-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MedprpXI5BMMKaZbqkaaFv13kEVExBbd8yx4XLlVqF3gD1dbi3t23I6OWjHcaJ6H 9qWp6wdGMEFvdkyf+zGoSw== 0000873799-07-000003.txt : 20071113 0000873799-07-000003.hdr.sgml : 20071112 20071113142247 ACCESSION NUMBER: 0000873799-07-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071113 DATE AS OF CHANGE: 20071113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY SPECTRUM SELECT LP CENTRAL INDEX KEY: 0000873799 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133619290 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19511 FILM NUMBER: 071236988 BUSINESS ADDRESS: STREET 1: 522 FIFTH AVENUE, 13TH FLOOR STREET 2: C/O JEREMY BEAL CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 212-296-1999 MAIL ADDRESS: STREET 1: 522 FIFTH AVENUE, 13TH FLOOR STREET 2: C/O JEREMY BEAL CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER SPECTRUM SELECT LP DATE OF NAME CHANGE: 19990412 FORMER COMPANY: FORMER CONFORMED NAME: DEAN WITTER SPECTRUM SELECT LP DATE OF NAME CHANGE: 19980507 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN SELECT FUTURES FUND LP DATE OF NAME CHANGE: 19930328 10-Q 1 dwfff.txt DWSF UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2007 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 522 Fifth Avenue, 13th Floor New York, NY 10036 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 296-1999 (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___________ 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 September 30, 2007
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Financial Condition as of September 30, 2007 (Unaudited) and December 31, 2006 2 Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006 (Unaudited) 3 Statements of Changes in Partners' Capital for the Nine Months Ended September 30, 2007 and 2006 (Unaudited) 4 Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (Unaudited) 5 Schedules of Investments as of September 30, 2007 (Unaudited) and December 31, 2006...........................6 Notes to Financial Statements (Unaudited) 7-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-30 Item 3. Quantitative and Qualitative Disclosures about Market Risk 30-43 Item 4. Controls and Procedures 44 Item 4T. Controls and Procedures 44 PART II. OTHER INFORMATION Item 1A.Risk Factors 45 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45-46 Item 5. Other Information ... 46 Item 6. Exhibits 46-47
PART I. FINANCIAL INFORMATION Item 1. Financial Statements MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF FINANCIAL CONDITION
September 30, December 31, 2007 2006 $ $ (Unaudited) ASSETS Equity in futures interests trading accounts: Unrestricted cash 443,366,675 472,088,633 Restricted cash 47,100,397 64,801,445 Total cash 490,467,072 536,890,078 Net unrealized gain on open contracts (MS&Co.) 33,275,747 11,039,855 Net unrealized gain on open contracts (MSIP) 1,507,175 921,756 Total net unrealized gain on open contracts 34,782,922 11,961,611 Total Trading Equity 525,249,994 548,851,689 Subscriptions receivable 1,996,517 4,725,710 Interest receivable (MS&Co.) 1,307,468 1,858,406 Total Assets 528,553,979 555,435,805 LIABILITIES AND PARTNERS' CAPITAL Liabilities Redemptions payable 10,465,722 7,988,976 Accrued brokerage fees (MS&Co.) 2,427,950 2,727,852 Accrued management fees 1,060,545 1,196,492 Accrued incentive fee 445,293 - Total Liabilities 14,399,510 11,913,320 Partners' Capital Limited Partners (17,195,472.423 and 18,501,387.237 Units, respectively) 508,499,625 537,667,844 General Partner (191,224.769 and 201,460.769 Units, respectively) 5,654,844 5,854,641 Total Partners' Capital 514,154,469 543,522,485 Total Liabilities and Partners' Capital 528,553,979 555,435,805 NET ASSET VALUE PER UNIT 29.57 29.06 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, 2007 2006 2007 2006 $ $ $ $ INVESTMENT INCOME Interest income (MS&Co.) 4,817,933 5,482,892 15,050,688 15,228,561 EXPENSES Brokerage fees (MS&Co.) 7,810,074 8,220,584 23,635,367 24,777,826 Management fees 3,420,998 3,915,861 10,385,929 11,796,806 Incentive fees 497,617 - 497,617 - Total Expenses 11,728,689 12,136,445 34,518,913 36,574,632 NET INVESTMENT LOSS (6,910,756) (6,653,553) (19,468,225) (21,346,071) TRADING RESULTS Trading profit (loss): Realized (29,965,493) (23,258,682) 5,348,358 41,067,247 Net change in unrealized 15,497,488 (243,326) 22,821,311 (5,759,365) Total Trading Results (14,468,005) (23,502,008) 28,169,669 35,307,882 NET INCOME (LOSS) (21,378,761) (30,155,561) 8,701,444 13,961,811 NET INCOME (LOSS) ALLOCATION Limited Partners (21,141,608) (29,819,979) 8,602,350 13,811,989 General Partner (237,153) (335,582) 99,094 149,822 NET INCOME (LOSS) PER UNIT Limited Partners (1.16) (1.59) 0.51 0.70 General Partner (1.16) (1.59) 0.51 0.70 Units Units Units Units WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 17,744,142.966 19,017,055.500 18,209,734.053 19,089,725.854 (0.19) 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 Nine Months Ended September 30, 2007 and 2006 (Unaudited)
Units of Partnership Limited General Interest Partners Partner Total $ $ $ Partners' Capital, December 31, 2005 19,420,800.627 527,198,790 5,803,552 533,002,342 Offering of Units 2,084,611.535 60,239,714 - 60,239,714 Net Income - 13,811,989 149,822 13,961,811 Redemptions (2,516,978.515) (72,614,331) - (72,614,331) Partners' Capital, September 30, 2006 18,988,433.647 528,636,162 5,953,374 534,589,536 Units of Partnership Limited General Interest Partners Partner Total $ $ $ Partners' Capital, December 31, 2006 18,702,848.006 537,667,844 5,854,641 543,522,485 Offering of Units 1,285,666.373 36,860,346 - 36,860,346 Net Income - 8,602,350 99,094 8,701,444 Redemptions (2,601,817.187) (74,630,915) (298,891) (74,929,806) Partners' Capital, September 30, 2007 17,386,697.192 508,499,625 5,654,844 514,154,469 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2007 2006 $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income 8,701,444 13,961,811 Noncash item included in net income: Net change in unrealized (22,821,311) 5,759,365 (Increase) decrease in operating assets: Restricted cash 17,701,048 (585,466) Interest receivable (MS&Co.) 550,938 (353,185) Increase (decrease) in operating liabilities: Accrued brokerage fees (MS&Co.) (299,902) (28,094) Accrued management fee (135,947) (8,030) Accrued incentive fee 445,293 - Net cash provided by operating activities 4,141,563 18,746,401 CASH FLOWS FROM FINANCING ACTIVITIES Cash received from offering of Units 39,589,539 59,160,387 Cash paid for redemptions of Units (72,453,060) (77,952,111) Net cash used for financing activities (32,863,521) (18,791,724) Net decrease in unrestricted cash (28,721,958) (45,323) Unrestricted cash at beginning of period 472,088,633 475,166,952 Unrestricted cash at end of period 443,366,675 475,121,629 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P. SCHEDULES OF INVESTMENTS September 30, 2007 (Unaudited) and December 31, 2006
September 30, 2007, Partnership Net Assets: $514,154,469 Futures and Forward Contracts Long Unrealized Gain/(Loss) Percentage of Net Assets Short Unrealized Gain/(Loss) Percentage of Net Assets Net Unrealized Gain/(Loss) $ % $ % $ Commodity 18,081,423 3.52 840,361 0.16 18,921,784 Equity 1,254,590 0.24 (1,582,801) (0.31) (328,211) Foreign currency 12,999,339 2.53 2,201,199 0.43 15,200,538 Interest rate 1,240,174 0.24 (98,993) (0.02) 1,141,181 Grand Total: 33,575,526 6.53 1,359,766 0.26 34,935,292 Unrealized Currency Loss (152,370) Total Net Unrealized Gain per Statement of Financial Condition 34,782,922 December 31, 2006, Partnership Net Assets: $543,522,485 Futures and Forward Contracts Long Unrealized Gain/(Loss) Percentage of Net Assets Short Unrealized Gain/(Loss) Percentage of Net Assets Net Unrealized Gain/(Loss) $ % $ % $ Commodity 456,160 0.08 2,995,834 0.55 3,451,994 Equity 4,924,820 0.91 - - 4,924,820 Foreign currency (247,846) (0.05) 2,552,915 0.47 2,305,069 Interest rate (2,248,119) (0.41) 4,585,113 0.84 2,336,994 Grand Total: 2,885,015 0.53 10,133,862 1.86 13,018,877 Unrealized Currency Loss (1,057,266) Total Net Unrealized Gain per Statement of Financial Condition 11,961,611 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS September 30, 2007 (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, 2006, Annual Report on Form 10-K. 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 Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P. MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Partnership's general partner is Demeter Management Corporation ("Demeter"). Morgan Stanley & Co. Incorporated ("MS&Co.") is the Partnership's principal commodity broker-dealer and also acts as the counterparty on all trading of foreign currency forward contracts. In addition, Morgan Stanley & Co. International plc ("MSIP") serves as the commodity broker for trades on the London Metal Exchange. Demeter, MS&Co., and MSIP are wholly-owned subsidiaries of Morgan Stanley. The trading advisors to the Partnership are EMC Capital Management, Inc., Northfield Trading L.P., Rabar Market Research, Inc., Sunrise Capital Management, Inc., and Graham Capital Management, L.P. (individually, a "Trading Advisor", or collectively, the "Trading Advisors"). 2. Related Party Transactions The Partnership's cash is on deposit with MS&Co. and MSIP in futures, forward, and options trading accounts to meet margin requirements as needed. MS&Co. pays the Partnership at each month end interest income on 80% of the funds on deposit with the commodity brokers at a rate equal to the monthly average of the 4-week U.S. Treasury bills discount rate during such month. The Partnership pays brokerage fees to MS&Co. MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 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. MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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, swap or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars. The net unrealized gains 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: MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Net Unrealized Gains on Open Contracts Longest Maturities Exchange- Off-Exchange- Exchange- Off-Exchange- Date Traded Traded Total Traded Traded $ $ $ Sep. 30, 2007 27,859,496 6,923,426 34,782,922 Mar. 2009 Dec. 2007 Dec. 31, 2006 10,738,293 1,223,318 11,961,611 Jun. 2008 Mar. 2007 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 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 marked to market on a daily basis, with variations in value settled on a daily basis. MS&Co. and MSIP, each as a futures commission merchant 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 MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) their commodity customers, all funds held by them with respect to exchange-traded futures, exchange-traded forward, and exchange- traded futures-styled options contracts, including an amount equal to the net unrealized gains (losses) on all open exchange-traded futures, exchange-traded forward, and exchange-traded futures- styled options contracts, which funds, in the aggregate, totaled $518,326,568 and $547,628,371 at September 30, 2007, and December 31, 2006, 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 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 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. MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. New Accounting Developments In July 2006, the Financial Accounting Standards Board ("FASB") issued interpretation No. 48, "Accounting for Uncertainty in Income Taxes " an interpretation of FASB Statement 109 - ("FIN 48"). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. FIN 48 was effective for the Partnership as of January 1, 2007. Based on its analysis, management believes that the adoption of FIN 48 has no impact on the Partnership's financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Partnership as of January 1, 2008. The impact to the Partnership's financial statements, if any, is currently being assessed. 5. Restricted and Unrestricted Cash As reflected on the Partnership's Statements of Financial Condition, restricted cash represents cash on deposit to satisfy margin requirements for trading. These amounts of restricted cash MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONCLUDED) are maintained in separate trading accounts. Cash that is not on deposit to satisfy the margin requirements for trading is reflected as unrestricted cash. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity. The Partnership deposits its assets with MS&Co. and MSIP as commodity brokers in separate futures, forward, and options trading accounts established for each Trading Advisor. Such assets are used as margin to engage in trading and may be used as margin solely for the Partnership's trading. The assets are held in either non-interest bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds. Since the Partnership's sole purpose is to trade in futures, forwards, and options, it is expected that the Partnership will continue to own such liquid assets for margin purposes. The Partnership's investment in futures, forwards, and options may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as "daily price 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 does it expect 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 to take advantage of price movements in the futures, forward, and options markets. The following presents a summary of the Partnership''s operations for the three and nine month periods ended September 30, 2007, and 2006, 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 14 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 a foreign currency forward contract 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 Three and Nine Months Ended September 30, 2007 The Partnership recorded total trading results including interest income totaling $(9,650,072) and expenses totaling $11,728,689, resulting in a net loss of $21,378,761 for the three months ended September 30, 2007. The Partnership's net asset value per Unit decreased from $30.73 at June 30, 2007, to $29.57 at September 30, 2007. The most significant trading losses of approximately 2.9% were recorded in the global stock index sector primarily during July and August from long positions in Japanese, European, and U.S. equity index futures as prices fell sharply amid speculation that a widening credit crunch, sparked by U.S. sub-prime mortgage losses, would erode global economic growth and corporate earnings. Additional losses of approximately 1.3% were incurred in the global interest rate sector, also during July and August, from short positions in European, Australian, and U.S. fixed- income futures as prices reversed sharply higher in a worldwide "flight-to-quality" after the significant decline in the global equity markets resulted in substantially higher demand for the "safe haven" of government bonds. Smaller losses continued during September from long positions in European interest rate futures as prices reversed lower following a rebound in global equities, which reduced demand for the relative safety of government debt. A portion of the Partnership's losses during the quarter was offset by gains of approximately 1.2% experienced in the agricultural markets during August and September from long positions in wheat futures as prices increased to a record high amid persistently strong international demand and news from the U.S. Department of Agriculture that global stockpiles would fall to the lowest level in 26 years. Further gains of approximately 0.4% were recorded in the metals markets primarily during September from long positions in gold and platinum futures as prices moved higher due to persistent weakness in the value of the U.S. dollar. In addition, prices of gold futures rose on speculation that a strike in Peru's largest gold mine would disrupt global supplies. Smaller gains of approximately 0.2% were experienced in the energy markets primarily during July and September from long futures positions in crude oil and its related products as prices moved higher amid persistent concerns regarding U.S. refinery capacity and after continuous hurricane activity in the Gulf of Mexico threatened production facilities. Lastly, further gains of approximately 0.1% were recorded in the currency sector primarily during September from long positions in the euro, Canadian dollar, and Norwegian krone versus the U.S. dollar, as well as outright short positions in the U.S. Dollar Index, as the value of the U.S. dollar moved lower relative to most of its major rivals leading up to and after the U.S. Federal Reserve's decision to cut interest rates at its September 18 meeting. In addition, the value of the U.S. dollar was pulled lower amid speculation that the U.S. Federal Reserve would continue to reduce interest rates in the near term. Conversely, the value of the Canadian dollar and Norwegian krone moved higher in tandem with rising energy prices on investor belief that surging oil prices and exports would expand these respective economies. The Partnership recorded total trading results including interest income totaling $43,220,357 and expenses totaling $34,518,913, resulting in net income of $8,701,444 for the nine months ended September 30, 2007. The Partnership's net asset value per Unit increased from $29.06 at December 31, 2006, to $29.57 at September 30, 2007. The most significant trading gains of approximately 4.6% were experienced in the currency sector during April, May, June, and September from long positions in the euro, Canadian dollar, Australian dollar, Turkish lira, and Brazilian real versus the U.S. dollar, as well as outright short positions in the U.S. Dollar Index, as the value of these currencies strengthened relative to the U.S. dollar amid the release of consistently strong economic data out of their respective countries. Furthermore, the value of the U.S. dollar weakened against most of its major rivals leading up to and after the U.S. Federal Reserve's decision to cut interest rates at its September 18 meeting. Additional gains of approximately 3.9% were recorded in the global interest rate sector during January, May, and June from short positions in European interest rate futures as prices initially fell after reports showed confidence in the Euro-Zone economy stayed close to a six-year high in December and unemployment dropped in the United Kingdom and Germany. In addition, European fixed-income futures prices fell after reports showed Italian retail sales were stronger than expected during April and German investor confidence rose during May. Furthermore, prices continued to move lower on news that housing prices in the United Kingdom showed their biggest jump this year. During August, long positions in Japanese government bond futures resulted in smaller gains as prices increased in a continuation of a worldwide "flight-to-quality" after volatility in the global equity markets, spurred by losses in the U.S. sub-prime mortgage sector, caused investors to seek the "safe haven" of government bonds. Smaller gains of approximately 0.5% were recorded in the agricultural markets during June, August, and September from long positions in wheat futures as prices rose amid persistently strong international demand and news from the U.S. Department of Agriculture that global stockpiles would fall to the lowest level in 26 years. Elsewhere, long positions in soybean oil and soybean meal futures resulted in gains primarily during May and June as prices moved higher after a representative from the European Union announced plans to increase alternative fuel sources and U.S. government reports showed that soybean acreage was down from a year earlier. A portion of the Partnership' gains in the first nine months of the year was offset by losses of approximately 2.0% recorded in the metals markets throughout a majority of the year from both short and long positions in silver, gold, and aluminum futures as prices moved without consistent direction due to conflicting data regarding supply and demand, as well as uncertainty regarding the direction of the U.S. dollar. Additional losses of approximately 1.3% were incurred in the global stock index sector during February and early March from long positions in Japanese and U.S. stock index futures as prices reversed sharply lower after a massive sell-off in the global equity markets that began on February 27, 2007, following comments from former U.S. Federal Reserve Chairman Alan Greenspan that the U.S. economy could be due for a recession. In addition, concerns that tighter credit conditions in China and Japan might dampen global growth first sent Chinese stock markets plunging before the sell-off spread to other equity markets. During July and August, long positions in U.S. equity index futures resulted in further losses as prices fell sharply amid speculation that a widening credit crunch, sparked by U.S. sub- prime mortgage losses, would erode global economic growth and corporate earnings. Smaller losses of approximately 0.1% were experienced within the energy markets during March from short positions in natural gas futures as prices reversed higher after the U.S. Department of Energy reported that supplies were down 15% from a year earlier. Further losses were recorded from both short and long positions in natural gas futures as prices moved in a trendless pattern during May. During August, long positions in gasoline futures resulted in losses as prices declined amid concerns that a slowdown in the global economy would negatively impact global energy demand. For the Three and Nine Months Ended September 30, 2006 The Partnership recorded total trading results including interest income totaling $(18,019,116) and expenses totaling $12,136,445, resulting in a net loss of $30,155,561 for the three months ended September 30, 2006. The Partnership's net asset value per Unit decreased from $29.74 at June 30, 2006, to $28.15 at September 30, 2006. The most significant trading losses of approximately 3.6% were incurred in the global interest rate futures markets primarily during July from short positions in U.S., British, German, and Japanese fixed-income futures as prices reversed higher on significant geopolitical concerns after North Korea conducted long-range missile tests, terrorist bombings aboard commuter trains in Bombay, India, and fears of an escalating conflict in the Middle East. Prices for German fixed-income futures continued to rise in August after the "ZEW" report showed investor confidence in Germany fell to its lowest level since June 2001. Meanwhile, British fixed-income futures prices increased on weaker than expected industrial data. Finally, short positions in Japanese fixed-income futures incurred losses during August as prices were pressured higher after lower than expected inflation data dampened expectations for an interest rate hike by the Bank of Japan in the near future. Losses of approximately 0.8% were recorded in the energy markets during July and August from long futures positions in crude oil and its related products as prices moved lower after weaker than expected U.S. economic data led investors to believe that energy demand would be negatively affected and the U.S. Department of Labor reported an unexpected climb in domestic gasoline supplies. Prices were pressured further lower after news of an official cease-fire between Israel and Hezbollah militants in Lebanon and news that the Organization of Petroleum Exporting Countries reduced its 2006 oil demand growth forecast. Within the agricultural markets, losses of approximately 0.7% were incurred primarily during July from long futures positions in wheat and soybean oil as prices decreased on forecasts of improved weather conditions across the growing regions of the U.S. Additional losses were incurred during July from long positions in cocoa futures as prices reversed lower on news from the International Cocoa Organization that global supplies were still adequate to meet demand. A portion of the Partnership's overall losses for the quarter was offset by gains of approximately 0.4% in the global stock index markets during July and August from long positions in Hong Kong stock index futures as prices moved higher on news that Gross Domestic Product in China surged to 10.9% in the first six months of this year. Additional gains in the global stock index futures markets were experienced during September from long positions in European equity index futures as prices were supported higher on merger and acquisition activity and stronger than expected corporate earnings. Within the currency markets, gains of approximately 0.3% were recorded primarily during August from short positions in the Japanese yen against the U.S. dollar, British pound, and euro as the value of the Japanese yen moved lower against other foreign currencies after the Japanese Consumer Price Index for July came in lower than expected and was revised down for the previous months. As such, this weaker than expected inflation data diminished expectations of another interest rate hike by the Bank of Japan this year. Finally, smaller gains of approximately 0.2% were recorded within the metals markets from long futures positions in nickel during July and August as prices reached record highs on strong demand from China and inadequate inventories. Additionally, prices moved higher on news of a labor strike at a Canadian nickel mine. The Partnership recorded total trading results including interest income totaling $50,536,443 and expenses totaling $36,574,632, resulting in net income of $13,961,811 for the nine months ended September 30, 2006. The Partnership's net asset value per Unit increased from $27.45 at December 31, 2005, to $28.15 at September 30, 2006. The most significant trading gains of approximately 6.5% were recorded in the metals markets primarily during the first six months of the year from long futures positions in copper, nickel, zinc, and aluminum as base metals prices rallied on strong global demand and reports of falling inventories. As a result, copper and nickel prices hit new record highs during the month of May. Further gains in the metals markets were experienced from long positions in gold and silver futures as prices reached 25-year highs in May, benefiting from strong demand and lagging supply. Demand for precious metals increased on continued geopolitical concerns and inflation fears due to high energy prices. Additional gains of approximately 4.8% were experienced within the global interest rates sector, during March and April, from short positions in U.S., European, and Australian interest rate futures as global bond prices trended lower throughout a majority of the first quarter amid strength in regional equity markets and investor sentiment that interest rates in the United States, the European Union, and Australia would rise. U.S. fixed-income futures continued to move lower into the second quarter following the release of consistently strong U.S. economic data. Similarly in Germany, rising equity prices, strong economic growth, and concerns about rising oil prices pressured German fixed-income futures prices even lower in the second quarter. Smaller gains of approximately 1.0% were recorded within the global stock index markets from long positions in European and Australian stock index futures as global equity prices trended higher throughout the first quarter on strong corporate earnings and solid economic data. Long positions in Hong Kong equity index futures also recorded gains as prices moved higher during April on positive performance in the technology sector and amid speculation that the U.S. Federal Reserve could be near the end of its interest rate tightening campaign. During July, long positions in Hong Kong stock index futures experienced gains as prices moved higher on news that Gross Domestic Product in China surged to 10.9% in the first six months of this year. Gains were also experienced during September from long positions in European equity index futures as prices were supported higher on merger and acquisition activity and solid corporate earnings. A portion of the Partnership's overall gains for the first nine months of the year was offset by losses of approximately 2.7% in the currency markets primarily during the first six months of the year from short positions in the Swiss franc and Japanese yen versus the U.S. dollar. Throughout a majority of the first half of the year, the U.S. dollar moved lower on news that foreign central banks were beginning to diversify their currency reserves away from U.S. dollar-denominated assets, as well as uncertainty regarding the future of the U.S. Federal Reserve's interest rate tightening campaign. The Swiss franc and Japanese yen moved higher against the U.S. dollar during January and February as strong economic data out of Switzerland and Japan increased speculation that the Swiss National Bank and Bank of Japan might raise interest rates. During April, the Swiss franc moved higher on the political tensions in the Middle East, which increased the demand for the 1120: "safe haven" currency, while the Japanese yen strengthened on speculation of a possible Bank of Japan interest rate hike in the near-future. Short positions in the Australian dollar relative to the U.S. dollar also incurred losses as the value of the Australian dollar moved higher from May to July on an unexpected interest rate hike by the Reserve Bank of Australia. Additional losses of approximately 1.8% were incurred within the energy markets throughout the first nine months of the year from futures positions in crude oil and its related products, as well as in natural gas. During February, long futures positions in crude oil and its related products recorded losses 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 as prices reversed higher early in the month on supply fears. During May, losses were incurred from long futures positions in crude oil and its related products as prices fell after supply data showed an increase in domestic gasoline and crude oil inventories. Losses were also incurred from short positions in natural gas as prices moved higher on fears of a possible supply shortage. During June, newly established long positions in natural gas futures recorded losses as prices reversed lower on reports of a supply surplus and fears of a slowing global economy. During July and August, losses were experienced from long futures positions in crude oil and its related products as prices moved lower after weaker than expected U.S. economic data led investors to believe that energy demand would be negatively affected and the U.S. Department of Labor reported an unexpected climb in domestic gasoline supplies. Prices were pressured further lower after news of an official cease-fire between Israel and Hezbollah militants in Lebanon and news that the Organization of Petroleum Exporting Countries reduced its 2006 oil demand growth forecast. Finally, the agricultural complex experienced losses of approximately 1.5% from positions in wheat, soybeans, and cocoa futures. Losses were incurred from long positions in wheat futures as prices fell in March, April, and June on forecasts for favorable weather in U.S. wheat-growing regions, while short futures positions in soybeans recorded losses as prices moved higher in March on speculative buying and increased demand. During the third quarter, losses were incurred primarily during July from long futures positions in wheat and soybean oil as prices decreased on forecasts of improved weather conditions across the growing regions of the U.S. 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, 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. 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 MS&Co. The Partnership's total market risk may increase or decrease as it is influenced by a wide variety of factors, including, but not limited to, the diversification among the Partnership's open positions, the volatility present within the markets, and the liquidity of the markets. The face value of the market sector instruments held by the Partnership is typically many times the applicable margin requirements. Margin requirements generally range between 2% and 15% of contract face value. Additionally, the use of leverage causes the face value of the market sector instruments held by the Partnership typically to be many times the total capitalization of the Partnership. The Partnership's past performance is no guarantee of its future results. Any attempt to numerically quantify the Partnership's market risk is limited by the uncertainty of its speculative trading. The Partnership's speculative trading and use of leverage may cause future losses and volatility (i.e., "risk of ruin") that far exceed the Partnership's experiences 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 this 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 September 30, 2007, and 2006. At September 30, 2007, and 2006, the Partnership's total capitalization was approximately $514 million and $535 million, respectively. Primary Market September 30, 2007 September 30, 2006 Risk Category Value at Risk Value at Risk Currency (1.37)% (0.99)% Interest Rate (0.44) (1.46) Equity (0.35) (1.46) Commodity (2.21) (0.75) Aggregate Value at Risk (2.96)% (1.86)% 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. Such changes 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 October 1, 2006, through September 30, 2007. Primary Market Risk Category High Low Average Currency (1.53)% (1.11)% (1.32)% Interest Rate (1.33) (0.44) (0.80) Equity (1.95) (0.35) (1.12) Commodity (2.21) (0.47) (0.96) Aggregate Value at Risk (2.96)% (1.93)% (2.51)% 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 September 30, 2006, and for the four quarter- end reporting periods from October 1, 2006, through September 30, 2007. 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 MS&Co.; as of September 30, 2007, such amount is equal to approximately 91% 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 September 30, 2007, by market sector. It may be anticipated, however, that these market exposures will vary materially over time. Currency. The second largest market exposure of the Partnership at September 30, 2007, 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 Partner-ship trades a large number of currencies, including cross-rates - i.e., positions between two currencies other than the U.S. dollar. At September 30, 2007, the Partnership's major exposures were to the euro, Norwegian krone, and Canadian dollar 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. Interest Rate. At September 30, 2007, the Partnership had market exposure to the global interest rate sector. Exposure was primarily spread across the U.S., Japanese, European, 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. At September 30, 2007, the Partnership had market exposure 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 NASDAQ 100 (U.S.), DAX (Germany), NIKKEI 225 (Japan), TOPIX (Japan), Hang Seng (China), Canadian S&P 60 (Canada), Dow Jones (U.S.), S&P 500 (U.S.), FTSE 100 (United Kingdom), SPI 200 (Australia), Euro Stoxx 50 (Europe), and S&P/MIB Index (Italy) stock indices. The Partnership is typically exposed to the risk of adverse price trends or static markets in the European, U.S., Chinese, Japanese, and Australian 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. Commodity. Energy. The largest market exposure of the Partnership at September 30, 2007, was to 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. Metals. The third largest market exposure of the Partnership at September 30, 2007, was to the metals sector. The Partnership's metals exposure was to fluctuations in the price of precious metals, such as gold, platinum, and silver and base metals, such as copper, aluminum, nickel, zinc, lead, and tin. 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 September 30, 2007, the Partnership had market exposure to the markets that comprise these sectors. Most of the exposure was to the soybeans, soybean oil, soybean meal, wheat, coffee, live cattle, cotton, corn, feeder cattle, cocoa, rubber, and lean hogs markets. Supply and demand inequalities, severe weather disruptions, and market expectations affect price movements in these markets. Qualitative Disclosures Regarding Non-Trading Risk Exposure The following was the only non-trading risk exposure of the Partnership at September 30, 2007: Foreign Currency Balances. The Partnership's primary foreign currency balances at September 30, 2007, were in euros, Hong Kong dollars, Australian dollars, British pounds, Norwegian krone, Swiss francs, Canadian dollars, Japanese yen, and Swedish krona. 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. Item 4T. CONTROLS AND PROCEDURES Not applicable. PART II. OTHER INFORMATION Item 1A. RISK FACTORS There have been no material changes from the risk factors previously referenced in the Partnership's Report on Form 10-K for the fiscal year ended December 31, 2006, and the Partnership's Report on Form 10Q for the quarters ended March 31, 2007, and June 30, 2007. 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 the 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 28,496,204.066 Units unsold through 9/30/07 13,503,795.934 Total Units sold through 9/30/07 43,110,171.166 (pre and post conversion)
The managing underwriter for the Partnership is MS&Co. 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 September 30, 2007, was $969,168,140. 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 Effective December 1, 2007, Altis Partners (Jerey) Limited will be added as a trading advisor to the Partnership. 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) November 13, 2007 By:/s/ Lee Horwitz Lee Horwitz 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. EX-1 2 dwsfex3101.txt EXHIBIT EXHIBIT 31.01 CERTIFICATIONS I, Walter Davis, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Morgan Stanley Spectrum Select L.P.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant?s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant?s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant?s internal control over financial reporting that occurred during the registrant?s most recent fiscal quarter (the registrant?s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant?s internal control over financial reporting; and 5. The registrant?s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant?s auditors and the audit committee of the registrant?s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant?s ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant?s internal control over financial reporting. Date: November 13, 2007 /s/ Walter Davis Walter Davis President, Demeter Management Corporation, general partner of the registrant EX-2 3 dwsfex3102.txt EXHIBIT EXHIBIT 31.02 CERTIFICATIONS I, Lee Horwitz, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Morgan Stanley Spectrum Select L.P.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant?s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant?s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant?s internal control over financial reporting that occurred during the registrant?s most recent fiscal quarter (the registrant?s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant?s internal control over financial reporting; and 5. The registrant?s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant?s auditors and the audit committee of the registrant?s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant?s ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant?s internal control over financial reporting. Date: November 13, 2007 /s/ Lee Horwitz Lee Horwitz Chief Financial Officer, Demeter Management Corporation, general partner of the registrant EX-3 4 dwsfex3201.txt EXHIBIT EXHIBIT 32.01 CERTIFICATION OF PRESIDENT PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Morgan Stanley Spectrum Select L.P. (the ?Partnership?) on Form 10-Q for the quarter ended September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the ?Report?), I, Walter Davis, President of Demeter Management Corporation, the general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. By: /s/ Walter Davis Name: Walter Davis Title: President of Demeter Management Corporation, the general partner of the Partnership Date: November 13, 2007 EX-4 5 dwsfex3202.txt EXHIBIT EXHIBIT 32.02 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Morgan Stanley Spectrum Select L.P. (the ?Partnership?) on Form 10-Q for the quarter ended September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the ?Report?), I, Lee Horwitz, Chief Financial Officer of Demeter Management Corporation, the general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. By: /s/ Lee Horwitz Name: Lee Horwitz Title: Chief Financial Officer of Demeter Management Corporation, the general partner of the Partnership Date: November 13, 2007 -----END PRIVACY-ENHANCED MESSAGE-----