-----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, JyF/e+VoYfBMavK1XsVCOrlf7/d8fHKRn2kCJaTEf/eUztIMnbX7C14IcZyLgnx5 7xr6YVEe8ybGsyVhCO2S1Q== 0000914747-09-000005.txt : 20090812 0000914747-09-000005.hdr.sgml : 20090812 20090812152407 ACCESSION NUMBER: 0000914747-09-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20090630 FILED AS OF DATE: 20090812 DATE AS OF CHANGE: 20090812 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: 091006648 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 dwsf.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 June 30, 2009 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 LLC 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (?232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No___________ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of ?large accelerated filer?, ?accelerated filer? and ?smaller reporting company? in Rule 12b-2 of the Exchange Act. Large accelerated filer______ Accelerated filer______ Non-accelerated filer X Smaller reporting company_______ 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 June 30, 2009
PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Statements of Financial Condition as of June 30, 2009 and December 31, 2008 . ..2 Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008 3 Statements of Changes in Partners? Capital for the Six Months Ended June 30, 2009 and 2008 . 4 Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 5 Condensed Schedules of Investments as of June 30, 2009 and December 31, 2008 .......................................6 Notes to Financial Statements 7-24 Item 2. Management?s Discussion and Analysis of Financial Condition and Results of Operations 25-39 Item 3. Quantitative and Qualitative Disclosures About Market Risk 39-52 Item 4. Controls and Procedures 52-53 Item 4T. Controls and Procedures 53 PART II. OTHER INFORMATION Item 1A.Risk Factors 54 Item 6. Exhibits 54
PART I. FINANCIAL INFORMATION Item 1. Financial Statements MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF FINANCIAL CONDITION (Unaudited)
June 30, December 31, 2009 2008 $ $ ASSETS Trading Equity: Unrestricted cash 447,752,048 601,638,653 Restricted cash 31,278,476 8,756,170 Total cash 479,030,524 610,394,823 Net unrealized gain on open contracts (MS&Co.) 5,009,145 19,905,581 Net unrealized gain on open contracts (MSIP) 261,895 6,140,183 Total net unrealized gain on open contracts 5,271,040 26,045,764 Total Trading Equity 484,301,564 636,440,587 Interest receivable (MS&Co.) 30,827 4,300 Total Assets 484,332,391 636,444,887 LIABILITIES AND PARTNERS? CAPITAL Liabilities Redemptions payable 5,281,008 23,861,804 Accrued brokerage fees (MS&Co.) 2,493,755 3,093,914 Accrued management fees 949,976 1,175,736 Accrued incentive fee ? 2,429,055 Total Liabilities 8,724,739 30,560,509 Partners? Capital Limited Partners (12,787,814.460 and 14,700,689.307 Units, respectively) 470,774,021 599,790,920 General Partner (131,297.769 and 149,348.769 Units, respectively) 4,833,631 6,093,458 Total Partners? Capital 475,607,652 605,884,378 Total Liabilities and Partners? Capital 484,332,391 636,444,887 NET ASSET VALUE PER UNIT 36.81 40.80 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 Six Months Ended June 30, Ended June 30, 2009 2008 2009 2008 $ $ $ $ INVESTMENT INCOME Interest income (MS&Co.) 114,950 1,821,455 265,116 4,219,407 EXPENSES Brokerage fees (MS&Co.) 7,561,371 8,525,711 16,262,823 16,723,687 Management fees 2,882,656 3,420,281 6,202,852 6,695,939 Incentive fees ? 4,825,589 391,898 10,541,832 Total Expenses 10,444,027 16,771,581 22,857,573 33,961,458 NET INVESTMENT LOSS (10,329,077) (14,950,126) (22,592,457) (29,742,051) TRADING RESULTS Trading profit (loss): Realized (12,468,788) 42,370,166 (11,820,649) 123,952,059 Net change in unrealized 1,907,982 24,976,431 (20,774,724) 25,914,273 Total Trading Results (10,560,806) 67,346,597 (32,595,373) 149,866,332 NET INCOME (LOSS) (20,889,883) 52,396,471 (55,187,830) 120,124,281 NET INCOME (LOSS) ALLOCATION Limited Partners (20,681,387) 51,821,916 (54,634,399) 118,808,376 General Partner (208,496) 574,555 (553,431) 1,315,905 NET INCOME (LOSS) PER UNIT Limited Partners (1.59) 3.31 (4.03) 7.39 General Partner (1.59) 3.31 (4.03) 7.39 Units Units Units Units WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 13,176,734.469 15,883,717.225 13,707,552.782 16,170,648.846 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 Six Months Ended June 30, 2009 and 2008 (Unaudited)
Units of Partnership Limited General Interest Partners Partner Total $ $ $ Partners? Capital, December 31, 2007 16,744,490.009 517,496,723 5,681,832 523,178,555 Offering of Units 680,255.731 24,472,286 ? 24,472,286 Net Income ? 118,808,376 1,315,905 120,124,281 Redemptions (1,865,566.537) (66,361,148) (296,829) (66,657,977) Partners? Capital, June 30, 2008 15,559,179.203 594,416,237 6,700,908 601,117,145 Partners? Capital, December 31, 2008 14,850,038.076 599,790,920 6,093,458 605,884,378 Net Loss ? (54,634,399) (553,431) (55,187,830) Redemptions (1,930,925.847) (74,382,500) (706,396) (75,088,896) Partners? Capital, June 30, 2009 12,919,112.229 470,774,021 4,833,631 475,607,652 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2009 2008 $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) (55,187,830) 120,124,281 Noncash item included in net income (loss): Net change in unrealized 20,774,724 (25,914,273) (Increase) decrease in operating assets: Restricted cash (22,522,306) 13,435,220 Interest receivable (MS&Co.) (26,527) 329,986 Net premiums paid for options purchased ? 68,716 Increase (decrease) in operating liabilities: Accrued brokerage fees (MS&Co.) (600,159) 232,051 Accrued management fees (225,760) 99,125 Accured incentive fees (2,429,055) 4,286,783 Net cash provided by (used for) operating activities (60,216,913) 112,661,889 CASH FLOWS FROM FINANCING ACTIVITIES Cash received from offering of Units ? 21,610,482 Cash paid for redemptions of Units (93,669,692) (60,749,643) Net cash used for financing activities (93,669,692) (39,139,161) Net increase (decrease) in unrestricted cash (153,886,605) 73,522,728 Unrestricted cash at beginning of period 601,638,653 475,137,768 Unrestricted cash at end of period 447,752,048 548,660,496 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P. CONDENSED SCHEDULES OF INVESTMENTS June 30, 2009 and December 31, 2008 (Unaudited)
Futures and Forward Contracts Long Unrealized Gain/(Loss) Percentage of Net Assets Short Unrealized Gain/(Loss) Percentage of Net Assets Net Unrealized Gain/(Loss) $ % $ % $ June 30, 2009, Partnership Net Assets: $475,607,652 ,c> Commodity 2,173,666 0.46 558,736 0.12 2,732,402 Equity 374,804 0.08 (101,221) (0.02) 273,583 Foreign currency 134,639 0.03 (492,661) (0.11) (358,022) Interest rate 4,423,810 0.93 (724,724) (0.15) 3,699,086 Grand Total: 7,106,919 1.50 (759,870) (0.16) 6,347,049 Unrealized Currency Loss (0.23) (1,076,009) Total Net Unrealized Gain on Open Contracts 5,271,040 December 31, 2008, Partnership Net Assets: $605,884,378 Commodity 838,755 0.14 11,613,498 1.92 12,452,253 Equity 145,512 0.02 (39,608) (0.01) 105,904 Foreign currency (318,118) (0.05) 453,250 0.07 135,132 Interest rate 14,885,639 2.46 2,078 ? 14,887,717 Grand Total: 15,551,788 2.57 12,029,218 1.98 27,581,006 Unrealized Currency Loss (0.25) (1,535,242) Total Net Unrealized Gain on Open Contracts 26,045,764 The accompanying notes are an integral part of these financial statements.
- - 6 - MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS June 30, 2009 (Unaudited) The unaudited financial statements contained herein include, in the opinion of management, all adjustments necessary for a fair presentation of the financial condition and results of operations of Morgan Stanley Spectrum Select L.P. (the ?Partnership?). The financial statements and condensed notes herein should be read in conjunction with the Partnership?s December 31, 2008, 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 and forward contracts, and forward contracts on physical commodities and other commodity interests, including, but not limited to, foreign currencies, financial instruments, metals, energy, and agricultural products (collectively, ?Futures Interests?) (refer to Note 4. Financial Instruments). The Partnership is one of the Morgan Stanley 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. - 7 - MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (collectively, the ?Spectrum Series?). The Partnership may buy or write put and call options through listed exchanges and the over-the-counter market. The buyer of an option has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of a specific Futures Interest or underlying asset at a specified price prior to or on a specified expiration date. The writer of an option is exposed to the risk of loss if the market price of the Futures Interest or underlying asset declines (in the case of a put option) or increases (in the case of a call option). The writer of an option can never profit by more than the premium paid by the buyer but can lose an unlimited amount. Premiums received/premiums paid from writing/purchasing options are recorded as liabilities/assets on the Statements of Financial Condition and are subsequently adjusted to fair values. The difference between the fair value of the option and the premiums received/premiums paid is treated as an unrealized gain or loss. The Partnership?s general partner is Demeter Management LLC (?Demeter?). On April 30, 2009, Demeter Management Corporation was converted from a Delaware corporation to a Delaware limited - 8 - MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) liability company and changed its name to Demeter Management LLC. The commodity brokers are Morgan Stanley & Co. Incorporated (?MS&Co.?) and Morgan Stanley & Co. International plc (?MSIP?). MS&Co. also acts as the counterparty on all trading of foreign currency forward contracts. Morgan Stanley Capital Group Inc. (?MSCG?) acts as the counterparty on all trading of options on foreign currency forward contracts. MSIP serves as the commodity broker for trades on the London Metal Exchange (?LME?). Demeter is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC, which in turn is majority owned by Morgan Stanley and minority owned by Citigroup Inc. (?Citigroup?). MS&Co., MSIP, and MSCG 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., Graham Capital Management, L.P., and Altis Partners (Jersey) Limited (each individually, a ?Trading Advisor?, or collectively, the ?Trading Advisors?). Demeter does not believe that the change in ownership of Demeter had a material impact on the Partnership?s limited partners. At all times Demeter served as the general partner of the Partnership and it continues to do so. The change in ownership occurred pursuant to the transaction in which Morgan Stanley and Citigroup agreed to combine the Global Wealth Management Group of Morgan - 9 - MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Stanley and the Smith Barney division of Citigroup Global Markets Inc. into a new joint venture. The transaction closed on June 1, 2009. On May 28, 2009, the Board of Directors of Demeter, in accordance with the provisions of Section 5 of the limited partnership agreement for the Partnership, resolved to modify the net worth requirement of Demeter. Demeter?s net worth requirement going forward is 5% of the total partners? contributions, with a minimum net worth of $50,000 and a maximum of $1,000,000 (cumulative for all the limited partnerships for which Demeter acts as a general partner, collectively the ?Funds?). Prior to the amendment, Demeter?s net worth requirement was generally at least 10% of total partners? contributions (cumulative for all the limited partnerships for which Demeter acted as general partner), with a minimum net worth of $50,000, but with no maximum. This change in Demeter?s net worth requirement for the Funds does not affect the limited partners? interests in the Funds, status as a limited partner in the Funds, or the status of the Funds as partnerships for tax purposes. 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 MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) end interest income on 80% of the funds on deposit with the commodity brokers at a rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate during such month. The Partnership pays brokerage fees to MS&Co. 3. Income Taxes No provision for income taxes has been made in the accompanying financial statements, as partners are individually responsible for reporting income or loss based upon their respective share of the Partnership?s revenues or expenses for income tax purposes. The Partnership files U.S. federal and state tax returns. Financial Accounting Standards Board (?FASB?) Interpretation No. 48, ?Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109? (?FIN 48?), clarifies the accounting for uncertainty in income taxes recognized in a Partnership's financial statements, and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken. The 2005 through 2008 tax years generally remain subject to examination by U.S. federal and most state tax authorities. MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. Financial Instruments The Partnership trades Futures Interests. Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price. Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts. There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility. The fair value of exchange-traded contracts is based on the settlement price quoted by the exchange on the day with respect to which fair value is being determined. If an exchange-traded contract could not have been liquidated on such day due to the operation of daily limits or other rules of the exchange, the settlement price shall be the settlement price on the first subsequent day on which the contract could be liquidated. The fair value of off-exchange-traded contracts is based on the fair 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 MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (?SFAS?) 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. The net unrealized gains (losses) on open contracts, reported as a component of ?Trading Equity? on the Statements of Financial Condition, and their longest contract maturities were as follows:
Net Unrealized Gains/(Losses) on Open Contracts Longest Maturities Exchange- Off-Exchange- Exchange- Off-Exchange- Date Traded Traded Total Traded Traded $ $ $ Jun. 30, 2009 6,536,720 (1,265,680) 5,271,040 Jun. 2011 Sep. 2009 Dec. 31, 2008 27,202,139 (1,156,375) 26,045,764 Jun. 2010 Mar. 2009
- - 13 - MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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., MSIP, and/or MSCG act as the futures commission merchants or the counter- parties, 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 acting as a commodity broker for the Partnership?s exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, are required, pursuant to regulations of the Commodity Futures Trading Commission (?CFTC?), to segregate from their own assets, and for the sole benefit of their commodity customers, 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 MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) the aggregate, totaled $485,567,244 and $637,596,962 at June 30, 2009 and December 31, 2008, respectively. With respect to the Partnership?s off-exchange-traded forward currency contracts and forward currency options 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. With respect to those off-exchange-traded forward currency options contracts, the Partnership is at risk to the ability of MSCG, the sole counterparty on all such contracts, to perform. The Partnership has a netting agreement with each counterparty. These agreements, which seek to reduce both the Partnership?s and the counterparties? exposure on off-exchange-traded forward currency contracts, including options on such contracts, should materially decrease the Partnership?s credit risk in the event of MS&Co.?s or MSCG?s bankruptcy or insolvency. MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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. 5. Derivative Instruments and Hedging Activities In March 2008, the FASB issued SFAS No. 161, ?Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133? (?SFAS No. 161?). SFAS No. 161 is intended to improve financial reporting about derivative MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand how those Instruments and activities are accounted for; how and why they are used; and their effects on a Partnership?s financial position, financial performance, and cash flows. SFAS No. 161 was effective as of January 1, 2009, for the Partnership. The Partnership?s objective is to profit from speculative trading in Futures Interests. Therefore, the Trading Advisors for the Partnership will take speculative positions in Futures Interests where they feel the best profit opportunities exist for their trading strategy. As such, the absolute quantity (the total of the open long and open short positions) has been presented as a part of the volume disclosure, as position direction is not an indicative factor in such volume disclosures. In regards to foreign currency forward trades, each notional quantity amount has been converted to an equivalent contract based upon an industry convention. The following table summarizes the valuation of the Partnership?s investments by the above SFAS No. 161 disclosure as of June 30, 2009 and reflects the contracts outstanding at such time. MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Effect of Trading Activities on the Statements of Financial Condition as of June 30, 2009: Futures and Forward Contracts Long Unrealized Gain Long L Unrealized Loss Short Unrealized Gain Short Unrealized Loss Net Unrealized Gain/(Loss) Total number of outstanding contracts $ $ $ $ $ June 30, 2009 Tr Commodity 5,253,378 (3,079,712) 1,844,836 (1,286,100) 2,732,402 4,742 K Equity 754,132 (379,328) 8,504 (109,725) 273,583 1,814 K Foreign currency 1,508,853 (1,374,214) 218,565 (711,226) (358,022) 6,435 K Interest rate 4,772,441 (348,631) 92,085 (816,809) 3,699,086 6,498 K Total 12,288,804 (5,181,885) 2,163,990 (2,923,860) 6,347,049 K Unrealized currency loss (1,076,009) K Total net unrealized gain on open contracts 5,271,040
The following tables summarize the net trading results of the Partnership during the three and six month periods as required by SFAS No. 161. The Effect of Trading Activities on the Statements of Operations for the Three and Six Months Ended June 30, 2009 included in Total Trading Results:
For the Three Months For the Six Months Ended June 30, 2009 Ended June 30, 2009 Type of Instrument $ $ Commodity 1,913,301 (8,091,616) K Equity 1,812,259 915,602 K Foreign currency (2,539,364) (11,199,226) K Interest rate (12,333,657) (14,679,365) K Unrealized currency gain 586,655 459,232 K Total (10,560,806) (32,595,373)
Line Items on the Statements of Operations for the Three and Six Months Ended June 30, 2009:
For the Three Months For the Six Months Ended June 30, 2009 Ended June 30, 2009 Trading Results $ $ Realized (12,468,788) (11,820,649) K Net change in unrealized 1,907,982 (20,774,724) K Total Trading Results (10,560,806) (32,595,373)
MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. Fair Value Measurements As defined by SFAS No. 157, ?Fair Value Measurements?, fair value is the amount that would be recovered when an asset is sold or an amount paid to transfer a liability, in an ordinary transaction between market participants at the measurement date (exit price). Market price observability is impacted by a number of factors, including the types of investments, the characteristics specific to the investment, and the state of the market (including the existence and the transparency of transactions between market participants). Investments with readily available actively quoted prices in an ordinary market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. SFAS No. 157 requires use of a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 ? unadjusted quoted market prices in active markets for identical assets and liabilities; Level 2 - inputs other than unadjusted quoted market prices that are observable for the asset or liability, either directly or indirectly (including quoted prices for similar investments, MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) interest rates, credit risk); and Level 3 - unobservable inputs for the asset or liability (including the Partnership?s own assumptions used in determining the fair value of investments). In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment?s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Partnership?s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The following tables summarize the valuation of the Partnership?s investments by the above SFAS No. 157 fair value hierarchy as of June 30, 2009 and December 31, 2008: MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2009 Assets Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Net unrealized gain (loss) on open contracts $6,536,720 $(1,265,680) n/a $5,271,040
December 31, 2008 Assets Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Net unrealized gain (loss) on open contracts $ $ $27,202,139 $(1,156,375) n/a $26,045,764
7. Recent Accounting Pronouncements (a) Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly In April 2009, the FASB issued FASB Staff Position (?FSP?) SFAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (?FSP SFAS No. 157-4?). FSP SFAS No. 157-4 provides additional guidance for determining fair value and requires new disclosures regarding the categories of fair value instruments, as well as the inputs and valuation techniques utilized to determine fair value and any changes to the inputs and valuation techniques during the period. FSP SFAS No. 157-4 is effective for the quarter ended June 30, 2009. The adoption of FSP SFAS No. 157-4 did not have a material MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) impact on the Partnership?s financial statements. (b) Interim Disclosures about Fair Value of Financial Instruments In April 2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principals Board (?APB?) No. 28-1, Interim Disclosures About Fair Value of Financial Instruments (?FSP SFAS No. 107-1? and ?APB No. 28-1?). The staff position requires fair value disclosures of financial instruments on a quarterly basis, as well as new disclosures regarding the methodology and significant assumptions underlying the fair value measures and any changes to the methodology and assumptions during the reporting period. FSP SFAS No. 107-1 and APB No. 28-1 are effective for the quarter ended June 30, 2009. The adoption of FSP SFAS No. 107-1 and APB No. 28-1 did not have a material impact on the Partnership?s financial statements. (c) Subsequent Events In May 2009, the FASB issued SFAS No. 165, Subsequent Events (?SFAS No. 165?). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date; that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS No. 165 is effective for the quarter ended June 30, 2009. Management has performed its evaluation of subsequent events through August 12, 2009, the date these financial statements were issued. (d) Accounting Standards Codification On June 29, 2009, the FASB issued Statement No. 168, ?FASB Accounting Standards Codification? and the Hierarchy of Generally Accepted Accounting Principles ? a replacement of FASB Statement No. 162. The FASB has stated that ?the FASB Accounting Standards Codification? (?Codification?) will become the source of authoritative U.S. Generally Accepted Accounting Principles (?GAAP?) recognized by the FASB to be applied by nongovernmental entities. Once effective, the Codification?s content will carry the same level of authority, effectively superseding Statement No. 162. In other words, the GAAP hierarchy will be modified to include only two levels of GAAP: authoritative and nonauthoritative. Statement No. 168 is effective for financial MORGAN STANLEY SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (CONCLUDED) statements issued for interim and annual periods ending after September 15, 2009. 8. Restricted and Unrestricted Cash As reflected on the Partnership?s Statements of Financial Condition, restricted cash equals the cash portion of assets on deposit to meet margin requirements plus the cash required to offset unrealized losses on foreign currency forwards and options and offset losses on offset LME positions. All of these amounts are maintained separately. Cash that is not classified as restricted cash is therefore classified as unrestricted cash. 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 - - 25 - 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 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 - - 26 - estimate the amount, and therefore the impact, of future outflows of Units. There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to the Partnership?s capital resource arrangements at the present time. 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 six month periods ended June 30, 2009 and 2008, 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 24 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 original contract value 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 Six Months Ended June 30, 2009 The Partnership recorded total trading results including interest income totaling $(10,445,856) and expenses totaling $10,444,027, resulting in a net loss of $20,889,883 for the three months ended June 30, 2009. The Partnership?s net asset value per Unit decreased from $38.40 at March 31, 2009, to $36.81 at June 30, 2009. The most significant trading losses of approximately 2.5% were incurred in the global fixed-income sector during April from long positions in U.S. and European fixed-income futures as prices reversed lower after a pledge from G-20 leaders to support the global economy sapped demand for the ?safe haven? of government bonds. Additional losses were recorded in June from long positions in short-term U.S. and European interest rate futures as prices declined amid rising investor confidence. Meanwhile, short positions in Japanese fixed-income futures resulted in losses, primarily during June, as prices increased after the Bank of Japan indicated that it remained cautious about the Japanese economy. Within the global equity index sector, losses of approximately 0.5% were recorded primarily during April from short futures positions in European equity index futures as prices rose amid better-than-expected corporate earnings reports and news that G-20 leaders pledged more than $1 trillion in emergency aid to cushion the global economy from further financial turmoil. Additional losses were experienced during June from newly established long positions in European equity index futures as prices reversed lower on speculation that the recent rally in the global stock markets might have outpaced the prospects for corporate earnings growth. Smaller losses of approximately 0.1% were incurred within the metals complex throughout a majority of the quarter from short futures positions in aluminum as prices increased on sentiment that efforts by the Chinese government to revive that nation?s economy might boost demand for base metals. Additional losses were incurred from long positions in gold futures as prices dropped in June due to a rise in the value of the U.S. dollar, which eroded demand for precious metals as an alternative investment. A portion of the Partnership?s losses for the quarter was offset by gains of approximately 0.3% in the currency sector, primarily during May, from long positions in the South African rand, Australian dollar, and New Zealand dollar versus the U.S. dollar as the value of the U.S. dollar moved lower against most of its rivals after a government report showed U.S. employers cut fewer jobs than forecasted, which reduced demand for the U.S. dollar as a ?safe haven? currency. Meanwhile, the value of the South African rand, Australian dollar, and New Zealand dollar increased in the wake of rising commodity prices. Within the energy markets, gains of approximately 0.3% were achieved primarily during May from long futures positions in gasoline and crude oil as prices rose on optimism that a possible rebound in global economic growth might boost energy demand. Smaller gains of 0.1% were experienced in the agricultural complex throughout a majority of the quarter from long futures positions in the soybean complex as prices moved higher on news of record imports in China, the world?s largest purchaser. Elsewhere, short positions in lean hog futures resulted in gains as prices fell in April and June on speculation that demand for U.S. pork products might remain sluggish amid ongoing swine flu concerns. Further gains in the agricultural complex were recorded from long positions in sugar futures as prices moved higher in May and June after the U.S. Department of Agriculture said global output might fall more than previously forecast. The Partnership recorded total trading results including interest income totaling $(32,330,257) and expenses totaling $22,857,573, resulting in a net loss of $55,187,830 for the six months ended June 30, 2009. The Partnership?s net asset value per Unit decreased from $40.80 at December 31, 2008, to $36.81 at June 30, 2009. The most significant trading losses of approximately 2.8% were recorded in the global fixed-income sector during January, March, and April from long positions in U.S., European, and Japanese fixed-income futures as prices dropped following news that debt sales might increase as governments around the world boosted spending in an effort to ease the deepening economic slump. Additional losses were recorded in June from long positions in short-term U.S. and European interest rate futures as prices declined amid rising investor confidence due to better- than-expected economic data. Meanwhile, newly established short positions in Japanese fixed-income futures resulted in losses, primarily during June, as prices increased after the Bank of Japan indicated that it remained cautious about the Japanese economy. Within the currency markets, losses of approximately 1.2% were incurred primarily during March from short positions in the Swiss franc, euro, and Canadian dollar versus the U.S. dollar as the value of the U.S. dollar decreased relative to most of its rivals following the U.S. Federal Reserve?s surprise plans to begin a more aggressive phase of quantitative easing and economic stimulus spending. Additional losses were recorded during June from long positions in Swiss franc, euro, and Canadian dollar versus the U.S. dollar as the value of the U.S. dollar reversed higher against these currencies amid speculation that the U.S. Federal Reserve might raise interest rates following news that U.S. payrolls fell less-than-expected in May. Elsewhere, losses were recorded during January, February, and June from long positions in the Japanese yen versus the U.S. dollar as the value of the Japanese yen reversed lower against most of its rivals on speculation that the Bank of Japan might intervene to weaken the currency, as well as on news that Japan?s trade deficit substantially increased. Additional losses of approximately 1.1% were experienced in the agricultural complex primarily during March from short futures positions in the corn and coffee as prices rose on speculation that government bailouts might help revive the world economy and boost demand for these commodities. During June, coffee futures prices fell amid expectations of higher global output due to favorable weather conditions in the world?s major growing regions, thus resulting in losses from long positions. Elsewhere in the agricultural complex, long positions in cocoa and wheat futures resulted in losses as prices dropped during June amid speculation that supplies might exceed demand due to the economic slowdown. Within the metals complex, losses of approximately 0.7% were experienced during late February, March, and June from long positions in gold futures as prices fell amid a rebound in the global equity markets and a rise in the value of the U.S. dollar, which eroded demand for precious metals as an alternative investment. Meanwhile, short futures positions in zinc and aluminum resulted in further losses as prices reversed higher during February, March, and June on speculation that economic stimulus plans in the U.S. and China would help boost demand for base metals. Smaller losses of approximately 0.7% were experienced within the global equity index sector, primarily during March and April, from short futures positions in U.S. and European equity index futures as prices rose amid better- than-expected corporate earnings reports and news that G-20 leaders pledged more than $1 trillion in emergency aid to cushion the global economy from further financial turmoil. Additional losses were experienced during June from newly established long positions in European equity index futures as prices reversed lower on speculation that the recent rally in the global stock markets might have outpaced the prospects for corporate earnings growth. A portion of the Partnership?s losses for the first six months of the year was offset by gains of approximately 0.4% experienced within the energy markets throughout the first quarter and April from short futures positions in natural gas as prices moved lower amid speculation that the ongoing global economic recession might continue to erode energy demand. Further gains were achieved primarily during May from long futures positions in gasoline as prices rose on optimism that a possible rebound in global economic growth might boost energy demand. For the Three and Six Months Ended June 30, 2008 The Partnership recorded total trading results including interest income totaling $69,168,052 and expenses totaling $16,771,581, resulting in net income of $52,396,471 for the three months ended June 30, 2008. The Partnership?s net asset value per Unit increased from $35.32 at March 31, 2008, to $38.63 at June 30, 2008. The most significant trading gains of approximately 9.7% were experienced in the energy markets throughout the quarter from long futures positions in crude oil and its related products as prices moved higher due to supply threats in Nigeria and Iraq, growing Asian fuel consumption, and concerns of a U.S. supply shortage. Elsewhere, long positions in natural gas futures resulted in gains as prices rose after U.S. inventories declined to the lowest level since 2005 amid forecasts for warmer weather throughout the United States. Furthermore, futures prices for crude oil, its related products, and natural gas were also pressured higher due to continued weakness in the U.S. dollar. Additional gains of approximately 0.9% were recorded in the global interest rate sector primarily during May and June from short positions in European fixed-income futures as prices moved lower due to reports of accelerating inflation in the Euro-Zone. Gains of approximately 0.8% were also recorded in the global stock index sector primarily during June from short positions in European equity index futures as prices declined sharply on concerns that record commodity prices and additional subprime- related writedowns might erode corporate earnings and continue to slow global economic growth. In addition, prices were pressured lower after government reports revealed an unexpected drop in Germany?s consumer confidence and a continued housing slump in the United Kingdom. Smaller gains of approximately 0.6% were experienced in the agricultural markets primarily during June from long futures positions in corn and the soybean complex as prices moved higher on supply concerns after severe floods in the U.S. Midwest damaged crops. In addition, corn futures prices moved higher due to strong demand for ethanol. Elsewhere, long positions in cocoa futures resulted in gains during June as prices rose to the highest level since 1986 on fears that dry weather would damage crops in the Ivory Coast, the world?s largest producer. A portion of the Partnership?s gains for the quarter was offset by losses of approximately 0.2% in the currency sector primarily from long positions in the Swiss franc and euro versus the U.S. dollar as the value of the U.S. dollar strengthened against these currencies during April after the release of stronger-than-expected U.S. economic reports. Meanwhile, short positions in the Canadian dollar versus the U.S. dollar resulted in losses primarily during April as the value of the Canadian dollar moved higher against the U.S. dollar amid rising energy prices. The Partnership recorded total trading results including interest income totaling $154,085,739 and expenses totaling $33,961,458, resulting in net income of $120,124,281 for the six months ended June 30, 2008. The Partnership?s net asset value per Unit increased from $31.24 at December 31, 2007, to $38.63 at June 30, 2008. The most significant trading gains of approximately 10.5% were recorded in the energy sector primarily throughout a majority of the first six months of the year from long futures positions in crude oil and its related products as prices moved higher amid increasing global supply concerns and strong demand in Asia. Elsewhere, long positions in natural gas futures resulted in gains during April, May, and June as prices rose after U.S. inventories declined to the lowest level since 2005. Furthermore, futures prices for crude oil, its related products, and natural gas were also pressured higher due to continued weakness in the U.S. dollar. Additional gains of approximately 5.7% were experienced in the agricultural sector primarily during January, February, and June from long positions in corn futures as prices moved higher on supply concerns and rising demand for alternative fuels made from crops. Meanwhile, long futures positions in the soybean complex resulted in gains primarily during June as prices increased after a government report showed a rise in demand for U.S. supplies following labor disputes that slowed exports from Argentina and Brazil. Elsewhere, gains were experienced from long positions in cocoa futures primarily during January, February, and June as prices moved higher amid supply disruptions in the Ivory Coast, the world?s largest producer. Gains of approximately 3.9% were also recorded within the global interest rate sector primarily during January and February from long positions in U.S. fixed-income futures as prices moved higher amid a sharp decline in global equity markets and fears of a recession in the United States. During May and June, gains were recorded from short positions in European fixed-income futures as prices decreased after the European Central Bank left its benchmark interest rate unchanged at 4.0% and signaled it might raise borrowing costs in July in order to combat accelerating inflation in the Euro-Zone. Within the currency sector, gains of approximately 3.1% were recorded primarily during February, March, and May from short positions in the U.S. dollar versus the euro, Swiss franc, Brazilian real, and Mexican peso as the value of the U.S. dollar weakened against most of its major rivals after U.S. government reports showed a rise in unemployment, weaker-than-expected U.S. retail sales, and U.S. consumer confidence at a 16-year low. The value of the U.S. dollar continued to fall in June after the U.S. Federal Reserve held interest rates steady at 2.0%. Smaller gains of approximately 2.5% were experienced in the global stock index sector primarily during January, February, March, and June from short positions in European and Pacific Rim equity index futures as prices decreased on concerns that mounting losses linked to U.S. sub-prime mortgage investments might continue to erode corporate earnings and curb global economic growth. Lastly, gains of approximately 1.9% were recorded in the metals markets primarily during January and February from long positions in gold, silver, and platinum futures as prices moved higher amid continued uncertainty in the direction of the U.S. dollar and further ?safe haven? buying because of weakness in global equity markets. Elsewhere, long positions in tin futures experienced gains primarily during February as prices moved higher on supply concerns and rising demand from China and India. Meanwhile, short positions in nickel futures resulted in gains during May as prices fell amid rising inventories. 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 June 30, 2009 and 2008. At June 30, 2009 and 2008, the Partnership?s total capitalization was approximately $476 million and $601 million, respectively. Primary Market June 30, 2009 June 30, 2008 Risk Category Value at Risk Value at Risk Equity (0.81)% (0.59)% Currency (0.56) (0.76) Interest Rate (0.25) (0.39) Commodity (0.94) (1.69) Aggregate Value at Risk (1.95)% (1.94)% 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 July 1, 2008, through June 30, 2009. Primary Market Risk Category High Low Average Equity (0.81)% (0.03)% (0.41)% Currency (0.76) (0.10) (0.41) Interest Rate (0.71) (0.25) (0.44) Commodity (1.69) (0.27) (0.80) Aggregate Value at Risk (1.95)% (0.57)% (1.31)% 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 June 30, 2009 and 2008, and for the four quarter-end reporting periods from July 1, 2008 through June 30, 2009. 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 June 30, 2009, such amount was equal to approximately 94% 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. The Trading Advisors, in general, tend to utilize their trading system(s) to take positions when market opportunities develop, and Demeter anticipates that the Trading Advisors will continue to do so. 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 June 30, 2009, by market sector. It may be anticipated, however, that these market exposures will vary materially over time. Equity. The second largest market exposure of the Partnership at June 30, 2009, was to the global stock index sector, primarily to equity price risk in the G-7 countries. The G-7 countries consist of France, the U.S., the United Kingdom, Germany, Japan, Italy, and Canada. 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 Nikkei 225 (Japan), IBEX 35 (Spain), S&P 500 (U.S.), TOPIX (Japan), NASDAQ 100 (U.S.), Euro Stox 50 (Europe), Hang Seng (Hong Kong), DAX (Germany), CAC 40 (France), S&P/MIB (Italy), H-Shares (Hong Kong), FTSE 100 (United Kingdom), Dow Jones (U.S.), OMX 30 (Sweden), and SPI 200 (Australia) stock indices. The Partnership is typically exposed to the risk of adverse price trends or static markets in the European, U.S., Asian, South African, 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. Currency. At June 30, 2009, the Partnership had market exposure 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 June 30, 2009, the Partnership?s major exposures were to the euro, Japanese yen, British pound, Australian dollar, Canadian dollar, Swiss franc, New Zealand dollar, 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. Interest Rate. At June 30, 2009, the Partnership had market exposure to the global interest rate sector. Exposure was primarily spread across the European, Japanese, U.S., 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. 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. Commodity. Energy. The largest market exposure of the Partnership at June 30, 2009, was to the energy sector. The Partnership?s energy exposure was shared primarily by futures contracts in crude oil and its related products, as well as in 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. Soft Commodities and Agriculturals. The third largest market exposure of the Partnership at June 30, 2009, was to the markets that comprise these sectors. Most of the exposure was to the sugar, wheat, soybean meal, corn, soybean oil, cocoa, lean hogs, coffee, live cattle, feeder cattle, soybeans, orange juice, rubber, and cotton markets. Supply and demand inequalities, severe weather disruptions, and market expectations affect price movements in these markets. Metals. At June 30, 2009, the Partnership had market exposure to the metals sector. The Partnership's metals exposure was to fluctuations in the price of base metals, such as copper, nickel, aluminum, zinc, lead, and tin, as well as precious metals, such as silver, gold, and palladium. Economic forces, supply and demand inequalities, geopolitical factors, and market expectations influence 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 June 30, 2009: Foreign Currency Balances. The Partnership?s primary foreign currency balances at June 30, 2009, were in euros, Australian dollars, Japanese yen, British pounds, South African rands, Hong Kong dollars, Swedish kronor, Czech koruny, New Zealand dollars, Canadian dollars, Hungarian forint, Singapore dollars, Swiss francs, and Norwegian kroner. 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 market sectors and trading approaches through the selection of Commodity Trading Advisors and by daily monitoring their performance. In addition, the Trading Advisors establish diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument. 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 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. Changes in Internal Control over Financial Reporting 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. Limitations on the Effectiveness of Controls Any control system, no matter how well designed and operated, can provide reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. 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, 2008, and the Partnership?s Report on Form 10Q for the quarter ended March 31, 2009. Item 6. EXHIBITS 31.01 Certification of President of Demeter Management LLC, the general partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.02 Certification of Chief Financial Officer of Demeter Management LLC, 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 LLC, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.02 Certification of Chief Financial Officer of Demeter Management LLC, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - - 54 - 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 LLC (General Partner) August 12, 2009 By:/s/ Christian Angstadt Christian Angstadt 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. - - 55 - - - 24 - - - 53 - EX-2 2 dwsfex3102.txt EXHIBIT EXHIBIT 31.02 CERTIFICATIONS I, Christian Angstadt, 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: August 12, 2009 By: /s/ Christian Angstadt Christian Angstadt Chief Financial Officer, Demeter Management LLC, general partner of the registrant EX-3 3 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 June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the ?Report?), I, Walter Davis, President of Demeter Management LLC, 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 LLC, the general partner of the Partnership Date: August 12, 2009 EX-4 4 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 June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the ?Report?), I, Christian Angstadt, Chief Financial Officer of Demeter Management LLC, 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/ Christian Angstadt Name: Christian Angstadt Title: Chief Financial Officer of Demeter Management LLC, the general partner of the Partnership Date: August 12, 2009 EX-1 5 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: August 12, 2009 By: /s/ Walter Davis Walter Davis President, Demeter Management LLC, general partner of the registrant -----END PRIVACY-ENHANCED MESSAGE-----