee of its future results. Any attempt to numerically quantify the Partnership?s market risk is limited by the uncertainty of its speculative trading. The Partnership?s speculative trading and use of leverage may cause future losses and volatility (i.e., ?risk of ruin?) that far exceed the Partnership?s experience to date under the ?Partnership?s Value at Risk in Different Market Sectors? section and significantly exceed the Value at Risk (?VaR?) tables disclosed. Limited partners will not be liable for losses exceeding the current net asset value of their investment. Quantifying the Partnership?s Trading Value at Risk The following quantitative disclosures regarding the Partnership?s market risk exposures contain ?forward-looking statements? within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward- looking statements for purposes of the safe harbor, except for statements of historical fact. The Partnership accounts for open positions on the basis of mark to market accounting principles. Any loss in the market value of the Partnership?s open positions is directly reflected in the Partnership?s earnings and cash flow. The Partnership?s risk exposure in the market sectors traded by the Trading Advisors is estimated below in terms of VaR. The Partnership estimates VaR using a model based upon historical simulation (with a confidence level of 99%) which involves constructing a distribution of hypothetical daily changes in the value of a trading portfolio. The VaR model takes into account linear exposures to risk including equity and commodity prices, interest rates, foreign exchange rates, and correlation among these variables. The hypothetical changes in portfolio value are based on daily percentage changes observed in key market indices or other market factors (?market risk factors?) to which the portfolio is sensitive. The one-day 99% confidence level of the Partnership?s VaR corresponds to the negative change in portfolio value that, based on observed market risk factors, would have been exceeded once in 100 trading days, or one day in 100. VaR typically does not represent the worst case outcome. Demeter uses approximately four years of daily market data (1,000 observations) and re-values its portfolio (using delta-gamma approximations) for each of the historical market moves that occurred over the time period. This generates a probability distribution of daily ?simulated profit and loss? outcomes. The VaR is the appropriate percentile of this distribution. For example, the 99% one-day VaR would represent the 10th worst outcome from Demeter?s simulated profit and loss series. The Partnership?s VaR computations are based on the risk representation of the underlying benchmark for each instrument or contract and do not distinguish between exchange and non-exchange dealer-based instruments. They are also not based on exchange and/or dealer-based maintenance margin requirements. VaR models, including the Partnership?s, are continually evolving as trading portfolios become more diverse and modeling techniques and systems capabilities improve. Please note that the VaR model is used to numerically quantify market risk for historic reporting purposes only and is not utilized by either Demeter or the Trading Advisors in their daily risk management activities. Please further note that VaR as described above may not be comparable to similarly-titled measures used by other entities. The Partnership?s Value at Risk in Different Market Sectors The following table indicates the VaR associated with the Partnership?s open positions as a percentage of total Net Assets by primary market risk category at March 31, 2006 and 2005. At March 31, 2006 and 2005, the Partnership?s total capitalization was approximately $543 million and $557 million, respectively. Primary Market March 31, 2006 March 31, 2005 Risk Category Value at Risk Value at Risk Interest Rate (1.67)% (0.98)% Equity (1.60) (1.45) Currency (0.63) (0.69) Commodity (0.57) (1.21) Aggregate Value at Risk (2.96)% (2.65)% The VaR for a market category represents the one-day downside risk for the aggregate exposures associated with this market category. The Aggregate Value at Risk listed above represents the VaR of the Partnership?s open positions across all the market categories, and is less than the sum of the VaRs for all such market categories due to the diversification benefit across asset classes. Because the business of the Partnership is the speculative trading of futures, forwards, and options, the composition of its trading portfolio can change significantly over any given time period, or even within a single trading day, which could positively or negatively materially impact market risk as measured by VaR. The table below supplements the quarter-end VaR set forth above by presenting the Partnership?s high, low, and average VaR, as a percentage of total Net Assets for the four quarter-end reporting periods from April 1, 2005 through March 31, 2006. Primary Market Risk Category High Low Average Interest Rate (2.49)% (0.31)% (1.23)% Equity (2.51) (1.60) (2.07) Currency (1.94) (0.63) (1.11) Commodity (1.04) (0.57) (0.80) Aggregate Value at Risk (3.18)% (2.86)% (2.98)% Limitations on Value at Risk as an Assessment of Market Risk VaR models permit estimation of a portfolio?s aggregate market risk exposure, incorporating a range of varied market risks; reflect risk reduction due to portfolio diversification or hedging activities; and can cover a wide range of portfolio assets. However, VaR risk measures should be viewed in light of the methodology?s limitations, which include, but may not be limited to the following: * past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements; * changes in portfolio value caused by market movements may differ from those of the VaR model; * VaR results reflect past market fluctuations applied to current trading positions while future risk depends on future positions; * VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and * the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements. In addition, the VaR tables above, as well as the past performance of the Partnership, give no indication of the Partnership?s potential ?risk of ruin?. The VaR tables provided present the results of the Partnership?s VaR for each of the Partnership?s market risk exposures and on an aggregate basis at March 31, 2005, and for the four quarter-end reporting periods from April 1, 2005 through March 31, 2006. VaR is not necessarily representative of the Partnership?s historic risk, nor should it be used to predict the Partnership?s future financial performance or its ability to manage or monitor risk. There can be no assurance that the Partnership?s actual losses on a particular day will not exceed the VaR amounts indicated above or that such losses will not occur more than once in 100 trading days. Non-Trading Risk The Partnership has non-trading market risk on its foreign cash balances. These balances and any market risk they may represent are immaterial. The Partnership also maintains a substantial portion of its available assets in cash at Morgan Stanely DW; as of March 31, 2006, such amount is equal to approximately 88% of the Partnership?s net asset value. A decline in short-term interest rates would result in a decline in the Partnership?s cash management income. This cash flow risk is not considered to be material. Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality, and multiplier features of the Partnership?s market- sensitive instruments, in relation to the Partnership?s Net Assets. Qualitative Disclosures Regarding Primary Trading Risk Exposures The following qualitative disclosures regarding the Partnership?s market risk exposures - except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership?s primary market risk exposures, as well as the strategies used and to be used by Demeter and the Trading Advisors for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership?s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership. Investors must be prepared to lose all or substantially all of their investment in the Partnership. The following were the primary trading risk exposures of the Partnership at March 31, 2006, by market sector. It may be anticipated, however, that these market exposures will vary materially over time. Interest Rate. The largest market exposure of the Partnership at March 31, 2006, was to the global interest rate sector. Exposure was primarily spread across the European, U.S., Japanese, Australian, and Canadian interest rate sectors. Interest rate movements directly affect the price of the sovereign bond futures positions held by the Partnership and indirectly affect the value of its stock index and currency positions. Interest rate movements in one country, as well as relative interest rate movements between countries, materially impact the Partnership?s profitability. The Partnership?s interest rate exposure is generally to interest rate fluctuations in the U.S. and the other G-7 countries interest rates. The G-7 countries consist of France, the U.S., Britain, Germany, Japan, Italy, and Canada. However, the Partnership also takes futures positions in the government debt of smaller countries ? e.g., Australia. Demeter anticipates that the G-7 countries interest rates and Australian interest rates will remain the primary interest rate exposure of the Partnership for the foreseeable future. The speculative futures positions held by the Partnership may range from short to long-term instruments. Consequently, changes in short, medium, or long-term interest rates may have an effect on the Partnership. Equity. The second largest market exposure of the Partnership at March 31, 2006 was to the global stock index sector, primarily to equity price risk in the G-7 countries. The stock index futures traded by the Partnership are by law limited to futures on broadly-based indices. The Partnership?s primary market exposures were to the S&P 500 (U.S.), DAX (Germany), Hang Seng (China), FTSE 100 (United Kingdom), Euro Stoxx 50 (Europe), NASDAQ 100 (U.S.), CAC 40 (France), S&P/MIB (Italy), NIKKEI 225 (Japan), Dow Jones (U.S.), IBEX 35 (Spain), ASX-AOI (Australia), TAIWAN (Taiwan), Canadian S&P 60 (Canada), TOPIX (Japan), and RUSSELL 2000 (U.S.) stock indices. The Partnership is typically exposed to the risk of adverse price trends or static markets in the European, U.S., Chinese, and Japanese stock indices. Static markets would not cause major market changes, but would make it difficult for the Partnership to avoid trendless price movements, resulting in numerous small losses. Currency. The third largest market exposure of the Partnership at March 31, 2006 was to the currency sector. The Partnership?s currency market exposure was to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. Interest rate changes, as well as political and general economic conditions influence these fluctuations. The Partnership trades a large number of currencies, including cross- rates ? i.e., positions between two currencies other than the U.S. dollar. At March 31, 2006, the Partnership?s major exposures were to euros, Japanese yen, British pounds, and Norwegian krone currency crosses, as well as to outright U.S. dollar positions. Outright positions consist of the U.S. dollar vs. other currencies. These other currencies include major and minor currencies. Demeter does not anticipate that the risk associated with the Partnership?s currency trades will change significantly in the future. Commodity. Metals. At March 31, 2006, the Partnership had market exposure in the metals sector. The Partnership's metals exposure was to fluctuations in the price of base metals, such as copper, nickel, aluminum, zinc, and lead, and precious metals, such as silver, gold, and platinum. Economic forces, supply and demand inequalities, geopolitical factors, and market expectations influence price movements in these markets. The Trading Advisors utilize the trading system(s) to take positions when market opportunities develop, and Demeter anticipates that the Partnership will continue to do so. Soft Commodities and Agriculturals. At March 31, 2006, the Partnership had market exposure to the markets that comprise these sectors. Most of the exposure was to the cotton, live cattle, sugar, soybean oil, feeder cattle, lean hogs, orange juice, rubber, soybeans, corn, and coffee markets. Supply and demand inequalities, severe weather disruptions and market expectations affect price movements in these markets. Energy. At March 31, 2006, the Partnership had market exposure in the energy sector. The Partnership?s energy exposure was shared primarily by futures contracts in crude oil and its related products, and natural gas. Price movements in these markets result from geopolitical developments, particularly in the Middle East, as well as weather patterns and other economic fundamentals. Significant profits and losses, which have been experienced in the past, are expected to continue to be experienced in the future. Natural gas has exhibited volatility in prices resulting from weather patterns and supply and demand factors and will likely continue in this choppy pattern. Qualitative Disclosures Regarding Non-Trading Risk Exposure The following was the only non-trading risk exposure of the Partnership at March 31, 2006: Foreign Currency Balances. The Partnership?s primary foreign currency balances at March 31, 2006 were in euros, Hong Kong dollars, Japanese yen, Australian dollars, British pounds, Swiss francs, Canadian dollars, and Norwegian krone. The Partnership controls the non-trading risk of foreign currency balances by regularly converting them back into U.S. dollars upon liquidation of their respective positions. Qualitative Disclosures Regarding Means of Managing Risk Exposure The Partnership and the Trading Advisors, separately, attempt to manage the risk of the Partnership?s open positions in essentially the same manner in all market categories traded. Demeter attempts to manage market exposure by diversifying the Partnership?s assets among different Trading Advisors in a multi-advisor Partnership, each of whose strategies focus on different market sectors and trading approaches, and by monitoring the performance of the Trading Advisors daily. In addition, the Trading Advisors establish diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument. Demeter monitors and controls the risk of the Partnership?s non-trading instrument, cash. Cash is the only Partnership investment directed by Demeter, rather than the Trading Advisors. Item 4. CONTROLS AND PROCEDURES (a) As of the end of the period covered by this quarterly report, the President and Chief Financial Officer of Demeter, the general partner of the Partnership, have evaluated the effectiveness of the Partnership?s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), and have judged such controls and procedures to be effective. (b) There have been no material 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) or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION Item 1A. RISK FACTORS The Partnership?s trading is highly leveraged. As an example of the leverage employed by the Partnership, the average of the underlying value of the Partnership?s month-end positions for the period March 2005 through February 2006 compared to the average month-end Net Assets of the Partnership during such period was 11.6 times Net Assets. Option trading can be more volatile than futures trading. The Partnership?s average month-end margin level for its options positions as a percent of its total average month-end margin requirements for the period March 2005 through February 2006 was 0.4%. Trading on foreign exchanges presents greater risks to the Partnership than trading on U.S. exchanges. The average percentage of month-end margin requirements for the period March 2005 through February 2006 that relates to futures and options contracts on foreign exchanges as compared to the Partnership?s total average month-end margin requirements was 42.1%. The unregulated nature of the forwards markets creates counterparty risks that does not exist in futures trading on exchanges. The average percentage of month-end total margin requirements for the period March 2005 through February 2006 that relates to forward contracts as compared to the Partnership?s total average month-end margin requirements was 15.7%. The Partnership incurs substantial charges. Demeter estimates the percentage of Partnership Net Assets that must be earned each year in order for the Partnership to break even without accounting for a redemption charge to be 6.05%. The Partnership could lose assets and have its trading disrupted if a commodity broker, any of the Trading Advisors, or others become bankrupt or if any of the Partnership?s Trading Advisors commits a trading error. The Partnership?s assets could be lost or impounded and trading suspended if a commodity broker, any of the Partnership?s Trading Advisors, an exchange or a clearinghouse becomes insolvent or involved in lengthy bankruptcy proceedings, or if any of the Partnership?s Trading Advisors commits a trading error executed on behalf of the Partnership. Increasing the assets managed by the Trading Advisors may adversely affect performance. The assets under management for Graham have increased from approximately $3 billion on February 29, 2004 to approximately $5.1 billion on February 28, 2006. Northfield?s use of an increased rate of leverage could affect future performance. Demeter and Northfield have agreed that Northfield will leverage the funds of the Partnership allocated to Northfield at 150% the leverage Northfield normally applies to its Diversified Program. This increased leverage could, depending on Northfield?s performance, results in increased gain or loss and trading volatility as compared to other accounts employing Northfield?s Diversified Program at standard leverage. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS SEC Registration Statement on Form S-1 Units Registered Effective Date File Number Initial Registration 60,000.000 May 17, 1991 33-39667 Supplemental Closing 10,000.000 August 23, 1991 33-42380 Additional Registration 75,000.000 August 31, 1993 33-65072 Additional Registration 60,000.000 October 27, 1997 333-01918 Pre-conversion 205,000.000 Units sold through 10/17/97 146,139.671 Units unsold through 10/17/97 58,860.329 (Ultimately de-registered) Commencing with April 30, 1998 monthly closing and with becoming a member of the Spectrum Series of funds, each previously outstanding Unit of the Partnership was converted into 100 Units, totaling 14,613,967.100 (pre-conversion). Additional Registration 1,500,000.000 May 11, 1998 333-47829 Additional Registration 5,000,000.000 January 21, 1999 333-68773 Additional Registration 4,500,000.000 February 28, 2000 333-90467 Additional Registration 1,000,000.000 April 30, 2002 333-84656 Additional Registration 7,000,000.000 April 28, 2003 333-104005 Additional Registration 23,000,000.000 April 28, 2004 333-113393 Total Units Registered 42,000,000.000 Units sold post conversion 25,235,442.904 Units unsold through 3/31/06 16,764,557.096 Total Units sold through 3/31/06 39,849,410.004 (pre and post conversion) The managing underwriter for the Partnership is Morgan Stanley DW. Units are continuously sold at monthly closings at a purchase price equal to 100% of the net asset value per Unit as of the close of business on the last day of each month. The aggregate price of the Units sold through March 31, 2006 was $874,739,098. Since no expenses are chargeable against proceeds, 100% of the proceeds of the offering have been applied to the working capital of the Partnership for use in accordance with the ?Use of Proceeds? section of the prospectus included as part of the above referenced Registration Statements. Item 5. OTHER INFORMATION Management. In connection with the election of new directors to the Board of Directors of Demeter, the following information updates the disclosures in the Partnership?s Form 8-K filed on March 27, 2006 and Form 8-K filed on April 5, 2006: On April 11, 2006, the National Futures Association approved Mr. Richard Gueren as a director of Demeter. Item 6. EXHIBITS 31.01 Certification of President of Demeter Management Corporation, 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 Demeter Management Corporation, the general partner of the Partnership pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.01 Certification of President of Demeter Management Corporation, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.02 Certification of Chief Financial Officer of Demeter Management Corporation, 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. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Morgan Stanley Spectrum Select L.P. (Registrant) By: Demeter Management Corporation (General Partner) May 15, 2006 By:/s/ Kevin Perry Kevin Perry Chief Financial Officer The General Partner which signed the above is the only party authorized to act for the Regisrant. The Registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors.