10-K 1 dws.txt DWSF UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the year ended December 31, 2006 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] 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 Limited Partnership Agreement) DELAWARE 13-3619290 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Demeter Management Corporation 330 Madison Avenue, 8th Floor New York, NY 10017 (Address of principal executive offices) (Zip Code) Registrant?s telephone number, including area code (212) 905-2700 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No X Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant?s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions 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 Act). Yes No X State the aggregate market value of the Units of Limited Partnership Interest held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which Units were sold as of the last business day of the registrant?s most recently completed second fiscal quarter: $558,553,514 at June 30, 2006. DOCUMENTS INCORPORATED BY REFERENCE (See Page 1) MORGAN STANLEY SPECTRUM SELECT L.P. INDEX TO ANNUAL REPORT ON FORM 10-K DECEMBER 31, 2006
Page No. DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . . . 1 Part I . Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . .2?6 Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . .6 Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . .6 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . 7 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 7 Item 4. Submission of Matters to a Vote of Security Holders. . . .7 Part II. Item 5. Market for Registrant's Partnership Units and Related Security Holder Matters . . . . . . . . . . 8-10 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . 12?33 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . .33-47 Item 8. Financial Statements and Supplementary Data. . . . . . . .48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . .48 Item 9A. Controls and Procedures . . . . . . . . . . . . . . . .48-51 Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . 51 Part III. Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . 52-59 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . .60 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Security Holder Matters . . . .60 Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . .60-61 Item 14. Principal Accountant Fees and Services . . . . . . . . 61-62 Part IV. Item 15. Exhibits and Financial Statement Schedules . . . . . . 63?64
DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference as follows: Documents Incorporated Part of Form 10-K Partnership?s Prospectus dated May 1, 2006 I Partnership's Supplement to the Prospectus dated January 18, 2007 I Annual Report to Morgan Stanley Spectrum Series Limited Partners for the year ended December 31, 2006 II, III, and IV PART I Item 1. BUSINESS (a) General Development of Business. Morgan Stanley Spectrum Select L.P. (the "Partnership") 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 commenced trading operations on August 1, 1991. 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. (collectively, the ?Spectrum Series?). The Partnership?s general partner is Demeter Management Corporation (?Demeter?). The non-clearing commodity broker is Morgan Stanley DW Inc. (?Morgan Stanley DW?). The clearing commodity brokers are Morgan Stanley & Co. Incorporated (?MS&Co.?) and Morgan Stanley & Co. International Limited (?MSIL?). MS&Co. acts as the counterparty on all of the foreign currency forward contracts. In 2007, Morgan Stanley intends to merge Morgan Stanley DW into MS&Co. Upon completion of the merger, the surviving entity, MS&Co., will be the Partnership?s principal U.S. commodity broker-dealer. Demeter, Morgan Stanley DW, MS&Co., and MSIL are wholly-owned subsidiaries of Morgan Stanley. The trading advisors to the Partnership are EMC Capital Management, Inc. (?EMC?), Northfield Trading L.P., Rabar Market Research, Inc. (?Rabar?), Sunrise Capital Management, Inc. (?Sunrise?), and Graham Capital Management, L.P. (?Graham?) (each individually, a ?Trading Advisor?, or collectively, the ?Trading Advisors?). Effective February 1, 2007, subscriptions are allocated among the Trading Advisors as follows: EMC (10%), Rabar (30%), Sunrise (30%), and Graham (30%); redemptions are allocated as follows: Rabar (33.33%), Sunrise (33.33%), and Graham (33.33%). Units of limited partnership interest (?Unit(s)?) are 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 managing underwriter for the Partnership is Morgan Stanley DW. The Partnership began the year at a net asset value per Unit of $27.45 and returned 5.9% to $29.06 on December 31, 2006. For a more detailed description of the Partnership's business, see subparagraph (c). (b) Financial Information about Segments. For financial infor- mation reporting purposes, the Partnership is deemed to engage in one industry segment, the speculative trading of futures, forwards, and options on such contracts. The relevant financial information is presented in Items 6 and 8. (c) Narrative Description of Business. The Partnership is in the business of speculative trading of futures, forwards, and options pursuant to trading instructions provided by the Trading Advisors. For a detailed description of the different facets of the Partnership's business, see those portions of the Partnership's prospectus, dated May 1, 2006 (the ?Prospectus?), and the Partnership's supplement to the Prospectus dated January 18, 2007 (the "Supplement"), incorporated by reference in this Form 10-K, set forth below. Facets of Business 1. Summary 1. "Summary" (Pages 1-9 of the Prospectus and Page S-1 of the Supplement). 2. Futures, Options, and 2. "The Futures, Options, and Forwards Markets Forwards Markets" (Pages 150-154 of the Prospectus). 3. Partnership?s Trading 3. ?Use of Proceeds? (Pages 29-31 Arrangements and of the Prospectus and Page Policies S-5 of the Supplement), ?The Trading Advisors? (Pages 78- 126 of the Prospectus and Pages S-33 ? S-39 of the Supplement). 4. Management of the Part- 4. ?The Trading Advisors ? nership Management Agreements? (Page 78 of the Prospectus), ?The General Partner? (Pages 75- 77 of the Prospectus and Page S-32 of the Supple- ment), ?The Commodity Brokers? (Pages 129-130 of the Prospectus) and ?The Limited Partnership Agree- ments? (Pages 133-136 of the Prospectus and page S-41 of the Supplement). 5. Taxation of the Partner- 5. ?Material Federal Income Tax ship?s Limited Partners Considerations? and ?State and Local Income Tax Aspects? (Pages 142-148 of the Prospectus and Page S-41 of the Supplement). (d) Financial Information about Geographic Areas. The Partnership has not engaged in any operations in foreign countries; however, the Partnership (through the commodity brokers) enters into forward contract transactions where foreign banks are the contracting party and trades futures, forwards, and options on foreign exchanges. (e) Available Information. The Partnership files an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports with the Securities and Exchange Commission (?SEC?). You may read and copy any document filed by the Partnership at the SEC?s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. The Partnership does not maintain an internet website, however, the SEC maintains a website that contains annual, quarterly, and current reports, proxy statements, and other information that issuers (including the Partnership) file electronically with the SEC. The SEC?s website address is http://www.sec.gov. Item 1A. RISK FACTORS The Partnership is in the business of speculative trading of futures, forwards, and options. For a detailed description of the risks that may affect the business of the Partnership or the limited partnership interests offered by the Partnership, see those portions of the Partnership?s Prospectus dated May 1, 2006, and the Partnership?s Supplement dated January 18, 2007, incorporated by reference in this Form 10-K, set forth in the ?Risk Factors? section of the Prospectus at pages 10-15 and the ?Risk Factors? section of the Supplement at pages S-2?S-4. Item 1B. UNRESOLVED STAFF COMMENTS Not applicable. Item 2. PROPERTIES The Partnership?s executive and administrative offices are located within the offices of Morgan Stanley DW. The Morgan Stanley DW offices utilized by the Partnership are located at 330 Madison Avenue, 8th Floor, New York, NY 10017. Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II Item 5. MARKET FOR REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS (a) Market Information. There is no established public trading market for Units of the Partnership. (b) Holders. The number of holders of Units at December 31, 2006, was approximately 44,664. (c) Distributions. No distributions have been made by the Partnership since it commenced trading operations on August 1, 1991. Demeter has sole discretion to decide what distributions, if any, shall be made to investors in the Partnership. Demeter currently does not intend to make any distributions of the Partnership?s profits. (d) Securities Sold; Consideration. 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 December 31, 2006, was $932,307,794. (e) Underwriter. The managing underwriter for the Partnership is Morgan Stanley DW. (f) 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, when the Partnership became 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 27,210,537.693 Units unsold through 12/31/06 14,789,462.307 Total Units sold through 12/31/06 41,824,504.793 (pre and post conversion) 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 and the Supplement included as part of the above referenced Registration Statements. Item 6. SELECTED FINANCIAL DATA (in dollars)
For the Years Ended December 31, __ 2006 2005 2004 2003 2002 . Total Trading Results including interest income 79,402,767 23,039,815 33,923,907 74,213,042 67,605,728 Net Income (Loss) 31,117,372 (29,214,513) (23,311,900) 34,186,905 40,823,199 Net Income (Loss) Per Unit (Limited & General Partners) 1.61 (1.43) (1.43) 2.66 3.69 Total Assets 555,435,805 550,467,763 595,823,205 449,549,242 299,604,379 Total Limited Partners' Capital 537,667,844 527,198,790 579,155,164 436,666,633 292,226,000 Net Asset Value Per Unit 29.06 27.45 28.88 30.31 27.65
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity. The Partnership deposits its assets with Morgan Stanley DW as non-clearing broker, and MS&Co. and MSIL as clearing brokers in separate futures, forwards, and options trading accounts established for each Trading Advisor. Such assets are used as margin to engage in trading and may be used as margin solely for the Partnership?s trading. The assets are held in either non- interest bearing bank accounts or in securities and instruments permitted by the Commodity Futures Trading Commission 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 affect 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 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. 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, forwards, and options markets. The following presents a summary of the Partnership's operations for each of the three years in the period ended December 31, 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 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, along with the ?Proceeds from Litigation Settlement?, 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. The Partnership recorded total trading results including interest income totaling $79,402,767 and expenses totaling $48,285,395, resulting in net income of $31,117,372 for the year ended December 31, 2006. The Partnership?s net asset value per Unit increased from $27.45 at December 31, 2005, to $29.06 at December 31, 2006. Total redemptions and subscriptions for the year were $97,503,224 and $76,905,995, respectively, and the Partnership?s ending capital was $543,522,485 at December 31, 2006, an increase of $10,520,143 from ending capital at December 31, 2005, of $533,002,342. The most significant trading gains of approximately 6.1% 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. Further gains in the metals markets were experienced from long positions in gold and silver futures as prices reached 25-year highs, benefiting from strong demand and lagging supply. Demand for precious metals increased on continued geopolitical concerns, inflation fears, and consistent demand from foreign central banks. In addition, silver prices were pressured higher after news that a silver- backed Exchange Traded Fund would launch. Gains were extended during October from long positions in base metals as prices continued to trend higher amid labor protests in producer countries and news that inventories had declined more than expected. Additionally, prices were pressured higher after the National Bureau of Statistics said that China's industrial production had increased significantly from a year earlier, reaffirming expectations that demand from China would stay strong. Additional gains of approximately 5.6% were recorded within the global stock index markets from long positions in European, U.S., and Pacific Rim 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 and July on positive performance in the technology sector, speculation that the U.S. Federal Reserve could be near the end of its interest rate tightening campaign, and news that Gross Domestic Product in China had surged to 10.9% in the first six months of the year. Further 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 solid corporate earnings. During the fourth quarter, further gains were recorded from long positions in U.S., European, and Pacific Rim equity index futures as prices continued to move higher amid the U.S. Federal Reserve?s decision to hold interest rates steady, consistent merger and acquisition activity, and news of the world?s largest initial public offering in China. Smaller gains of approximately 1.3% were experienced within the global interest rates sector, primarily during March and April, from short positions in U.S. and European 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 and the European Union might rise in order to combat inflation. U.S. fixed-income futures continued to move lower into the second quarter following the release of consistently strong U.S. economic data resulting in further gains from short positions. Finally, during November, gains were recorded from long positions in U.S. fixed-income futures as prices moved higher on new concerns of a slowing U.S. economy after reports showed an increase in jobless claims, while consumer sentiment unexpectedly weakened. A portion of the Partnership?s overall gains for the year was offset by losses of approximately 1.7% in the agricultural markets from positions in wheat, soybeans, and cocoa futures. Long positions in wheat futures incurred losses 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. 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. Further losses in the agricultural markets were experienced during October, November, and December from both short and long positions in the soybean complex as prices moved without consistent direction due to conflicting news regarding supply and demand. Smaller losses of approximately 1.1% were incurred within the energy markets throughout 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 an announcement by Chinese government authorities that China would place an emphasis on prospecting alternative energy sources in the future, reports of larger than expected supplies, and mild weather in the U.S. Northeast. Further losses were recorded during March from short futures positions in crude oil and its related products 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 inventories. Further losses were 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 also 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. In addition, prices were pressured lower after news of an official cease-fire between Israel and Hezbollah militants in Lebanon and news that OPEC had reduced its 2006 oil demand growth forecast. Finally, during November, losses were incurred from newly established short positions in crude oil futures and its related products as prices moved higher amid concern over OPEC's production cut after the U.S. Department of Energy reported a sharp fall in domestic inventories. The Partnership recorded total trading results including interest income totaling $23,039,815 and expenses totaling $52,254,328, resulting in a net loss of $29,214,513 for the year ended December 31, 2005. The Partnership?s net asset value per Unit decreased from $28.88 at December 31, 2004, to $27.45 at December 31, 2005. Total redemptions and subscriptions for the year were $115,415,285 and $92,326,015, respectively, and the Partnership?s ending capital was $533,002,342 at December 31, 2005, a decrease of $52,303,783 from ending capital at December 31, 2004, of $585,306,125. The most significant trading losses of approximately 5.5% were recorded in the currency markets during the first and third quarters, as well as during December, from positions in foreign currencies versus the U.S. dollar. During January, long positions in the euro versus the U.S. dollar incurred losses after the U.S. dollar?s value reversed sharply higher amid conflicting economic data, improvements in U.S. trade deficit numbers, and speculation for higher U.S. interest rates. The U.S. dollar?s value also advanced in response to expectations that the Chinese government would announce postponement of Chinese yuan re-valuation for the foreseeable future. Additional losses were recorded during February from short positions in the euro versus the U.S. dollar as the U.S. dollar weakened in response to concern for the considerable U.S. Current-Account deficit expressed by U.S. Federal Reserve Chairman Alan Greenspan. The value of the U.S. dollar was further weakened during the remainder of February by a larger than expected drop in January leading economic indicators and news that South Korea?s Central Bank would be reducing its U.S. dollar currency reserves. Long European currency positions versus the U.S. dollar also recorded losses during March after the value of the U.S. dollar reversed sharply higher benefiting from higher U.S. interest rates and consumer prices. During August, long U.S. dollar positions against the British pound and euro resulted in losses as the value of the U.S. dollar declined amid higher crude oil prices, lower durable goods orders, the U.S. trade imbalance, and economic warnings from U.S. Federal Reserve Chairman Alan Greenspan. During December, the largest losses were incurred from long U.S. dollar positions versus the euro after the euro?s value increased during mid-month on the possibility that the European Central Bank would raise interest rates in 2006. Additional losses resulted from long U.S. dollar positions versus the South African rand and both the Australian and the New Zealand dollars as their values reversed higher with gold prices. Sector losses also stemmed from short U.S. dollar positions against the British pound. Partnership losses of approximately 0.9% were recorded in the global interest rate markets primarily during the third quarter from long positions in U.S. interest rate futures. During July, long positions experienced losses as prices declined following a rise in interest rates and after the U.S. Labor Department released its June employment report. During September, long positions incurred additional losses as prices weakened after it was revealed that Hurricane Katrina?s economic impact was not significant enough to deter the U.S. Federal Reserve from its policy of raising interest rates. Smaller Partnership losses of approximately 0.6% were incurred in the agricultural markets primarily during the second and third quarters from long futures positions in wheat and corn. During April, long futures positions in wheat resulted in losses as prices fell in response to favorable weather in growing regions and reduced foreign demand. During July and August, long positions in corn futures experienced losses after prices weakened in response to higher silo rates and forecasts for supply increases. A portion of the Partnership?s overall losses for the year was offset by gains of approximately 4.4% established in the global stock index markets during the third and fourth quarters from positions in Japanese and European stock index futures. During July, long positions in Pacific Rim and European stock index futures benefited after positive economic data out of the U.S. and Japan pushed global equity prices higher. Prices continued to strengthen after China reformed its U.S. dollar currency peg policy. Strong corporate earnings out of the European Union, Japan, and the U.S. resulted in optimistic investor sentiment and pushed prices further. During September, long positions in Japanese stock index futures experienced gains as prices increased on positive comments from Bank of Japan Governor Toshihiko Fukui, who said the Japanese economy was in the process of emerging from a soft patch. Additional sector gains resulted from long positions in European stock index futures as oil prices declined and investors embraced signs that the global economy could move forward despite Hurricane Katrina's devastation of the U.S. Gulf Coast. During the fourth quarter, long positions in Japanese and European stock index futures supplied gains as prices increased in response to falling energy prices, strong corporate earnings, and positive economic data out of the U.S. European stock markets also found support from the possibility of an end to U.S. interest rate increases. Partnership gains of approximately 3.3% were recorded in metals during the third and fourth quarters from long futures positions in copper, aluminum, and zinc as prices strengthened amid supply tightness and strong demand from China, India, and the Middle East. In the energy markets, gains of approximately 1.0% were achieved primarily during August from long futures positions in natural gas and crude oil and its related products as prices rose on supply and demand concerns. After Hurricane Katrina struck the Gulf of Mexico, prices advanced further to touch record highs. The Partnership recorded total trading results including interest income totaling $33,923,907 and expenses totaling $57,235,807, resulting in a net loss of $23,311,900 for the year ended December 31, 2004. The Partnership?s net asset value per Unit decreased from $30.31 at December 31, 2003, to $28.88 at December 31, 2004. Total redemptions and subscriptions for the year were $43,132,131 and $210,227,672, respectively, and the Partnership?s ending capital was $585,306,125 at December 31, 2004, an increase of $143,783,641 from ending capital at December 31, 2003, of $441,522,484. The most significant trading gains of approximately 4.7% were recorded in the energy markets, primarily during February, May, throughout the third quarter, and in October, from long futures positions in crude oil and its related products as prices advanced upwards amid concerns for market supply, falling inventory levels, and heavy market demand. Additional Partnership gains of approximately 1.7% achieved in the agricultural markets, primarily during the first quarter, resulted from long futures positions in corn, soybeans, and soybean-related products as prices for these commodities finished higher amid strong, steady demand from Asia. In the metals markets, gains of approximately 1.5% were recorded primarily during the first quarter from long futures positions in base metals as prices moved higher in response to increased demand from China coupled with a weaker U.S. dollar. Long futures positions in industrial metals held during October were also profitable due to the drop in the U.S. dollar prompted by the investment community?s perception that the Bush Administration would not take steps to stem the U.S. dollar?s decline. Relatively smaller Partnership gains of approximately 0.8% resulted from trading in the currency markets, primarily during October and November. Long positions in the euro and Swiss franc versus the U.S. dollar benefited from a declining U.S. dollar trend triggered by prospects for lower U.S. interest rates, higher oil prices, concern for the growing U.S. Current-Account deficit, and beliefs that the Bush Administration would not act to curb the decline in the U.S. dollar. A portion of the Partnership?s overall gains for the year was offset by losses of approximately 2.5% incurred in the global interest rate sector, particularly during the second and third quarters, from positions in U.S. and Australian interest rate futures. During January, long positions in U.S. interest rate futures experienced losses as prices declined following comments from the U.S. Federal Reserve concerning a shift in the U.S. Federal Reserve?s interest rate policy. Short positions in Australian interest rate futures deepened sector losses as prices reversed higher during the final week of January. During April, long U.S. interest rate futures positions incurred losses as prices tumbled following the release of stronger than expected U.S. jobs data. During May, short positions in global bond futures experienced losses as prices moved higher during the latter half of the month due to uncertainty in global equity prices, weaker than expected economic data, stronger energy prices, and geopolitical concerns. During June, short positions experienced losses as prices rallied on weaker than expected economic reports and expectations that the U.S. Federal Reserve would not aggressively tighten U.S. interest rates. During July, short positions in U.S. interest rate futures recorded losses as prices moved higher after the release of disappointing U.S. unemployment data. Additional losses were incurred from newly established long U.S. interest rate futures positions after prices moved lower following U.S. Federal Reserve Chairman Alan Greenspan?s upbeat assessment of the U.S. economy. During September, long positions in U.S. interest rate futures resulted in losses as prices declined due to expectations for rising U.S. interest rates prompted by the release of positive U.S. economic data. Smaller Partnership losses of approximately 0.4% resulted from trading in the global stock index sector, primarily during the second and third quarters, via positions in Asian equity index futures. During the second quarter, long positions in these markets incurred losses as global equity prices were negatively impacted by geopolitical concerns and expanding energy prices. Newly established short Asian equity index positions experienced losses as prices rebounded during the second quarter amid a slight pullback in oil prices and strong earnings from technology companies. During the third quarter, long Asian equity index positions experienced losses as prices reversed lower due to the release of disappointing U.S. employment data, surging energy prices, and new warnings concerning potential terrorist attacks. For an analysis of unrealized gains and (losses) by contract type and a further description of 2006 trading results, refer to the Partnership?s Annual Report to Limited Partners for the year ended December 31, 2006, which is incorporated by reference to Exhibit 13.01 of this Form 10-K. The Partnership's gains and losses are allocated among its partners for income tax purposes. 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. Market Risk. The Partnership is a party to financial instruments with elements of off-balance sheet market and credit risk. 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. In entering into these contracts, the Partnership is subject to the market risk that such contracts may be significantly influenced by market conditions, such as interest rate volatility, resulting in such contracts being less valuable. If the markets should move against all of the positions held by the Partnership at the same time, and the Trading Advisors were unable to offset positions of the Partnership, the Partnership could lose all of its assets and the limited partners would realize a 100% loss. In addition to the Trading Advisors? internal controls, the Trading Advisors must comply with the Partnership?s trading policies that include standards for liquidity and leverage that must be maintained. The Trading Advisors and Demeter monitor the Partnership's trading activities to ensure compliance with the trading policies and Demeter can require the Trading Advisors to modify positions of the Partnership if Demeter believes they violate the Partnership's trading policies. Credit Risk. In addition to market risk, in entering into futures, forward, and options contracts, there is a credit risk to the Partnership that the counterparty on a contract will not be able to meet its obligations to the Partnership. The ultimate counterparty or guarantor of the Partnership for futures, forward, and options contracts traded in the United States and most foreign exchanges on which the Partnership trades is the clearinghouse associated with such exchange. In general, a clearinghouse is backed by the membership of the exchange and will act in the event of non- performance by one of its members or one of its member?s customers, which should significantly reduce this credit risk. There is no assurance that a clearinghouse, exchange, or other exchange member will meet its obligations to the Partnership, and Demeter and the commodity brokers will not indemnify the Partnership against a default by such parties. Further, the law is unclear as to whether a commodity broker has any obligation to protect its customers from loss in the event of an exchange or clearinghouse defaulting on trades affected for the broker?s customers. In cases where the Partnership trades off-exchange forward contracts with a counterparty, the sole recourse of the Partnership will be the forward contract?s counterparty. Demeter deals with these credit risks of the Partnership in several ways. First, Demeter monitors the Partnership?s credit exposure to each exchange on a daily basis. The commodity brokers inform the Partnership, as with all their customers, of the Partnership?s net margin requirements for all its existing open positions, and Demeter has installed a system which permits it to monitor the Partnership?s potential net credit exposure, exchange by exchange, by adding the unrealized trading gains on each exchange, if any, to the Partnership?s margin liability thereon. Second, the Partnership?s trading policies limit the amount of its Net Assets that can be committed at any given time to futures contracts and require a minimum amount of diversification in the Partnership?s trading, usually over several different products and exchanges. Historically, the Partnership?s exposure to any one exchange has typically amounted to only a small percentage of its total Net Assets and on those relatively few occasions where the Partnership?s credit exposure climbs above such level, Demeter deals with the situation on a case by case basis, carefully weighing whether the increased level of credit exposure remains appropriate. Material changes to the trading policies may be made only with the prior written approval of the limited partners owning more than 50% of Units then outstanding. Third, with respect to forward contract trading, the Partnership trades with only those counterparties which Demeter, together with Morgan Stanley DW, have determined to be creditworthy. The Partnership presently deals with MS&Co. as the sole counterparty on forward contracts. For additional information, see the ?Financial Instruments? section under ?Notes to Financial Statements? in the Partnership?s Annual Report to Limited Partners for the year ended December 31, 2006, which is incorporated by reference to Exhibit 13.01 of this Form 10-K. Inflation has not been a major factor in the Partnership?s operations. 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 is effective for fiscal years beginning after December 15, 2006. The impact to the Partnership?s Financial Statements, if any, is currently being assessed. 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. In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, ?Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements? (?SAB No. 108?) to provide guidance on how the effects of the carryover or reversal of prior year unrecorded misstatements should be considered in quantifying a current year misstatement. SAB No. 108 requires a company to apply an approach that considers the amount by which the current year income statement is misstated (?rollover approach?) and an approach that considers the cumulative amount by which the current year balance sheet is misstated (?iron-curtain approach?). Prior to the issuance of SAB No. 108, many companies applied either the rollover or iron-curtain approach for purposes of assessing materiality of misstatements. SAB No. 108 is effective for the Partnership as of January 1, 2007. Upon adoption, SAB No. 108 allows a one-time cumulative effect adjustment against Partners? Capital for those prior year misstatements that were not material under the Partnership?s prior approach, but are deemed material under the SAB No. 108 approach. Demeter does not expect the adoption of SAB No. 108 to have a material impact on the Partnership?s Financial Statements. Item 7A.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 Morgan Stanley DW for the benefit of MS&Co. The Partnership?s total market risk may increase or decrease as it is influenced by a wide variety of factors, including, but not limited to, the diversification among the Partnership?s open positions, the volatility present within the markets, and the liquidity of the markets. The face value of the market sector instruments held by the Partnership is typically many times the applicable margin requirements. Margin requirements generally range between 2% and 15% of contract face value. Additionally, the use of leverage causes the face value of the market sector instruments held by the Partnership 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 Partner- ship?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 risks 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 December 31, 2006 and 2005. At December 31, 2006 and 2005, the Partnership?s total capitalization was approximately $544 million and $533 million, respectively. Primary Market December 31, 2006 December 31, 2005 Risk Category Value at Risk Value at Risk Equity (1.95)% (1.95)% Currency (1.27) (0.82) Interest Rate (0.83) (0.45) Commodity (0.65) (0.87) Aggregate Value at Risk (2.40)% (2.86)% 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 December 31, 2006, 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 January 1, 2006, through December 31, 2006. Primary Market Risk Category High Low Average Equity (1.95)% (0.39)% (1.35)% Currency (1.27) (0.55) (0.86) Interest Rate (1.70) (0.83) (1.41) Commodity (0.75) (0.49) (0.61) Aggregate Value at Risk (2.96)% (1.73)% (2.24)% 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 December 31, 2005, and for the four quarter- end reporting periods during calendar year 2006. VaR is not necessarily representative of the Partnership?s historic risk, nor should it be used to predict the Partnership?s future financial performance or its ability to manage or monitor risk. There can be no assurance that the Partnership?s actual losses on a particular day will not exceed the VaR amounts indicated above or that such losses will not occur more than once in 100 trading days. Non-Trading Risk The Partnership has non-trading market risk on its foreign cash balances. These balances and any market risk they may represent are immaterial. The Partnership also maintains a substantial portion of its available assets in cash at Morgan Stanley DW; as of December 31, 2006, such amount is equal to approximately 89% 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 December 31, 2006, by market sector. It may be anticipated, however, that these market exposures will vary materially over time. Equity. The largest market exposure of the Partnership at December 31, 2006, 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., Britain, Germany, Japan, Italy, and Canada. The stock index futures traded by the Partnership are by law limited to futures on broadly-based indices. The Partner-ship?s primary market exposures were to the DAX (Germany), S&P 500 (U.S.), NIKKEI 225 (Japan), Euro Stoxx 50 (Europe), NASDAQ 100 (U.S.), TOPIX (Japan), Hang Seng (China), CAC 40 (France), FTSE 100 (United Kingdom), S&P/MIB (Italy), Dow Jones (U.S.), TAIWAN (Taiwan), SPI 200 (Australia), IBEX 35 (Spain), and Canadian S&P 60 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. Currency. The second largest market exposure of the Partnership at December 31, 2006, was to the currency sector. The Partner- ship?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 December 31, 2006, the Partnership?s major exposures were to British pounds, Japanese yen, euros, Norwegian krone, Swiss franc, Australian dollar, 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 December 31, 2006, the Partnership had market exposure to the global interest rate sector. Exposure was primarily spread across U.S., European, Japanese, Canadian, and Australian 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 third largest market exposure of the Partnership at December 31, 2006, 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. At December 31, 2006, the Partnership had market exposure in the metals sector. The Partnership's metals exposure was to fluctuations in the price of base metals, such as aluminum, copper, nickel, and zinc and precious metals, such as gold and palladium. 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 December 31, 2006, the Partnership had market exposure to the markets that comprise these sectors. Most of the exposure was to the coffee, soybean oil, sugar, soybeans, corn, live cattle, cocoa, soybean meal, cotton, wheat, pork bellies, 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 December 31, 2006: Foreign Currency Balances. The Partnership?s primary foreign currency balances at December 31, 2006, were in euros, Hong Kong dollars, Japanese yen, British pounds, Swiss francs, Canadian dollars, Australian dollars, and Norwegian krone. The Partnership controls the non-trading risk of foreign currency balances by regularly converting them back into U.S. dollars upon liquidation of their respective positions. Qualitative Disclosure 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are incorporated by reference to the Partnership's Annual Report, which is filed as Exhibit 13.01 hereto. Supplementary data specified by Item 302 of Regulation S-K: Summary of Quarterly Results (Unaudited) Quarter Total Trading Results Net Net Income/ Ended including interest income Income/(Loss) (Loss) Per Unit 2006 March 31 $ 31,802,353 $ 19,972,754 $ 1.03 June 30 36,753,206 24,144,618 1.26 September 30 (18,019,116) (30,155,561) (1.59) December 31 28,866,324 17,155,561 0.91 Total $ 79,402,767 $ 31,117,372 $ 1.61 2005 March 31 $(35,305,346) $ (49,599,774) $ (2.43) June 30 15,493,277 1,766,194 0.07 September 30 19,873,375 7,636,287 0.37 December 31 22,978,509 10,982,780 0.56 Total $ 23,039,815 $ (29,214,513) $ (1.43) Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACOUNTING AND FINANCIAL DISCLOSURE None. Item 9A. CONTROLS AND PROCEDURES (a) As of the end of the period covered by this annual 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 annual 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. Management?s Report on Internal Control Over Financial Reporting Demeter is responsible for the management of the Partnership. Management of Demeter (?Management?) is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control over financial reporting is designed 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. The Partnership?s internal control over financial reporting includes those policies and procedures that: - 49 - * Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; * Provide reasonable assurance that transactions are recorded as necessary to permit preparation of Financial Statements in accordance with generally accepted accounting principles, and that the Partnership?s transactions are being made only in accordance with authorizations of Management and directors; and * Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership?s assets that could have a material effect on the Financial Statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Partnership?s internal control over financial reporting as of December 31, 2006. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our assessment and those criteria, Management believes that the Partnership maintained effective internal control over financial reporting as of December 31, 2006. Deloitte & Touche LLP, the Partnership?s independent registered public accounting firm, has issued an attestation report on Management?s assessment of the Partnership?s internal control over financial reporting and on the effectiveness of the Partnership?s internal control over financial reporting. This report, which expresses an unqualified opinion on Management?s assessment and on the effectiveness of the Partnership?s internal control over financial reporting, appears under ?Report of Independent Registered Public Accounting Firm? in the Partnership?s Annual Report to Limited Partners for the year ended December 31, 2006. Item 9B. OTHER INFORMATION None. PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE There are no directors or executive officers of the Partnership. The Partnership is managed by Demeter, its general partner. Directors and Officers of the General Partner The directors and executive officers of Demeter are as follows: Effective May 1, 2006, Mr. Walter Davis, age 41, is a Director, Chairman of the Board of Directors, and President of Demeter. Mr. Davis is an Executive Director of Morgan Stanley and the Director of Morgan Stanley?s Managed Futures Department. Prior to joining Morgan Stanley in 1999, Mr. Davis worked for Chase Manhattan Bank?s Alternative Investment Group. Throughout his career, Mr. Davis has been involved with the development, management, and marketing of a diverse array of commodity pools, hedge funds, and other alternative investment funds. Mr. Davis received an MBA in Finance and International Business from the Columbia University Graduate School of Business in 1992 and a B.A. in Economics from the University of the South in 1987. Effective December 5, 2002, Mr. Frank Zafran, age 51, is a Director of Demeter. Mr. Zafran is a Managing Director of Morgan Stanley and, in November 2005, was named Managing Director of Wealth Solutions. Previously, Mr. Zafran was Chief Administrative Officer of Morgan Stanley?s Client Solutions Division. Mr. Zafran joined the firm in 1979 and has held various positions in Corporate Accounting and the Insurance Department, including Senior Operations Officer ? Insurance Division, until his appointment in 2000 as Director of Retirement Plan Services, responsible for all aspects of 401(k) Plan Services, including marketing, sales, and operations. Mr. Zafran received a B.S. degree in Accounting from Brooklyn College, New York. Effective March 31, 2003, Mr. Douglas J. Ketterer, age 41, is a Director of Demeter. Mr. Ketterer is a Managing Director of Morgan Stanley and is head of Morgan Stanley?s Managed Money Group. The Managed Money Group is comprised of a number of departments (including the Alternative Investments Group, Consulting Services Group, and Mutual Fund Department) which offer products and services through Morgan Stanley?s Global Wealth Management Group. Mr. Ketterer joined Morgan Stanley in 1990 and has served in many roles in the corporate finance/investment banking, asset management, and distribution divisions of the firm. Mr. Ketterer received his MBA from New York University?s Leonard N. Stern School of Business and his B.S. in Finance from the University at Albany?s School of Business. Effective May 1, 2005, Mr. Harry Handler, age 48, is a Director of Demeter. Mr. Handler serves as an Executive Director of Morgan Stanley?s Global Wealth Management Group. Mr. Handler works in Morgan Stanley?s Capital Markets Division as Equity Risk Officer. Additionally, Mr. Handler also serves as Chairman of the Morgan Stanley DW Best Execution Committee and manages the Global Wealth Management Group?s Stock Lending business. In his prior position, Mr. Handler was a Systems Director in Information Technology, in charge of Equity and Fixed Income Trading Systems along with the Special Products, such as Unit Trusts, Managed Futures, and Annuities. Prior to his transfer to the Information Technology Area, Mr. Handler managed the Foreign Currency and Precious Metals Trading Desk for Dean Witter, a predecessor company to Morgan Stanley. He also held various positions in the Futures Division where he helped to build the Precious Metals Trading Operation of Dean Witter. Before joining Dean Witter, Mr. Handler worked at Mocatta Metals as an Assistant to the Chairman. His roles at Mocatta Metals included stints on the Futures Order Entry Desk and the Commodities Exchange Trading Floor. Additional work included building a computerized Futures Trading System and writing a history of the company. Mr. Handler graduated on the Dean?s List from the University of Wisconsin-Madison with a B.A. degree and a double major in History and Political Science. Effective May 1, 2006, Mr. Richard D. Gueren, age 45, is a Director of Demeter. Mr. Gueren is Executive Director, Retail Options and Transactional Futures at Morgan Stanley. He is responsible for marketing the options product to the firm?s approximately 400 offices and 8,000 Financial Advisors. Mr. Gueren first joined Dean Witter in August 1986, as a member of the Options Strategy/Trading team. In 1997, Dean Witter merged with Morgan Stanley. Mr. Gueren is the firm?s Senior Registered Options Principal. He is a member of several Morgan Stanley committees, including the firm?s National Error Committee and Best Execution Committee. He is an advisory member to the Credit & Risk Committee. Mr. Gueren is also an active member of several exchange and industry committees, including the Retail Advisory committees for the Chicago Board Options Exchange, the American Stock Exchanges, the Philadelphia Stock Exchange, the Pacific Stock Exchange, and the International Securities Exchange. Mr. Gueren is also an Industry Arbitrator for the NASD and has been seated on numerous industry cases over the past eight years. He has also been asked to testify as an expert witness regarding options on numerous occasions. Mr. Gueren holds a Bachelor of Science in Economics from the University of Hartford. Effective May 1, 2006, Mr. Michael P. McGrath, age 38, is a Director of Demeter. Mr. McGrath is a Managing Director and the Director of Product Development for Morgan Stanley?s Global Wealth Management Group. In this role, Mr. McGrath oversees the flow of new products and services being offered through Global Wealth Management in the United States. He coordinates the firm?s New Product Committee as well as being a voting member on the committee. He is also a voting member of the Global Wealth Management Alternative Investments Due Diligence Committee, the Global Wealth Management Insurance Due Diligence Committee, and the Portfolio Architect Oversight Committee, and is a member of the Global Advisor Research Due Diligence Committee. Mr. McGrath joined Morgan Stanley in 2004, after three years with Nuveen Investments, a publicly traded investment management company headquartered in Chicago, Illinois. At Nuveen, Mr. McGrath served as a Managing Director and oversaw the development of alternative investment products catering to the ultra-high net worth investor. Mr. McGrath received his BA degree from Saint Peters College in 1990 and his MBA in Finance from New York University in 1996. Effective May 1, 2006, Mr. Andrew Saperstein, age 39, is a Director of Demeter. Mr. Saperstein is Chief Operating Officer of National Sales for Morgan Stanley?s Global Wealth Management Group, and serves as a member of the group?s Executive Committee. One of the largest businesses of its kind in the world with $640 billion in client assets, the Global Wealth Management Group provides a range of wealth management products and services to individuals, businesses, and institutions. These include brokerage and investment advisory services, financial and wealth planning, credit and lending, banking and cash management, annuities and insurance, retirement and trust. Prior to joining Morgan Stanley in March 2006, Mr. Saperstein was with Merrill Lynch as First Vice President and Chief Operating Officer of the Direct Division, and served as a member of the Global Private Client Executive Committee. In this capacity, he was responsible for the oversight of the online brokerage unit and the Financial Advisory Center, including the Retail Client Relationship Management group, the Services, Operations and Technology group, the Client Acquisition team, and the Business Development and Analysis team. Mr. Saperstein joined Merrill Lynch in November 2001. Prior to Merrill Lynch, Mr. Saperstein was a partner in the Financial Institutions group of McKinsey & Co. Additionally, he served as co-leader of both the North American Asset Management and Brokerage Practice and North American Recruiting. Mr. Saperstein graduated cum laude from Harvard Law School and summa cum laude from the Wharton School/College of Arts and Sciences at the University of Pennsylvania with a dual degree in Economics and Finance. Effective September 22, 2006, Mr. Jacques Chappuis, age 37, is a Director of Demeter. Mr. Chappuis is a Managing Director of Morgan Stanley and Head of Alternative Investments of Morgan Stanley?s Global Wealth Management Group. Prior to joining Morgan Stanley in 2006, Mr. Chappuis was Head of Alternative Investments for Citigroup?s Global Wealth Management Group and prior to that, a Managing Director at Citigroup Alternative Investments. Before joining Citigroup, Mr. Chappuis was a consultant at the Boston Consulting Group, where he focused on the financial services sector, and a corporate finance Associate at Bankers Trust Company. Mr. Chappuis received an MBA in Finance, with honors, from the Columbia University Graduate School of Business in 1998 and a B.A. in finance from Tulane University in 1991. Effective November 6, 2006, Mr. Lee Horwitz, age 55, is the Chief Financial Officer of Demeter and a Principal of Demeter. Mr. Horwitz currently serves as an Executive Director within Morgan Stanley?s Financial Control Group. Mr. Horwitz joined Morgan Stanley in March 1984 and has held a variety of positions throughout Morgan Stanley?s organization during his tenure. Mr. Horwitz received a B.A. degree from Queens College and an MBA from Rutgers University. Mr. Horwitz is a Certified Public Accountant. All of the foregoing directors have indefinite terms. Effective May 1, 2006, Mr. Jeffrey A. Rothman resigned his position as a Director of Demeter. Effective May 1, 2006, Mr. Richard A. Beech resigned his position as a Director of Demeter. Effective May 1, 2006, Ms. Shelley Hanan resigned her position as a Director of Demeter. Effective November 6, 2006, Mr. Kevin Perry resigned his position as Chief Financial Officer of Demeter. The Audit Committee The Partnership is operated by its general partner, Demeter, and has no audit committee and, thus, no audit committee financial expert. Code of Ethics The Partnership has not adopted a code of ethics that applies to the Partnership?s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Partnership is operated by its general partner, Demeter. The President, Chief Financial Officer, and each member of the Board of Directors of Demeter are employees of Morgan Stanley and are subject to the code of ethics adopted by Morgan Stanley, the text of which can be viewed on Morgan Stanley?s website at http://www.morganstanley.com/ourcommitment/ codeofconduct.html. Item 11. EXECUTIVE COMPENSATION The Partnership has no directors and executive officers. As a limited partnership, the business of the Partnership is managed by Demeter, which is responsible for the administration of the business affairs of the Partnership but receives no compensation for such services. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SECURITY HOLDER MATTERS (a) Security Ownership of Certain Beneficial Owners - At December 31, 2006, there were no persons known to be beneficial owners of more than 5 percent of the Units. (b) Security Ownership of Management - At December 31, 2006, Demeter owned 201,460.769 Units of general partnership interest, representing a 1.08 percent interest in the Partnership. (c) Changes in Control ? None. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Refer to Note 2 - "Related Party Transactions" of "Notes to Financial Statements", in the accompanying Annual Report to Limited Partners for the year ended December 31, 2006, which is incorporated by reference to Exhibit 13.01 of this Form 10- K. In its capacity as the Partnership's retail commodity broker, Morgan Stanley DW received commodity brokerage fees (paid and accrued by the Partnership) of $32,847,913 for the year ended December 31, 2006. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Morgan Stanley DW, on behalf of the Partnership, pays all accounting fees. The Partnership reimburses Morgan Stanley DW through the brokerage fees it pays, as discussed in the Notes to Financial Statements in the Annual Report to the Limited Partners for the year ended December 31, 2006. (1) Audit Fees. The aggregate fees for professional services rendered by Deloitte & Touche LLP in connection with their audit of the Partnership?s Financial Statements and review of the Financial Statements included in the Quarterly Reports on Form 10-Q, audit of Management?s assessments on the effectiveness of the internal control over financial reporting, and in connection with statutory and regulatory filings were approximately $60,928 for the year ended December 31, 2006, and $61,741 for the year ended December 31, 2005. (2) Audit-Related Fees. None. (3) Tax Fees. The Partnership did not pay Deloitte & Touche LLP any amounts in 2006 and 2005 for professional services in connection with tax compliance, tax advice, and tax planning. The Partnership engaged another unaffiliated professional firm to provide services in connection with tax compliance, tax advice, and tax planning. (4) All Other Fees. None. Because the Partnership has no audit committee, the Board of Directors of Demeter, its general partner, functions as the audit committee with respect to the Partnership. The Board of Directors of Demeter has not established pre-approval policies and procedures with respect to the engagement of audit or permitted non-audit services rendered to the Partnership. Consequently, all audit and permitted non-audit services provided by Deloitte & Touche LLP that are borne by Morgan Stanley DW through the brokerage fees paid for by the Partnership are approved by Morgan Stanley?s Board Audit Committee and the Board of Directors of Demeter. PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 1. Listing of Financial Statements The following Financial Statements and report of independent registered public accounting firm, all appearing in the accompanying Annual Report to Limited Partners for the year ended December 31, 2006 are incorporated by reference to Exhibit 13.01 of this Form 10-K: ? Report of Deloitte & Touche LLP, independent registered public accounting firm, for the years ended December 31, 2006, 2005, and 2004. ? Statements of Financial Condition, including the Schedules of Investments, as of December 31, 2006 and 2005. ? Statements of Operations, Changes in Partners? Capital, and Cash Flows for the years ended December 31, 2006, 2005, and 2004. ? Notes to Financial Statements. With the exception of the aforementioned information and the information incorporated in Items 7, 8, and 13, the Annual Report to Limited Partners for the year ended December 31, 2006 is not deemed to be filed with this report. 2. Listing of Financial Statements Schedules No Financial Statement schedules are required to be filed with this report. 3. Exhibits For the exhibits incorporated by reference or filed herewith to this report, refer to Exhibit Index on Page E-1 to E-4. SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) 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 March 8, 2007 BY: /s/ Walter Davis Walter Davis, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Demeter Management Corporation. BY: /s/ Walter Davis March 8, 2007 Walter Davis, President /s/ Frank Zafran March 8, 2007 Frank Zafran, Director /s/ Douglas J. Ketterer March 8, 2007 Douglas J. Ketterer, Director /s/ Harry Handler March 8, 2007 Harry Handler, Director /s/ Richard Gueren March 8, 2007 Richard Gueren, Director /s/ Michael McGrath March 8, 2007 Michael McGrath, Director /s/ Andrew Saperstein March 8, 2007 Andrew Saperstein, Director /s/ Jacques Chappuis March 8, 2007 Jacques Chappuis, Director /s/ Lee Horwitz March 8, 2007 Lee Horwitz, Chief Financial Officer EXHIBIT INDEX ITEM 3.01 Form of Amended and Restated Limited Partnership Agreement of the Partnership, is incorporated by reference to Exhibit A of the Partnership?s Prospectus, dated May 1, 2006, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 on May 4, 2006 and to pages S-122 ? S-124 of the Supplement dated January 18, 2007, to that Prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 on January 24, 2007. 3.02 Certificate of Limited Partnership, dated March 19, 1991, is incorporated by reference to Exhibit 3.02 of the Partnership?s Registration Statement on Form S-1 (File No. 333-47829) filed with the Securities and Exchange Commission on March 12, 1998. 3.03 Certificate of Amendment of Certificate of Limited Partnership, dated April 28, 1998 (changing its name from Dean Witter Select Futures Fund L.P.), is incorporated by reference to Exhibit 3.03 of the Partnership's 10-K for fiscal year ended December 31, 1998 filed with the Securities and Exchange Commission on March 31, 1999. 3.04 Certificate of Amendment of Certificate of Limited Partnership, dated April 6, 1999, (changing its name from Dean Witter Spectrum Select L.P.), is incorporated by reference to Exhibit 3.03 of the Partnership's Registration Statement on Form S-1 (File No. 333-68773) filed with the Securities and Exchange Commission on April 12, 1999. 3.05 Certificate of Amendment of Certificate of Limited Partnership, dated November 1, 2001 (changing its name from Morgan Stanley Dean Witter Spectrum Select L.P.), is incorporated by reference to Exhibit 3.01 of the Partnership?s Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 10.01 Amended and Restated Management Agreement, dated as of June 1, 1998, among the Partnership, Demeter, and Rabar Market Research, Inc. is incorporated by reference to Exhibit 10.01 of the Partnership's Form 10-K (File No. 0-19511) for fiscal year ended December 31, 1998 filed with the Securities and Exchange Commission on March 31, 1999. 10.01(a) Amendment No. 1 to Amended and Restated Management Agreement among the Partnership, Demeter, and Rabar Market Research, Inc., dated as of October 3, 2006, is incorporated by reference to Exhibit 10.01(a) of the Partnership?s Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on October 10, 2006. 10.02 Amended and Restated Management Agreement, dated as of June 1, 1998, among the Partnership, Demeter, and EMC Capital Management, Inc., is incorporated by reference to Exhibit 10.02 of the Partnership's Form 10-K (File No. 0- 19511) for fiscal year ended December 31, 1998 filed with the Securities and Exchange Commission on March 31, 1999. 10.02(a) Amendment No. 1 to Amended and Restated Management Agreement among the Partnership, Demeter, and EMC Capital Management, Inc., dated as of October 3, 2006, is incorporated by reference to Exhibit 10.02(a) of the Partnership?s Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on October 10, 2006. 10.03 Amended and Restated Management Agreement, dated as of June 1, 1998, among the Partnership, Demeter, and Sunrise Capital Management, Inc., is incorporated by reference to Exhibit 10.03 of the Partnership's Form 10-K (File No. 0-19511) for fiscal year ended December 31, 1998 filed with the Securities and Exchange Commission on March 31, 1999. 10.04 Management Agreement, dated as of January 1, 2004, among the Partnership, Demeter, and Graham Capital Management, L.P., is incorporated by reference to Exhibit 10.04 of the Partnership?s Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on March 10, 2004. 10.07 Form of Subscription and Exchange Agreement and Power of Attorney to be executed by purchasers of Units is incorporated by reference to Exhibit B of the Partnership?s Prospectus, dated May 1, 2006, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 on May 4, 2006. 10.10 Amended and Restated Escrow Agreement, among the Partnership, Morgan Stanley Spectrum Strategic L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Technical L.P., Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Commodity L.P., Morgan Stanley DW, and The Chase Manhattan Bank as escrow agent, dated March 10, 2000, is incorporated by reference to Exhibit 10.10 of the Partnership's Registration Statement on Form S-1 (File No. 333-90467) filed with the Securities and Exchange Commission on November 5, 2001. 10.11 Form of Subscription Agreement Update Form to be executed by purchasers of Units is incorporated by reference to Exhibit C of the Partnership?s Prospectus, dated May 1, 2006, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 on May 4, 2006. 10.12 Amended and Restated Customer Agreement between the Partnership and Morgan Stanley DW, dated as of October 16, 2000, is incorporated by reference to Exhibit 10.01 of the Partnership?s Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 10.12(a)Amendment No. 1 to the Amended and Restated Customer Agreement between the Partnership and Morgan Stanley DW Inc., dated July 1, 2005, is incorporated by reference to Exhibit 10.12(a) of the Partnership?s Form 10-Q (File No. 0-19511) filed with the Securities and Exchange Commission on August 10, 2005. 10.13 Commodity Futures Customer Agreement between MS&Co. and the Partnership, and acknowledged and agreed to by Morgan Stanley DW, dated as of June 6, 2000, is incorporated by reference to Exhibit 10.02 of the Partnership?s Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 10.14 Customer Agreement between the Partnership and MSIL, dated as of June 6, 2000, is incorporated by reference to Exhibit 10.04 of the Partnership?s Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 10.15 Foreign Exchange and Options Master Agreement between MS&Co. and the Partnership, dated as of April 30, 2000, is incorporated by reference to Exhibit 10.05 of the Partnership?s Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 10.16 Management Agreement, dated as of May 1, 2001, among the Partnership, Demeter, and Northfield Trading L.P., is incorporated by reference to Exhibit 10.01 of the Partnership?s Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on April 25, 2001. 10.17 Securities Account Control Agreement among the Partnership, MS&Co., and Morgan Stanley DW, dated as of May 1, 2000, is incorporated by reference to Exhibit 10.03 of the Partnership?s Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 13.01 December 31, 2006, Annual Report to Limited Partners is filed herewith. 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. Morgan Stanley Spectrum Series December 31, 2006 Annual Report [LOGO] Morgan Stanley MORGAN STANLEY SPECTRUM SERIES HISTORICAL FUND PERFORMANCE Presented below is the percentage change in Net Asset Value per Unit from the start of every calendar year each Fund has traded. Also provided is the inception-to-date return and the compound annualized return since inception for each Fund. Past performance is no guarantee of future results.
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 FUND % % % % % % % % % % % % % % % % -------------------------------------------------------------------------------------------------------------------------- Spectrum Currency. -- -- -- -- -- -- -- -- -- 11.7 11.1 12.2 12.4 (8.0) (18.3) (3.4) (6 mos.) -------------------------------------------------------------------------------------------------------------------------- Spectrum Global Balanced......... -- -- -- (1.7) 22.8 (3.6) 18.2 16.4 0.8 0.9 (0.3) (10.1) 6.2 (5.6) 4.2 2.4 (2 mos.) -------------------------------------------------------------------------------------------------------------------------- Spectrum Select... 31.2 (14.4) 41.6 (5.1) 23.6 5.3 6.2 14.2 (7.6) 7.1 1.7 15.4 9.6 (4.7) (5.0) 5.9 (5 mos.) -------------------------------------------------------------------------------------------------------------------------- Spectrum Strategic -- -- -- 0.1 10.5 (3.5) 0.4 7.8 37.2 (33.1) (0.6) 9.4 24.0 1.7 (2.6) 20.9 (2 mos.) -------------------------------------------------------------------------------------------------------------------------- Spectrum Technical -- -- -- (2.2) 17.6 18.3 7.5 10.2 (7.5) 7.8 (7.2) 23.3 23.0 4.4 (5.4) 5.4 (2 mos.) --------------------------------------------------------------------------------------------------------------------------
INCEPTION- COMPOUND TO-DATE ANNUALIZED RETURN RETURN FUND % % ---------------------------------------- Spectrum Currency. 13.8 2.0 ---------------------------------------- Spectrum Global Balanced......... 56.0 3.7 ---------------------------------------- Spectrum Select... 190.6 7.2 ---------------------------------------- Spectrum Strategic 71.5 4.5 ---------------------------------------- Spectrum Technical 135.7 7.3 ----------------------------------------
DEMETER MANAGEMENT CORPORATION 330 Madison Avenue, 8th Floor New York, NY 10017 (212) 905-2700 MORGAN STANLEY SPECTRUM SERIES ANNUAL REPORT 2006 Dear Limited Partner: This marks the seventh annual report for Morgan Stanley Spectrum Currency L.P., the thirteenth annual report for Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P., and the sixteenth annual report for Morgan Stanley Spectrum Select L.P. The Net Asset Value per Unit for each of the five Morgan Stanley Spectrum funds ("Fund(s)") as of December 31, 2006 was as follows:
% CHANGE FUNDS N.A.V. FOR YEAR ---------------------------------------- Spectrum Currency $11.38 (3.4)% ---------------------------------------- Spectrum Global Balanced $15.60 2.4% ---------------------------------------- Spectrum Select $29.06 5.9% ---------------------------------------- Spectrum Strategic $17.15 20.9% ---------------------------------------- Spectrum Technical $23.57 5.4% ----------------------------------------
Since its inception in July 2000, Spectrum Currency has returned 13.8% (a compound annualized return of 2.0%). Since their inception in November 1994, Spectrum Global Balanced has returned 56.0% (a compound annualized return of 3.7%), Spectrum Strategic has returned 71.5% (a compound annualized return of 4.5%), and Spectrum Technical has returned 135.7% (a compound annualized return of 7.3%). Since its inception in August 1991, Spectrum Select has returned 190.6% (a compound annualized return of 7.2%). Detailed performance information for each Fund is located in the body of the financial report. For each Fund, we provide a trading results by sector chart that portrays trading gains and trading losses for the year in each sector in which the Fund participates. In the case of Spectrum Currency, we provide the trading gains and trading losses for the five major currencies in which the Fund participates, and composite information for all other "minor" currencies traded within the Fund. The trading results by sector charts indicate the year's composite percentage returns generated by the specific assets dedicated to trading within each market sector in which each Fund participates. Please note that there is not an equal amount of assets in each market sector, and the specific allocations of assets by a Fund to each sector will vary over time within a predetermined range. Below each chart is a description of the factors that influenced trading gains and trading losses within each Fund during the year. Should you have any questions concerning this report, please feel free to contact Demeter Management Corporation, 330 Madison Avenue, 8th Floor, New York, NY 10017 or your Morgan Stanley Financial Advisor. I hereby affirm, that to the best of my knowledge and belief, the information contained in this report is accurate and complete. Past performance is no guarantee of future results. Sincerely, /s/ Walter J. Davis Walter J. Davis Chairman of the Board of Directors and President Demeter Management Corporation, General Partner of Morgan Stanley Spectrum Currency L.P. Morgan Stanley Spectrum Global Balanced L.P. Morgan Stanley Spectrum Select L.P. Morgan Stanley Spectrum Strategic L.P. Morgan Stanley Spectrum Technical L.P. This page intentionally left blank. MORGAN STANLEY SPECTRUM CURRENCY L.P. [CHART] Year Ended December 31, 2006 ----------------------- Australian dollar 0.07% British pound 6.07% Euro 0.90% Japanese yen -2.29% Swiss franc -5.95% Minor Currencies 0.76% Note:Reflects trading results only and does not include fees or interest income. Minor currencies may include, but are not limited to, the South African rand, Thai baht, Greek drachma, Singapore dollar, Mexican peso, New Zealand dollar, Australian dollar, Polish zloty, Brazilian real, Norwegian krone, and Czech koruna. FACTORS INFLUENCING ANNUAL TRADING LOSSES: . The most significant trading losses resulted from short positions in the Swiss franc and Japanese yen against the U.S. dollar. During January and February, the Swiss franc rose after strong economic data out of Switzerland, while the value of the Japanese yen increased on speculation that the Bank of Japan would raise interest rates in the following months. During April, further losses were recorded from short positions in the Swiss franc versus the U.S. dollar as the value of the Swiss franc strengthened on geopolitical tensions in the Middle East, while the value of the U.S. dollar was pressured lower on news that foreign central banks were beginning to diversify their currency reserves away from U.S. dollar-denominated assets. Further losses were experienced towards the end of October and during November from long positions in the U.S. dollar relative to the Swiss franc and Japanese yen as the value of the U.S. dollar declined after the U.S. Department of Commerce reported slower than expected growth in third quarter U.S. Gross Domestic Product, as well as a faster than expected decline in consumer core inflation. Meanwhile, the Japanese yen strengthened after the Swiss National Bank said it had raised its holdings of the Japanese currency in the previous quarter, while the Swiss franc strengthened in tandem with the euro. Additional losses MORGAN STANLEY SPECTRUM CURRENCY L.P. FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued) were experienced primarily during May and June from long positions in the Brazilian real versus the U.S. dollar as the value of the Brazilian real moved lower on political uncertainty out of Brazil. Finally, losses were recorded throughout the year from both short and long positions in the Mexican peso, Polish zloty, and Norwegian krone versus the U.S. dollar as the value of these currencies moved without consistent direction. FACTORS INFLUENCING ANNUAL TRADING GAINS: . Trading gains for the year were recorded from positions in the British pound, New Zealand dollar, and Singapore dollar versus the U.S. dollar. Long positions in the British pound versus the U.S. dollar experienced gains throughout the second half of the year as the value of the British pound increased on consistently strong economic data out of the United Kingdom, spurring the Bank of England to lift its key interest rate to 5.0% by the end of the year. Elsewhere, smaller gains resulted from long positions in the Singapore dollar relative to the U.S. dollar as the value of the Singapore dollar benefited from the U.S. dollar's weakness, particularly during April, May, and November. During the fourth quarter, the value of the U.S. dollar continued to move lower against most of its rivals on news that China, the world's largest holder of foreign-exchange reserves, would begin to more aggressively diversify its reserves away from the U.S. currency. Also weighing on the U.S. dollar were concerns of a slowing U.S. economy after reports showed an increase in jobless claims, while consumer sentiment unexpectedly weakened. Elsewhere, short positions in the New Zealand dollar versus the U.S. dollar experienced gains during March as the value of the New Zealand dollar moved lower on expectations for an economic slow-down in New Zealand. However, during the fourth quarter, gains were recorded from long positions in the New Zealand dollar versus the U.S. dollar as the value of the New Zealand dollar reversed higher after manufacturing sales figures added to evidence that the New Zealand economy was expanding fast enough to spur the Reserve Bank of New Zealand to raise interest rates in 2007. MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P. [CHART] Year ended December 31, 2006 ---------------------------- Currencies 0.19% Interest Rates -3.41% Stock Indices 5.79% Energies -0.85% Metals 1.15% Agriculturals -0.59% Note: Reflects trading results only and does not include fees or interest income. FACTORS INFLUENCING ANNUAL TRADING GAINS: . The most significant trading gains were recorded in the global stock index sector during January and March from long positions in U.S., European, and Japanese equity index futures as prices trended higher on strong corporate earnings and solid economic data. During August and September, additional gains were experienced from long positions in U.S. and European equity index futures as prices advanced after the U.S. Conference Board reported a stronger than expected rebound in consumer confidence and data showing increased merger and acquisition activity and solid corporate earnings in Europe. During October, gains continued from long positions in U.S. and European stock index futures as prices moved higher amid declining energy prices and stronger than expected third quarter earnings. In addition, U.S. equity index futures prices rose after the U.S. Federal Reserve's decision to hold interest rates steady and its assessment that the U.S. economy would continue to expand in the near-term but at a slower pace. Finally, gains were experienced during December from long positions in U.S. and European equity index futures as prices continued to move higher amid optimism about the future of the global economy. . Further gains were experienced within the metals markets, primarily during January and March, from long futures positions in copper, nickel, and zinc as prices strengthened amid weak supplies, forecasts for continued buying by China, MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P. FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued) and acceleration in global demand. During October, long positions in zinc futures resulted in further gains as prices rose amid labor protests in producer countries and news that inventories tracked by the London Metal Exchange declined more than expected. Additional gains were recorded in December from short positions in copper futures as prices dropped after industrial output unexpectedly fell in the Euro-Zone countries, signaling reduced demand for the metal. . Smaller gains were recorded in the currency markets, primarily from short positions in the South African rand against the U.S. dollar as the rand trended lower during the second quarter amid falling commodities prices, news that South Africa's Current-Account deficit had widened to a 24-year high and on expectations that the country's Gross Domestic Product growth would be weaker than expected. During September, short positions in the Norwegian krone versus the euro resulted in additional gains as the value of the Norwegian krone moved lower on investor concern that a prolonged decline in oil prices might negatively affect the Norwegian economy. In addition, gains were experienced from long positions in the euro against the U.S. dollar as the value of the U.S. dollar hit a 20-month low against the euro in November due to expectations that the European Central Bank would continue to raise interest rates and a marginal decline in unemployment within Germany and France. FACTORS INFLUENCING ANNUAL TRADING LOSSES: . Trading losses for the year were recorded in the global interest rate sector. In January, short and long positions in European and U.S. fixed-income futures incurred losses as prices moved without consistent direction amid uncertainty regarding the future of global interest rate policy. Additional losses were incurred from short positions in European interest rates as fixed-income prices reversed higher during the second quarter after weakness in the equity markets created strong demand for the safe-haven of fixed-income investments. European interest rates were also pushed higher after the May "ZEW" Institute survey showed investor confidence in Germany falling for a fourth straight month. During June, losses were incurred from long positions in Japanese interest rate futures as prices fell on speculation that the Bank of Japan would raise interest rates and end its "zero-interest-rate" policy. Losses were extended in October and December from long positions in U.S., European, and Japanese fixed-income futures as prices moved lower amid overall strength in the equity markets and speculation of further interest rate hikes by the U.S. Federal Reserve, European Central Bank, and Bank of Japan as a result of robust global economic data. MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P. FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued) . Further losses were recorded in the energy markets during March from short positions in gas oil futures as prices moved higher on fears of supply disruptions fueled by news of geopolitical tensions in Nigeria. In May, newly established long positions in gas oil experienced additional losses as prices fell after supply data from the U.S. Department of Energy showed crude oil inventory levels at an eight-year high. Gas oil prices continued to fall into June on news of the death of Iraqi insurgent leader Abu Musab al-Zarqawi and positive steps taken regarding the nuclear standoff between the U.S. and Iran, resulting in additional losses from long positions. During October and November, short positions in natural gas futures incurred losses as prices reversed higher on speculation of increased demand after near-term weather forecasts called for colder weather in much of the U.S. Losses were also recorded from long positions in gas oil futures as prices weakened due to uncertainty regarding OPEC's plan to cut production, as well as a lower demand forecast. In December, long positions in gas oil futures resulted in losses as prices weakened amid mild winter temperatures across the U.S. Northeast. . Smaller losses were incurred in the agricultural markets, during July, from long positions in orange juice futures as prices moved lower after the U.S. Department of Agriculture reported an increase in orange juice production. Additional losses were incurred from newly established short positions in orange juice futures as prices reversed higher towards the end of the month on concerns regarding poor harvest due to hot weather and labor shortages. Finally, losses were incurred from both short and long positions in corn and lean hog futures as prices moved without consistent direction throughout a majority of the year due to conflicting news regarding supply and demand. This page intentionally left blank. MORGAN STANLEY SPECTRUM SELECT L.P. [CHART] Year Ended December 31, 2006 ----------------------- Currencies 0.03% Interest Rates 1.31% Stock Indices 5.59% Energies -1.08% Metals 6.12% Agriculturals -1.70% Note: Reflects trading results only and does not include fees or interest income. FACTORS INFLUENCING ANNUAL TRADING GAINS: . The most significant trading gains 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. Further gains in the metals markets were experienced from long positions in gold and silver futures as prices reached 25-year highs, benefiting from strong demand and lagging supply. Demand for precious metals increased on continued geopolitical concerns, inflation fears, and consistent demand from foreign central banks. In addition, silver prices were pressured higher after news that a silver-backed Exchange Traded Fund would launch. Gains were extended during October from long positions in base metals as prices continued to trend higher amid labor protests in producer countries and news that inventories had declined more than expected. Additionally, prices were pressured higher after the National Bureau of Statistics said that China's industrial production had increased significantly from a year earlier, reaffirming expectations that demand from China would stay strong. . Additional gains were recorded within the global stock index markets from long positions in European, U.S., and Pacific Rim stock index futures as global equity prices trended higher throughout the first quarter on strong corporate earnings and MORGAN STANLEY SPECTRUM SELECT L.P. FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued) solid economic data. Long positions in Hong Kong equity index futures also recorded gains as prices moved higher during April and July on positive performance in the technology sector, speculation that the U.S. Federal Reserve could be near the end of its interest rate tightening campaign, and news that Gross Domestic Product in China had surged to 10.9% in the first six months of the year. Further 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 solid corporate earnings. During the fourth quarter, further gains were recorded from long positions in U.S., European, and Pacific Rim equity index futures as prices continued to move higher amid the U.S. Federal Reserve's decision to hold interest rates steady, consistent merger and acquisition activity, and news of the world's largest initial public offering in China. . Smaller gains were experienced within the global interest rates sector, primarily during March and April, from short positions in U.S. and European 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 and the European Union might rise in order to combat inflation. U.S. fixed-income futures continued to move lower into the second quarter following the release of consistently strong U.S. economic data resulting in further gains from short positions. Finally, during November, gains were recorded from long positions in U.S. fixed-income futures as prices moved higher on new concerns of a slowing U.S. economy after reports showed an increase in jobless claims, while consumer sentiment unexpectedly weakened. FACTORS INFLUENCING ANNUAL TRADING LOSSES: . Trading losses for the year were recorded in the agricultural markets from positions in wheat, soybeans, and cocoa futures. Long positions in wheat futures incurred losses 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. 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. Further losses in the agricultural markets were experienced during October, November, and December from MORGAN STANLEY SPECTRUM SELECT L.P. FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued) both short and long positions in the soybean complex as prices moved without consistent direction due to conflicting news regarding supply and demand. . Smaller losses were incurred within the energy markets throughout 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 an announcement by Chinese government authorities that China would place an emphasis on prospecting alternative energy sources in the future, reports of larger than expected supplies, and mild weather in the U.S. Northeast. Further losses were recorded during March from short futures positions in crude oil and its related products 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 inventories. Further losses were 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 also 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. In addition, prices were pressured lower after news of an official cease-fire between Israel and Hezbollah militants in Lebanon and news that the OPEC had reduced its 2006 oil demand growth forecast. Finally, during November, losses were incurred from newly established short positions in crude oil futures and its related products as prices moved higher amid concern over OPEC's production cut after the U.S. Department of Energy reported a sharp fall in domestic inventories. This page intentionally left blank. MORGAN STANLEY SPECTRUM STRATEGIC L.P. [CHART] Year ended December 31, 2006 ---------------------------- Currencies -0.42% Interest Rates 2.44% Stock Indices 4.24% Energies -0.36% Metals 22.87% Agriculturals 1.66% Note: Reflects trading results only and does not include fees or interest income. FACTORS INFLUENCING ANNUAL TRADING GAINS: . The most significant trading gains were recorded in the metals markets throughout the first half of the year from long positions in copper, zinc, and aluminum futures as base metals prices rallied on strong global demand, particularly from China, and reports of falling inventories. Elsewhere in the metals markets, long positions in gold futures experienced additional gains as prices reached 25-year highs amid continued geopolitical concerns, inflation concerns, and consistent demand from foreign central banks. Further gains were experienced from long positions in silver futures as prices moved higher due to the aforementioned factors that affected gold, as well as on news that a silver-backed Exchange Traded Fund would launch. Gains were extended during October from long positions in zinc and aluminum futures as base metals prices continued to trend higher amid labor protests in producer countries and news that inventories declined more than expected. Additionally, prices were pressured higher after the National Bureau of Statistics said that China's industrial production had increased significantly from a year earlier, reaffirming expectations that demand from China would stay strong. MORGAN STANLEY SPECTRUM STRATEGIC L.P. FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued) . Additional gains were experienced within the global stock index markets primarily during the first and fourth quarters from long positions in U.S., European, and Pacific Rim stock index futures as global equity markets trended higher on strong corporate earnings and solid economic data. Long positions in Hong Kong equity index futures recorded further gains during April, July, August, October, November, and December as prices moved higher amid positive performance in the technology and banking sectors and consistently strong economic data out of China and Japan. During the fourth quarter, European equity index futures prices moved higher due to consistent merger and acquisition activity, as well as strong performance in the automobile, industrial, and technology sectors, resulting in further gains from long positions. Meanwhile, U.S. equity prices rose after the U.S. Federal Reserve's decision to hold interest rates steady in October and its assessment that the U.S. economy would continue to expand in the near-term albeit at a slower pace. . Additional gains were experienced within the global interest rate markets during the first quarter from short positions in U.S. and European interest rate futures as prices trended lower amid strength in regional equity markets and investor sentiment that interest rates in the United States and the European Union would rise in order to combat inflation. U.S. and European fixed-income futures continued to move lower into the second quarter following the release of stronger than expected economic data out of the U.S. and the Euro-Zone. During October, U.S. fixed-income futures prices declined amid weak demand after U.S. economic reports showed unexpected strength in retail sales, business inventories, and consumer sentiment, while European fixed-income futures prices continued to decline on speculation of another European Central Bank interest rate hike after government reports showed higher industrial production in France and Italy. Finally, in November, newly established long positions in European fixed-income futures resulted in gains as prices rose after the release of data indicating that economic expansion in the Euro-Zone might have peaked during the first half of the year. . Smaller gains were recorded within the agricultural markets primarily during the fourth quarter from long positions in corn futures as prices moved higher after the U.S. Department of Agriculture's reduction of its world ending stock estimate, increased demand from ethanol producers, and news that Argentina, one of the world's major corn producers, would suspend new export orders. Elsewhere in the agricultural complex, long positions in coffee futures resulted in gains primarily during November as prices moved higher on speculation that inventories might be insufficient to satisfy growing demand. MORGAN STANLEY SPECTRUM STRATEGIC L.P. FACTORS INFLUENCING ANNUAL TRADING LOSSES: . Trading losses for the year were experienced in the currency markets from positions in the Japanese yen and Swiss franc relative to the U.S. dollar. During the first half of the year, long positions in the U.S. dollar versus the Swiss franc and Japanese yen experienced losses as the value of 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. In addition, the Japanese yen and Swiss franc moved higher against the U.S. dollar as strong economic data out of Japan and Switzerland increased speculation that the Bank of Japan and Swiss National Bank would raise interest rates. Losses were extended during October as the value of the U.S. dollar declined towards the latter half of the month after the U.S. Department of Commerce reported slower than expected growth in third quarter U.S. Gross Domestic Product, as well as a faster than expected decline in consumer core inflation. Smaller losses in the currency markets were experienced from both short and long positions in the Swedish krona versus the U.S. dollar as the value of the Swedish krona moved without consistent direction throughout a majority of the year. . Finally, losses were incurred within the energy markets during February, May, August, and December from both short and long positions in heating oil futures as prices experienced short-term volatility due to conflicting news regarding supply and demand. Smaller losses were recorded during October from long positions in gasoline futures as prices weakened due to uncertainty regarding OPEC's plan to cut production, as well as a lower demand forecast. This page intentionally left blank. MORGAN STANLEY SPECTRUM TECHNICAL L.P. [CHART] Year ended December 31, 2006 ---------------------------- Currencies -1.07% Interest Rates 0.33% Stock Indices 9.68% Energies -3.26% Metals 8.42% Agriculturals -2.75% Note: Reflects trading results only and does not include fees or interest income. FACTORS INFLUENCING ANNUAL TRADING GAINS: . The most significant trading gains were recorded in the global stock index markets primarily during January, March, April, and July from long positions in Pacific Rim, European, and U.S. stock index futures as prices trended higher on strong corporate earnings and solid global economic data. In addition, Pacific Rim equity index futures prices moved higher during July on news that Gross Domestic Product in China had surged to 10.9% in the first six months of the year. During September, additional gains were experienced from long positions in European equity index and U.S. equity index futures as prices increased on falling energy prices. Furthermore, U.S. equity index futures moved higher after the U.S. Conference Board reported a stronger than expected rebound in consumer confidence in September, while European equity index futures prices were supported higher on merger and acquisition activity. During the fourth quarter, global stock indices continued to rally amid declining energy prices and optimism about the future of the global economy, resulting in further gains from long positions. Additionally, Australian stock index futures prices increased on speculation that strong commodity prices in 2007 might have a positive effect on the Australian economy. . Additional gains were experienced in the metals markets throughout the first half of the year from long positions in copper, zinc, and aluminum futures as base metals prices MORGAN STANLEY SPECTRUM TECHNICAL L.P. FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued) rallied on strong global demand and on reports of falling inventories. Within precious metals, long positions in gold and silver futures experienced gains as gold and silver prices reached 25-year highs in May, benefiting from strong demand and lagging supply, continued geopolitical concerns regarding Iran's nuclear program, and consistent demand from foreign central banks. During October, gains were experienced in zinc and aluminum futures as prices continued to trend higher amid labor protests in producer countries and news that inventories declined more than expected. Prices were also pressured higher after the National Bureau of Statistics said that China's industrial production had increased 16.1% in September from a year earlier, reaffirming expectations that demand from China would stay strong. . Smaller gains were recorded in the global interest rates markets primarily during the first and second quarters from short positions in U.S., European, and Australian fixed-income futures as prices trended lower amid strength in regional equity markets and investor sentiment that interest rates in the United States, the European Union, and Australia would rise in order to combat inflation. In addition, U.S. fixed-income futures prices were pressured lower following the release of stronger than expected U.S. economic data and the sixteenth consecutive interest rate hike by the U.S. Federal Reserve, while German fixed-income futures prices declined amid rising equity prices and solid economic data out of the Euro-Zone. FACTORS INFLUENCING ANNUAL TRADING LOSSES: . Trading losses for the year were experienced within the energy markets during February from long futures positions in crude oil and its related products as prices declined after an announcement by Chinese government authorities that China would place an emphasis on prospecting alternative energy sources in the future, reports of larger than expected supplies, and mild weather in the U.S. Northeast. During August and September, long futures positions in crude oil and its related products incurred additional losses 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 lower during October due to uncertainty regarding OPEC's plan to cut production, as well as a lower demand forecast, resulting in additional losses from long positions. During November, short futures positions in crude oil and its related products incurred further losses as prices reversed higher on supply concerns. Additionally, short positions in natural gas futures resulted in losses during November as prices reversed MORGAN STANLEY SPECTRUM TECHNICAL L.P. FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued) higher on colder temperatures forecasted in the U.S. and expectations of a decline in domestic inventories. . Additional losses were recorded within the agricultural markets during second and third quarters, primarily from short positions in live cattle futures as prices moved higher on strong demand and technically-based buying. Meanwhile, losses were incurred during July and August from long positions in cocoa futures as prices fell on news from the International Cocoa Organization that global supplies were adequate to meet demand. Elsewhere in the agricultural complex, losses were incurred from short positions in soybean and soybean meal futures as prices rose during October on news of a smaller than expected crop from Brazil. . Smaller losses were incurred within the currency markets, primarily during the first half of the year, from short positions in the Swiss franc and Japanese yen versus the U.S. dollar as the value of the U.S. dollar moved lower against its major rivals 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. In addition, the Swiss franc and Japanese yen moved higher against the U.S. dollar as strong economic data out of Switzerland and Japan increased speculation that the Swiss National Bank and Bank of Japan would raise interest rates. Additionally, the Swiss franc moved higher on political tensions in the Middle East, which increased the demand for the safe-haven currency. Elsewhere in the currency markets, losses were experienced from both short and long positions in the Norwegian krone relative to the U.S. dollar as the value of the Norwegian krone moved without consistent direction throughout a majority of the year. This page intentionally left blank. MORGAN STANLEY SPECTRUM SERIES MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Demeter Management Corporation ("Demeter"), the general partner of Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P. (individually, a "Partnership", or collectively, the "Partnerships"), is responsible for the management of the Partnerships. Management of Demeter ("Management") is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control over financial reporting is designed 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. The Partnerships' internal control over financial reporting includes those policies and procedures that: . Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnerships; . Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Partnerships' transactions are being made only in accordance with authorizations of Management and directors; and . Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnerships' assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of each Partnership's internal control over financial reporting as of December 31, 2006. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control--Integrated Framework. Based on our assessment and those criteria, Management believes that each Partnership maintained effective internal control over financial reporting as of December 31, 2006. Deloitte & Touche LLP, the Partnerships' independent registered public accounting firm, has issued an audit report on Management's assessment of the Partnerships' internal control over financial reporting and on the effectiveness of the Partnerships' internal control over financial reporting. This report, which expresses unqualified opinions on Management's assessment and on the effectiveness of the Partnerships' internal control over financial reporting, appears under "Report of Independent Registered Public Accounting Firm" on the following page. /s/ Walter J. Davis Walter J. Davis President Demeter Management Corporation /s/ Lee Horwitz Lee Horwitz Chief Financial Officer Demeter Management Corporation New York, New York February 28, 2007 MORGAN STANLEY SPECTRUM SERIES REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Limited Partners and the General Partner of Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P.: We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P. (collectively, the "Partnerships") maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Partnerships' management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Partnerships' internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Partnerships maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Partnerships maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements as of and for the year ended December 31, 2006 of the Partnerships and our report dated February 28, 2007 expressed an unqualified opinion on those financial statements. /s/ Deloitte & Touche LLP New York, New York February 28, 2007 MORGAN STANLEY SPECTRUM SERIES REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Limited Partners and the General Partner of Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P. : We have audited the accompanying statements of financial condition of Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P. (collectively, the "Partnerships"), including the schedules of investments, as of December 31, 2006 and 2005, and the related statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P. at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, in 2006 and 2005, the Partnerships modified their classification of cash within the statements of cash flows. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Partnerships' internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an unqualified opinion on management's assessment of the effectiveness of the Partnerships' internal control over financial reporting and an unqualified opinion on the effectiveness of the Partnerships' internal control over financial reporting. /s/ Deloitte & Touche LLP New York, New York February 28, 2007 MORGAN STANLEY SPECTRUM CURRENCY L.P. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ------------------------- 2006 2005 ------------ ------------ $ $ ASSETS Equity in futures interests trading accounts: Unrestricted cash 162,737,117 207,952,625 Restricted cash -- -- ------------ ------------ Total Cash 162,737,117 207,952,625 Net unrealized gain on open contracts (MS & Co.) 4,534,033 6,202,194 ------------ ------------ Total Trading Equity 167,271,150 214,154,819 Subscriptions receivable 759,216 1,355,204 Interest receivable (Morgan Stanley DW) 560,751 559,983 ------------ ------------ Total Assets 168,591,117 216,070,006 ============ ============ LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Redemptions payable 4,643,347 6,346,278 Accrued brokerage fees (Morgan Stanley DW) 626,181 862,131 Accrued management fees 272,253 374,840 ------------ ------------ Total Liabilities 5,541,781 7,583,249 ------------ ------------ PARTNERS' CAPITAL Limited Partners (14,173,942.826 and 17,508,991.514 Units, respectively) 161,303,764 206,199,270 General Partner (153,385.343 and 194,237.343 Units, respectively) 1,745,572 2,287,487 ------------ ------------ Total Partners' Capital 163,049,336 208,486,757 ------------ ------------ Total Liabilities and Partners' Capital 168,591,117 216,070,006 ============ ============ NET ASSET VALUE PER UNIT 11.38 11.78 ============ ============
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 2006 2005 2004 ---------- ----------- ----------- $ $ $ INVESTMENT INCOME Interest income (Morgan Stanley DW) 6,632,240 5,391,828 2,064,338 ---------- ----------- ----------- EXPENSES Brokerage fees (Morgan Stanley DW) 8,151,647 10,921,579 10,011,029 Management fees 3,544,196 4,748,514 4,352,622 Incentive fee -- -- 177,763 ---------- ----------- ----------- Total Expenses 11,695,843 15,670,093 14,541,414 ---------- ----------- ----------- NET INVESTMENT LOSS (5,063,603) (10,278,265) (12,477,076) ---------- ----------- ----------- TRADING RESULTS Trading profit (loss): Realized (1,843,404) (28,979,835) (11,200,944) Net change in unrealized (1,668,161) (10,445,759) 11,769,313 ---------- ----------- ----------- Total Trading Results (3,511,565) (39,425,594) 568,369 ---------- ----------- ----------- NET LOSS (8,575,168) (49,703,859) (11,908,707) ========== =========== =========== NET LOSS ALLOCATION: Limited Partners (8,482,159) (49,177,845) (11,774,885) General Partner (93,009) (526,014) (133,822) NET LOSS PER UNIT: Limited Partners (0.40) (2.63) (1.25) General Partner (0.40) (2.63) (1.25)
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ----------------------- 2006 2005 ----------- ----------- $ $ ASSETS Equity in futures interests trading accounts: Unrestricted cash 36,518,808 41,897,899 Restricted cash 3,363,695 2,476,604 ----------- ----------- Total Cash 39,882,503 44,374,503 ----------- ----------- Net unrealized gain on open contracts (MS&Co.) 1,135,527 562,409 Net unrealized gain on open contracts (MSIL) 56,239 40,229 ----------- ----------- Total net unrealized gain on open contracts 1,191,766 602,638 ----------- ----------- Total Trading Equity 41,074,269 44,977,141 Subscriptions receivable 224,965 295,999 Interest receivable (Morgan Stanley DW) 179,223 149,040 ----------- ----------- Total Assets 41,478,457 45,422,180 =========== =========== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Redemptions payable 919,278 851,645 Accrued brokerage fees (Morgan Stanley DW) 158,727 171,976 Accrued management fees 43,132 46,733 ----------- ----------- Total Liabilities 1,121,137 1,070,354 ----------- ----------- PARTNERS' CAPITAL Limited Partners (2,558,814.213 and 2,879,808.149 Units, respectively) 39,917,674 43,870,162 General Partner (28,182.331 and 31,618.331 Units, respectively) 439,646 481,664 ----------- ----------- Total Partners' Capital 40,357,320 44,351,826 ----------- ----------- Total Liabilities and Partners' Capital 41,478,457 45,422,180 =========== =========== NET ASSET VALUE PER UNIT 15.60 15.23 =========== ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 2006 2005 2004 ------------ ------------ ---------- $ $ $ INVESTMENT INCOME Interest income (Morgan Stanley DW) 2,044,009 1,370,806 625,965 ------------ ------------ ---------- EXPENSES Brokerage fees (Morgan Stanley DW) 1,987,699 2,126,114 2,332,241 Management fees 540,137 577,754 633,766 ------------ ------------ ---------- Total Expenses 2,527,836 2,703,868 2,966,007 ------------ ------------ ---------- NET INVESTMENT LOSS (483,827) (1,333,062) (2,340,042) ------------ ------------ ---------- TRADING RESULTS Trading profit (loss): Realized 981,659 3,338,207 1,049,835 Net change in unrealized 589,128 (214,685) (1,729,717) ------------ ------------ ---------- 1,570,787 3,123,522 (679,882) Proceeds from Litigation Settlement -- 2,230 2,296 ------------ ------------ ---------- Total Trading Results 1,570,787 3,125,752 (677,586) ------------ ------------ ---------- NET INCOME (LOSS) 1,086,960 1,792,690 (3,017,628) ============ ============ ========== NET INCOME (LOSS) ALLOCATION: Limited Partners 1,074,038 1,769,412 (2,985,362) General Partner 12,922 23,278 (32,266) NET INCOME (LOSS) PER UNIT: Limited Partners 0.37 0.62 (0.86) General Partner 0.37 0.62 (0.86)
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ------------------------- 2006 2005 ------------ ------------ $ $ ASSETS Equity in futures interests trading accounts: Unrestricted cash 472,088,633 475,166,952 Restricted cash 64,801,445 51,242,347 ------------ ------------ Total Cash 536,890,078 526,409,299 ------------ ------------ Net unrealized gain on open contracts (MS&Co.) 11,039,855 9,019,008 Net unrealized gain on open contracts (MSIL) 921,756 9,166,796 ------------ ------------ Total net unrealized gain on open contracts 11,961,611 18,185,804 ------------ ------------ Total Trading Equity 548,851,689 544,595,103 Subscriptions receivable 4,725,710 4,455,213 Interest receivable (Morgan Stanley DW) 1,858,406 1,417,447 ------------ ------------ Total Assets 555,435,805 550,467,763 ============ ============ LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Redemptions payable 7,988,976 13,439,853 Accrued brokerage fees (Morgan Stanley DW) 2,727,852 2,730,072 Accrued management fees 1,196,492 1,295,496 ------------ ------------ Total Liabilities 11,913,320 17,465,421 ------------ ------------ PARTNERS' CAPITAL Limited Partners (18,501,387.237 and 19,209,338.858 Units, respectively) 537,667,844 527,198,790 General Partner (201,460.769 and 211,461.769 Units, respectively) 5,854,641 5,803,552 ------------ ------------ Total Partners' Capital 543,522,485 533,002,342 ------------ ------------ Total Liabilities and Partners' Capital 555,435,805 550,467,763 ============ ============ NET ASSET VALUE PER UNIT 29.06 27.45 ============ ============
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2006 2005 2004 ----------- ----------- ----------- $ $ $ INVESTMENT INCOME Interest income (Morgan Stanley DW) 20,639,273 12,876,956 4,952,656 ----------- ----------- ----------- EXPENSES Brokerage fees (Morgan Stanley DW) 32,847,913 36,601,881 36,680,599 Management fees 15,437,482 15,652,447 14,450,217 Incentive fee -- -- 6,104,991 ----------- ----------- ----------- Total Expenses 48,285,395 52,254,328 57,235,807 ----------- ----------- ----------- NET INVESTMENT LOSS (27,646,122) (39,377,372) (52,283,151) ----------- ----------- ----------- TRADING RESULTS Trading profit (loss): Realized 64,987,687 7,018,678 50,580,928 Net change in unrealized (6,224,193) 3,059,181 (21,655,342) ----------- ----------- ----------- 58,763,494 10,077,859 28,925,586 Proceeds from Litigation Settlement -- 85,000 45,665 ----------- ----------- ----------- Total Trading Results 58,763,494 10,162,859 28,971,251 ----------- ----------- ----------- NET INCOME (LOSS) 31,117,372 (29,214,513) (23,311,900) =========== =========== =========== NET INCOME (LOSS) ALLOCATION: Limited Partners 30,776,254 (28,920,794) (23,067,010) General Partner 341,118 (293,719) (244,890) NET INCOME (LOSS) PER UNIT: Limited Partners 1.61 (1.43) (1.43) General Partner 1.61 (1.43) (1.43)
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM STRATEGIC L.P. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ----------------------- 2006 2005 ----------- ----------- $ $ ASSETS Equity in futures interests trading accounts: Unrestricted cash 172,839,122 142,187,180 Restricted cash 20,250,647 19,593,820 ----------- ----------- Total Cash 193,089,769 161,781,000 ----------- ----------- Net unrealized gain on open contracts (MSIL) 9,283,006 5,662,270 Net unrealized gain on open contracts (MS&Co.) 7,766,985 7,823,513 ----------- ----------- Total net unrealized gain on open contracts 17,049,991 13,485,783 Net option premiums 680,129 (568) ----------- ----------- Total Trading Equity 210,819,889 175,266,215 Subscriptions receivable 2,601,546 1,351,545 Interest receivable (Morgan Stanley DW) 670,338 445,924 ----------- ----------- Total Assets 214,091,773 177,063,684 =========== =========== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Redemptions payable 3,111,834 4,515,005 Accrued brokerage fees (Morgan Stanley DW) 1,024,464 837,558 Accrued management fees 478,411 381,027 Accrued incentive fee -- 1,704,356 ----------- ----------- Total Liabilities 4,614,709 7,437,946 ----------- ----------- PARTNERS' CAPITAL Limited Partners (12,087,045.247 and 11,834,304.588 Units, respectively) 207,238,137 167,774,452 General Partner (130,584.135 Units) 2,238,927 1,851,286 ----------- ----------- Total Partners' Capital 209,477,064 169,625,738 ----------- ----------- Total Liabilities and Partners' Capital 214,091,773 177,063,684 =========== =========== NET ASSET VALUE PER UNIT 17.15 14.18 =========== ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2006 2005 2004 ----------- ----------- ----------- $ $ $ INVESTMENT INCOME Interest income (Morgan Stanley DW) 6,908,530 4,008,536 1,602,712 ----------- ----------- ----------- EXPENSES Brokerage fees (Morgan Stanley DW) 11,319,725 11,407,747 9,860,579 Incentive fees 5,369,200 2,251,786 2,751,859 Management fees 5,266,764 4,685,477 4,006,640 ----------- ----------- ----------- Total Expenses 21,955,689 18,345,010 16,619,078 ----------- ----------- ----------- NET INVESTMENT LOSS (15,047,159) (14,336,474) (15,016,366) ----------- ----------- ----------- TRADING RESULTS Trading profit (loss): Realized 47,135,224 (2,036,361) 21,527,423 Net change in unrealized 3,564,208 10,826,414 (5,262,416) ----------- ----------- ----------- 50,699,432 8,790,053 16,265,007 Proceeds from Litigation Settlement -- 454 173 ----------- ----------- ----------- Total Trading Results 50,699,432 8,790,507 16,265,180 ----------- ----------- ----------- NET INCOME (LOSS) 35,652,273 (5,545,967) 1,248,814 =========== =========== =========== NET INCOME (LOSS) ALLOCATION: Limited Partners 35,264,632 (5,489,130) 1,239,931 General Partner 387,641 (56,837) 8,883 NET INCOME (LOSS) PER UNIT: Limited Partners 2.97 (0.38) 0.25 General Partner 2.97 (0.38) 0.25
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM TECHNICAL L.P. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ----------------------- 2006 2005 ----------- ----------- $ $ ASSETS Equity in futures interests trading accounts: Unrestricted cash 618,802,593 591,492,563 Restricted cash 113,620,432 127,922,335 ----------- ----------- Total Cash 732,423,025 719,414,898 ----------- ----------- Net unrealized gain (loss) on open contracts (MS&Co.) 30,280,000 (2,653,896) Net unrealized gain on open contracts (MSIL) 1,537,347 24,718,032 ----------- ----------- Total net unrealized gain on open contracts 31,817,347 22,064,136 Net option premiums 64,116 -- ----------- ----------- Total Trading Equity 764,304,488 741,479,034 Subscriptions receivable 6,849,894 8,317,319 Interest receivable (Morgan Stanley DW) 2,538,494 1,887,334 ----------- ----------- Total Assets 773,692,876 751,683,687 =========== =========== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Redemptions payable 11,571,388 22,863,255 Accrued brokerage fees (Morgan Stanley DW) 3,693,334 3,775,150 Accrued management fees 1,607,196 1,629,189 ----------- ----------- Total Liabilities 16,871,918 28,267,594 ----------- ----------- PARTNERS' CAPITAL Limited Partners (31,769,428.115 and 32,000,561.834 Units, respectively) 748,658,571 715,669,731 General Partner (346,372.001 Units) 8,162,387 7,746,362 ----------- ----------- Total Partners' Capital 756,820,958 723,416,093 ----------- ----------- Total Liabilities and Partners' Capital 773,692,876 751,683,687 =========== =========== NET ASSET VALUE PER UNIT 23.57 22.36 =========== ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2006 2005 2004 ----------- ----------- ----------- $ $ $ INVESTMENT INCOME Interest income (Morgan Stanley DW) 27,915,330 17,176,811 6,171,302 ----------- ----------- ----------- EXPENSES Brokerage fees (Morgan Stanley DW) 44,839,676 49,430,024 45,508,966 Management fees 19,618,375 19,268,955 16,226,640 Incentive fees 6,762,802 2,668,447 12,132,833 ----------- ----------- ----------- Total Expenses 71,220,853 71,367,426 73,868,439 ----------- ----------- ----------- NET INVESTMENT LOSS (43,305,523) (54,190,615) (67,697,137) ----------- ----------- ----------- TRADING RESULTS Trading profit (loss): Realized 72,015,436 19,045,879 122,928,230 Net change in unrealized 9,753,211 (5,277,614) (19,092,460) ----------- ----------- ----------- 81,768,647 13,768,265 103,835,770 Proceeds from Litigation Settlement -- 4,209 3,018 ----------- ----------- ----------- Total Trading Results 81,768,647 13,772,474 103,838,788 ----------- ----------- ----------- NET INCOME (LOSS) 38,463,124 (40,418,141) 36,141,651 =========== =========== =========== NET INCOME (LOSS) ALLOCATION: Limited Partners 38,047,099 (39,990,714) 35,747,190 General Partner 416,025 (427,427) 394,461 NET INCOME (LOSS) PER UNIT: Limited Partners 1.21 (1.27) 0.99 General Partner 1.21 (1.27) 0.99
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM CURRENCY L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
UNITS OF PARTNERSHIP LIMITED GENERAL INTEREST PARTNERS PARTNER TOTAL -------------- ----------- --------- ----------- $ $ $ Partners' Capital, December 31, 2003 12,139,408.225 188,042,673 2,013,247 190,055,920 Offering of Units 8,372,327.316 114,539,377 990,000 115,529,377 Net loss -- (11,774,885) (133,822) (11,908,707) Redemptions (1,557,346.356) (20,575,860) -- (20,575,860) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2004 18,954,389.185 270,231,305 2,869,425 273,100,730 Offering of Units 3,336,357.445 40,295,529 170,000 40,465,529 Net loss -- (49,177,845) (526,014) (49,703,859) Redemptions (4,587,517.773) (55,149,719) (225,924) (55,375,643) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2005 17,703,228.857 206,199,270 2,287,487 208,486,757 Offering of Units 1,518,069.025 16,510,816 -- 16,510,816 Net loss -- (8,482,159) (93,009) (8,575,168) Redemptions (4,893,969.713) (52,924,163) (448,906) (53,373,069) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2006 14,327,328.169 161,303,764 1,745,572 163,049,336 ============== =========== ========= ===========
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
UNITS OF PARTNERSHIP LIMITED GENERAL INTEREST PARTNERS PARTNER TOTAL ------------- ----------- ------- ----------- $ $ $ Partners' Capital, December 31, 2003 3,401,912.446 52,064,431 575,062 52,639,493 Offering of Units 778,018.263 11,587,284 -- 11,587,284 Net loss -- (2,985,362) (32,266) (3,017,628) Redemptions (783,103.571) (11,597,531) -- (11,597,531) ------------- ----------- ------- ----------- Partners' Capital, December 31, 2004 3,396,827.138 49,068,822 542,796 49,611,618 Offering of Units 345,735.053 4,999,666 -- 4,999,666 Net income -- 1,769,412 23,278 1,792,690 Redemptions (831,135.711) (11,967,738) (84,410) (12,052,148) ------------- ----------- ------- ----------- Partners' Capital, December 31, 2005 2,911,426.480 43,870,162 481,664 44,351,826 Offering of Units 258,442.402 4,021,015 -- 4,021,015 Net income -- 1,074,038 12,922 1,086,960 Redemptions (582,872.338) (9,047,541) (54,940) (9,102,481) ------------- ----------- ------- ----------- Partners' Capital, December 31, 2006 2,586,996.544 39,917,674 439,646 40,357,320 ============= =========== ======= ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
UNITS OF PARTNERSHIP LIMITED GENERAL INTEREST PARTNERS PARTNER TOTAL -------------- ------------ --------- ------------ $ $ $ Partners' Capital, December 31, 2003 14,565,503.079 436,666,633 4,855,851 441,522,484 Offering of Units 7,215,873.382 208,687,672 1,540,000 210,227,672 Net loss -- (23,067,010) (244,890) (23,311,900) Redemptions (1,517,552.868) (43,132,131) -- (43,132,131) -------------- ------------ --------- ------------ Partners' Capital, December 31, 2004 20,263,823.593 579,155,164 6,150,961 585,306,125 Offering of Units 3,482,044.148 91,946,015 380,000 92,326,015 Net loss -- (28,920,794) (293,719) (29,214,513) Redemptions (4,325,067.114) (114,981,595) (433,690) (115,415,285) -------------- ------------ --------- ------------ Partners' Capital, December 31, 2005 19,420,800.627 527,198,790 5,803,552 533,002,342 Offering of Units 2,664,130.689 76,905,995 -- 76,905,995 Net income -- 30,776,254 341,118 31,117,372 Redemptions (3,382,083.310) (97,213,195) (290,029) (97,503,224) -------------- ------------ --------- ------------ Partners' Capital, December 31, 2006 18,702,848.006 537,667,844 5,854,641 543,522,485 ============== ============ ========= ============
MORGAN STANLEY SPECTRUM STRATEGIC L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
UNITS OF PARTNERSHIP LIMITED GENERAL INTEREST PARTNERS PARTNER TOTAL -------------- ----------- --------- ----------- $ $ $ Partners' Capital, December 31, 2003 8,475,891.871 119,976,992 1,293,447 121,270,439 Offering of Units 5,057,597.578 73,841,018 720,000 74,561,018 Net income -- 1,239,931 8,883 1,248,814 Redemptions (948,261.723) (13,839,146) -- (13,839,146) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2004 12,585,227.726 181,218,795 2,022,330 183,241,125 Offering of Units 2,346,340.284 31,611,503 -- 31,611,503 Net loss -- (5,489,130) (56,837) (5,545,967) Redemptions (2,966,679.287) (39,566,716) (114,207) (39,680,923) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2005 11,964,888.723 167,774,452 1,851,286 169,625,738 Offering of Units 2,517,218.118 40,403,751 -- 40,403,751 Net income -- 35,264,632 387,641 35,652,273 Redemptions (2,264,477.459) (36,204,698) -- (36,204,698) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2006 12,217,629.382 207,238,137 2,238,927 209,477,064 ============== =========== ========= ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM TECHNICAL L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
UNITS OF PARTNERSHIP LIMITED GENERAL INTEREST PARTNERS PARTNER TOTAL -------------- ------------ --------- ------------ $ $ $ Partners' Capital, December 31, 2003 23,774,204.324 532,266,109 5,918,169 538,184,278 Offering of Units 11,745,240.279 259,052,698 1,900,000 260,952,698 Net income -- 35,747,190 394,461 36,141,651 Redemptions (2,558,198.900) (56,554,740) -- (56,554,740) -------------- ------------ --------- ------------ Partners' Capital, December 31, 2004 32,961,245.703 770,511,257 8,212,630 778,723,887 Offering of Units 6,431,314.024 139,226,034 480,000 139,706,034 Net loss -- (39,990,714) (427,427) (40,418,141) Redemptions (7,045,625.892) (154,076,846) (518,841) (154,595,687) -------------- ------------ --------- ------------ Partners' Capital, December 31, 2005 32,346,933.835 715,669,731 7,746,362 723,416,093 Offering of Units 5,449,636.682 127,236,707 -- 127,236,707 Net income -- 38,047,099 416,025 38,463,124 Redemptions (5,680,770.401) (132,294,966) -- (132,294,966) -------------- ------------ --------- ------------ Partners' Capital, December 31, 2006 32,115,800.116 748,658,571 8,162,387 756,820,958 ============== ============ ========= ============
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM CURRENCY L.P. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2006 2005 2004 ----------- ----------- ----------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net loss (8,575,168) (49,703,859) (11,908,707) Noncash item included in net loss: Net change in unrealized 1,668,161 10,445,759 (11,769,313) (Increase) decrease in operating assets: Restricted cash -- 169,680 (169,680) Interest receivable (Morgan Stanley DW) (768) (244,444) (213,650) Increase (decrease) in operating liabilities: Accrued brokerage fees (Morgan Stanley DW) (235,950) (145,868) 346,433 Accrued management fees (102,587) (63,421) 150,624 Accrued incentive fee -- -- (399,035) ----------- ----------- ----------- Net cash used for operating activities (7,246,312) (39,542,153) (23,963,328) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Cash received from offering of Units 17,106,804 45,800,729 117,548,841 Cash paid for redemptions of Units (55,076,000) (51,528,518) (19,137,190) ----------- ----------- ----------- Net cash provided by (used for) financing activities (37,969,196) (5,727,789) 98,411,651 ----------- ----------- ----------- Net increase (decrease) in unrestricted cash (45,215,508) (45,269,942) 74,448,323 Unrestricted cash at beginning of period 207,952,625 253,222,567 178,774,244 ----------- ----------- ----------- Unrestricted cash at end of period 162,737,117 207,952,625 253,222,567 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 2006 2005 2004 ------------ ------------ ----------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) 1,086,960 1,792,690 (3,017,628) Noncash item included in net income (loss): Net change in unrealized (589,128) 214,685 1,729,717 (Increase) decrease in operating assets: Restricted cash (887,091) 1,501,795 (116,681) Interest receivable (Morgan Stanley DW) (30,183) (65,068) (43,862) Net option premiums -- -- (39,600) Decrease in operating liabilities: Accrued brokerage fees (Morgan Stanley DW) (13,249) (16,460) (6,455) Accrued management fees (3,601) (4,473) (1,754) ------------ ------------ ----------- Net cash provided by (used for) operating activities (436,292) 3,423,169 (1,496,263) ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Cash received from offering of Units 4,092,049 5,343,828 11,983,540 Cash paid for redemptions of Units (9,034,848) (11,783,215) (12,047,859) ------------ ------------ ----------- Net cash used for financing activities (4,942,799) (6,439,387) (64,319) ------------ ------------ ----------- Net decrease in unrestricted cash (5,379,091) (3,016,218) (1,560,582) Unrestricted cash at beginning of period 41,897,899 44,914,117 46,474,699 ------------ ------------ ----------- Unrestricted cash at end of period 36,518,808 41,897,899 44,914,117 ============ ============ ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 2006 2005 2004 ------------ ------------ ----------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) 31,117,372 (29,214,513) (23,311,900) Noncash item included in net income (loss): Net change in unrealized 6,224,193 (3,059,181) 21,655,342 (Increase) decrease in operating assets: Restricted cash (13,559,098) 24,246,115 (15,987,079) Interest receivable (Morgan Stanley DW) (440,959) (659,466) (507,361) Net option premiums -- 3,366,493 (2,134,005) Increase (decrease) in operating liabilities: Accrued brokerage fees (Morgan Stanley DW) (2,220) (738,682) 1,067,674 Accrued management fees (99,004) (60,615) 362,561 Accrued incentive fee -- -- (2,227,005) ------------ ------------ ----------- Net cash provided by (used for) operating activities 23,240,284 (6,119,849) (21,081,773) ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Cash received from offering of Units 76,635,498 100,607,663 210,179,028 Cash paid for redemptions of Units (102,954,101) (107,667,647) (39,845,039) ------------ ------------ ----------- Net cash provided by (used for) financing activities (26,318,603) (7,059,984) 170,333,989 ------------ ------------ ----------- Net increase (decrease) in unrestricted cash (3,078,319) (13,179,833) 149,252,216 Unrestricted cash at beginning of period 475,166,952 488,346,785 339,094,569 ------------ ------------ ----------- Unrestricted cash at end of period 472,088,633 475,166,952 488,346,785 ============ ============ ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM STRATEGIC L.P. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2006 2005 2004 ----------- ----------- ----------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) 35,652,273 (5,545,967) 1,248,814 Noncash item included in net income (loss): Net change in unrealized (3,564,208) (10,826,414) 5,262,416 (Increase) decrease in operating assets: Restricted cash (656,827) (2,785,615) (3,161,765) Net option premiums (680,697) 263,856 414,992 Interest receivable (Morgan Stanley DW) (224,414) (207,268) (172,065) Increase (decrease) in operating liabilities: Accrued brokerage fees (Morgan Stanley DW) 186,906 (243,247) 430,756 Accrued management fees 97,384 (28,870) 140,911 Accrued incentive fees (1,704,356) 1,515,612 (622,506) ----------- ----------- ----------- Net cash provided by (used for) operating activities 29,106,061 (17,857,913) 3,541,553 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Cash received from offering of Units 39,153,750 35,344,084 74,620,070 Cash paid for redemptions of Units (37,607,869) (36,891,247) (12,769,688) ----------- ----------- ----------- Net cash provided by (used for) financing activities 1,545,881 (1,547,163) 61,850,382 ----------- ----------- ----------- Net increase (decrease) in unrestricted cash 30,651,942 (19,405,076) 65,391,935 Unrestricted cash at beginning of period 142,187,180 161,592,256 96,200,321 ----------- ----------- ----------- Unrestricted cash at end of period 172,839,122 142,187,180 161,592,256 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM TECHNICAL L.P. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 2006 2005 2004 ------------ ------------ ----------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) 38,463,124 (40,418,141) 36,141,651 Noncash item included in net income (loss): Net change in unrealized (9,753,211) 5,277,614 19,092,460 (Increase) decrease in operating assets: Restricted cash 14,301,903 33,063,604 (71,797,043) Net option premiums (64,116) -- 3,973,725 Interest receivable (Morgan Stanley DW) (651,160) (887,041) (708,483) Increase (decrease) in operating liabilities: Accrued brokerage fees (Morgan Stanley DW) (81,816) (854,838) 1,682,213 Accrued management fees (21,993) (2,851) 547,516 Accrued incentive fee -- -- (4,924,640) ------------ ------------ ----------- Net cash provided by (used for) operating activities 42,192,731 (3,821,653) (15,992,601) ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Cash received from offering of Units 128,704,132 148,524,367 259,672,165 Cash paid for redemptions of Units (143,586,833) (138,199,116) (53,013,759) ------------ ------------ ----------- Net cash provided by (used for) financing activities (14,882,701) 10,325,251 206,658,406 ------------ ------------ ----------- Net increase in unrestricted cash 27,310,030 6,503,598 190,665,805 Unrestricted cash at beginning of period 591,492,563 584,988,965 394,323,160 ------------ ------------ ----------- Unrestricted cash at end of period 618,802,593 591,492,563 584,988,965 ============ ============ ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM CURRENCY L.P. SCHEDULES OF INVESTMENTS DECEMBER 31, 2006 AND 2005
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS ------------------------------ --------------- ------------- ---------------- ------------- 2006 PARTNERSHIP NET ASSETS: $163,049,336 $ % $ % Foreign currency 1,858,967 1.14 2,675,066 1.64 ---------- ----- --------- ---- Grand Total: 1,858,967 1.14 2,675,066 1.64 ========== ===== ========= ==== Unrealized Currency Gain/(Loss) Total Net Unrealized Gain per Statement of Financial Condition 2005 PARTNERSHIP NET ASSETS: $208,486,757 Foreign currency (1,081,795) (0.52) 7,283,989 3.49 ---------- ----- --------- ---- Grand Total: (1,081,795) (0.52) 7,283,989 3.49 ========== ===== ========= ==== Unrealized Currency Gain/(Loss) Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) ------------------------------ -------------- 2006 PARTNERSHIP NET ASSETS: $163,049,336 $ Foreign currency 4,534,033 --------- Grand Total: 4,534,033 Unrealized Currency Gain/(Loss) -- --------- Total Net Unrealized Gain per Statement of Financial Condition 4,534,033 ========= 2005 PARTNERSHIP NET ASSETS: $208,486,757 Foreign currency 6,202,194 --------- Grand Total: 6,202,194 Unrealized Currency Gain/(Loss) -- --------- Total Net Unrealized Gain per Statement of Financial Condition 6,202,194 =========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P. SCHEDULES OF INVESTMENTS DECEMBER 31, 2006 AND 2005
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS ------------------------------ --------------- ------------- ---------------- ------------- 2006 PARTNERSHIP NET ASSETS: $40,357,320 $ % $ % Commodity 65,101 0.16 127,695 0.32 Equity 269,904 0.66 -- -- Foreign currency (30,000) (0.07) (7,613) (0.02) Interest rate (41,078) (0.10) 371,009 0.92 ------- ----- ------- ----- Grand Total: 263,927 0.65 491,091 1.22 ======= ===== ======= ===== Unrealized Currency Gain Total Net Unrealized Gain per Statement of Financial Condition 2005 PARTNERSHIP NET ASSETS: $44,351,826 Commodity 74,261 0.17 (9,113) (0.02) Equity 431,246 0.97 -- -- Foreign currency 25,515 0.06 (31,429) (0.07) Interest rate 37,273 0.08 186,788 0.42 ------- ----- ------- ----- Grand Total: 568,295 1.28 146,246 0.33 ======= ===== ======= ===== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) ------------------------------ -------------- 2006 PARTNERSHIP NET ASSETS: $40,357,320 $ Commodity 192,796 Equity 269,904 Foreign currency (37,613) Interest rate 329,931 --------- Grand Total: 755,018 Unrealized Currency Gain 436,748 --------- Total Net Unrealized Gain per Statement of Financial Condition 1,191,766 ========= 2005 PARTNERSHIP NET ASSETS: $44,351,826 Commodity 65,148 Equity 431,246 Foreign currency (5,914) Interest rate 224,061 --------- Grand Total: 714,541 Unrealized Currency Loss (111,903) --------- Total Net Unrealized Gain per Statement of Financial Condition 602,638 =========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM SELECT L.P. SCHEDULES OF INVESTMENTS DECEMBER 31, 2006 AND 2005
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS ------------------------------ --------------- ------------- ---------------- ------------- 2006 PARTNERSHIP NET ASSETS: $543,522,485 $ % $ % Commodity 456,160 0.08 2,995,834 0.55 Equity 4,924,820 0.91 -- -- Foreign currency (247,846) (0.05) 2,552,915 0.47 Interest rate (2,248,119) (0.41) 4,585,113 0.84 ---------- ----- ---------- ----- Grand Total: 2,885,015 0.53 10,133,862 1.86 ========== ===== ========== ===== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition 2005 PARTNERSHIP NET ASSETS: $533,002,342 Commodity 15,589,813 2.92 (730,681) (0.14) Equity 1,882,850 0.35 12,500 -- Foreign currency (2,386,026) (0.44) 4,136,927 0.78 Interest rate 684,290 0.13 1,798,925 0.34 ---------- ----- ---------- ----- Grand Total: 15,770,927 2.96 5,217,671 0.98 ========== ===== ========== ===== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) ------------------------------ -------------- 2006 PARTNERSHIP NET ASSETS: $543,522,485 $ Commodity 3,451,994 Equity 4,924,820 Foreign currency 2,305,069 Interest rate 2,336,994 ---------- Grand Total: 13,018,877 Unrealized Currency Loss (1,057,266) ---------- Total Net Unrealized Gain per Statement of Financial Condition 11,961,611 ========== 2005 PARTNERSHIP NET ASSETS: $533,002,342 Commodity 14,859,132 Equity 1,895,350 Foreign currency 1,750,901 Interest rate 2,483,215 ---------- Grand Total: 20,988,598 Unrealized Currency Loss (2,802,794) ---------- Total Net Unrealized Gain per Statement of Financial Condition 18,185,804 ==========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM STRATEGIC L.P. SCHEDULES OF INVESTMENTS DECEMBER 31, 2006 AND 2005
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS ------------------------------ --------------- ------------- ---------------- ------------- 2006 PARTNERSHIP NET ASSETS: $209,477,064 $ % $ % Commodity 12,403,353 5.92* 570,125 0.27 Equity 1,533,728 0.73 (775) -- Foreign currency 1,553,840 0.74 1,207,868 0.58 Interest rate (773,724) (0.37) 969,810 0.46 ---------- ----- ---------- ----- Grand Total: 14,717,197 7.02 2,747,028 1.31 ========== ===== ========== ===== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition 2005 PARTNERSHIP NET ASSETS: $169,625,738 Commodity 16,718,531 9.86* (28,242) (0.01) Equity (96,027) (0.06) -- -- Foreign currency (1,327,499) (0.78) (2,048,373) (1.21) Interest rate -- -- 582,959 0.34 ---------- ----- ---------- ----- Grand Total: 15,295,005 9.02 (1,493,656) (0.88) ========== ===== ========== ===== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) ------------------------------ -------------- 2006 PARTNERSHIP NET ASSETS: $209,477,064 $ Commodity 12,973,478 Equity 1,532,953 Foreign currency 2,761,708 Interest rate 196,086 ---------- Grand Total: 17,464,225 Unrealized Currency Loss (414,234) ---------- Total Net Unrealized Gain per Statement of Financial Condition 17,049,991 ========== 2005 PARTNERSHIP NET ASSETS: $169,625,738 Commodity 16,690,289 Equity (96,027) Foreign currency (3,375,872) Interest rate 582,959 ---------- Grand Total: 13,801,349 Unrealized Currency Loss (315,566) ---------- Total Net Unrealized Gain per Statement of Financial Condition 13,485,783 ==========
*No single contract's value exceeds 5% of Net Assets. The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM TECHNICAL L.P. SCHEDULES OF INVESTMENTS DECEMBER 31, 2006 AND 2005
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS ------------------------------ --------------- ------------- ---------------- ------------- 2006 PARTNERSHIP NET ASSETS: $756,820,958 $ % $ % Commodity 1,502,376 0.20 2,066,014 0.27 Equity 7,860,426 1.04 -- -- Foreign currency 3,058,385 0.40 12,834,701 1.70 Interest rate (6,358,278) (0.84) 16,042,982 2.12 ---------- ----- ---------- ----- Grand Total: 6,062,909 0.80 30,943,697 4.09 ========== ===== ========== ===== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition 2005 PARTNERSHIP NET ASSETS: $723,416,093 Commodity 33,767,846 4.66 (1,474,466) (0.20) Equity (1,753,796) (0.24) -- -- Foreign currency (4,881,736) (0.67) (2,151,613) (0.30) Interest rate 1,726,772 0.24 2,349,450 0.32 ---------- ----- ---------- ----- Grand Total: 28,859,086 3.99 (1,276,629) (0.18) ========== ===== ========== ===== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) ------------------------------ -------------- 2006 PARTNERSHIP NET ASSETS: $756,820,958 $ Commodity 3,568,390 Equity 7,860,426 Foreign currency 15,893,086 Interest rate 9,684,704 ---------- Grand Total: 37,006,606 Unrealized Currency Loss (5,189,259) ---------- Total Net Unrealized Gain per Statement of Financial Condition 31,817,347 ========== 2005 PARTNERSHIP NET ASSETS: $723,416,093 Commodity 32,293,380 Equity (1,753,796) Foreign currency (7,033,349) Interest rate 4,076,222 ---------- Grand Total: 27,582,457 Unrealized Currency Loss (5,518,321) ---------- Total Net Unrealized Gain per Statement of Financial Condition 22,064,136 ==========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION. Morgan Stanley Spectrum Currency L.P. ("Spectrum Currency"), Morgan Stanley Spectrum Global Balanced L.P. ("Spectrum Global Balanced"), Morgan Stanley Spectrum Select L.P. ("Spectrum Select"), Morgan Stanley Spectrum Strategic L.P. ("Spectrum Strategic"), and Morgan Stanley Spectrum Technical L.P. ("Spectrum Technical") (individually, a "Partnership", or collectively, the "Partnerships"), are limited partnerships organized 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"). The general partner of each Partnership is Demeter Management Corporation ("Demeter"). The non-clearing commodity broker is Morgan Stanley DW Inc. ("Morgan Stanley DW"). The clearing commodity brokers for Spectrum Global Balanced, Spectrum Select, Spectrum Strategic, and Spectrum Technical are Morgan Stanley & Co. Incorporated ("MS&Co.") and Morgan Stanley & Co. International Limited ("MSIL"). Spectrum Currency's clearing commodity broker is MS&Co. MS&Co. acts as the counterparty on all of the foreign currency forward contracts for each Partnership. In 2007, Morgan Stanley intends to merge Morgan Stanley DW into MS&Co. Upon completion of the merger, the surviving entity, MS&Co., will be the Partnerships' principal U.S. commodity broker-dealer. For Spectrum Strategic and Spectrum Technical, Morgan Stanley Capital Group Inc. ("MSCG") acts as the counterparty on all of the options on foreign currency forward contracts. Demeter, Morgan Stanley DW, MS&Co., MSIL, and MSCG are wholly-owned subsidiaries of Morgan Stanley. Demeter is required to maintain a 1% minimum interest in the equity of each Partnership and income (losses) are shared by Demeter and the limited partners based upon their proportional ownership interests. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) USE OF ESTIMATES. The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts in the financial statements and related disclosures. Management believes that the estimates utilized in the preparation of the financial statements are prudent and reasonable. Actual results could differ from those estimates. REVENUE RECOGNITION. Futures Interests are open commitments until settlement date, at which time they are realized. They are valued at market on a daily basis and the resulting net change in unrealized gains and losses is reflected in the change in unrealized trading profit (loss) on open contracts from one period to the next on the Statements of Operations. Monthly, Morgan Stanley DW pays each Partnership interest income on 80% of the month's average daily "Net Assets" (as defined in the Limited Partnership Agreements) in the case of Spectrum Currency, Spectrum Select, Spectrum Strategic, and Spectrum Technical, and on 100% in the case of Spectrum Global Balanced. The interest rate is equal to a prevailing rate on U.S. Treasury bills. For purposes of such interest payments, Net Assets do not include monies owed to the Partnerships on Futures Interests. The Partnerships' functional currency is the U.S. dollar; however, they transact business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the Statements of Financial Condition. Income and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in income currently. NET INCOME (LOSS) PER UNIT. Net income (loss) per unit of limited partnership interest ("Unit(s)") is computed using the weighted average number of Units outstanding during the period. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) 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 is effective for fiscal years beginning after December 15, 2006. The impact to the Partnerships' Financial Statements, if any, is currently being assessed. 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 Partnerships as of January 1, 2008. The impact to the Partnerships' Financial Statements, if any, is currently being assessed. In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB No. 108") to provide guidance on how the effects of the carryover or reversal of prior year unrecorded misstatements should be considered in quantifying a current year misstatement. SAB No. 108 requires a company to apply an approach that considers the amount by which the current year income statement is misstated ("rollover approach") and an approach that considers the cumulative amount by which the current year balance sheet is misstated ("iron-curtain approach"). Prior to the issuance of SAB No. 108, many companies applied either the rollover or iron-curtain approach for purposes of assessing materiality of misstatements. SAB No. 108 is effective for the Partnerships as of January 1, 2007. Upon adoption, SAB No. 108 allows a one-time cumulative effect adjustment against Partners' Capital for those prior year misstatements that were not material under the Partnerships' prior approach, but that are deemed material under the SAB No. 108 approach. Demeter does not expect the adoption of SAB No. 108 to have a material impact on the Partnerships' Financial Statements. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) EQUITY IN FUTURES INTERESTS TRADING ACCOUNTS. The Partnerships' asset "Equity in futures interests trading accounts," reflected on the Statements of Financial Condition, consists of (A) cash on deposit with Morgan Stanley DW, MS&Co, and MSIL for Spectrum Global Balanced, Spectrum Select, Spectrum Strategic, and Spectrum Technical, and with Morgan Stanley DW and MS&Co. for Spectrum Currency, to be used as margin for trading; (B) net unrealized gains or losses on open contracts, which are valued at market and calculated as the difference between original contract value and market value; and (C) net option premiums, which represent the net of all monies paid and/or received for such option premiums. The Partnerships, in their normal course of business, enter into various contracts with MS&Co. and MSIL acting as their commodity brokers. Pursuant to brokerage agreements with MS&Co. and MSIL to the extent that such trading results in unrealized gains or losses, these amounts are offset and reported on a net basis on the Partnerships' Statements of Financial Condition. The Partnerships have offset the fair value amounts recognized for forward and options on forward contracts executed with the same counterparty as allowable under the terms of their master netting agreements with MS&Co., the sole counterparty on such contracts. The Partnerships have consistently applied their right to offset. BROKERAGE AND RELATED TRANSACTION FEES AND COSTS. The brokerage fees for Spectrum Currency and Spectrum Global Balanced are accrued at a flat monthly rate of 1/12 of 4.6% (a 4.6% annual rate) of Net Assets as of the first day of each month. Brokerage fees for Spectrum Select, Spectrum Strategic, and Spectrum Technical are currently accrued at a flat monthly rate of 1/12 of 6.00% (a 6.00% annual rate) of Net Assets as of the first day of each month. Effective July 1, 2005, brokerage fees for Spectrum Select, Spectrum Strategic, and Spectrum Technical were reduced from 1/12 of 7.25% (a 7.25% annual rate) to 1/12 of 6.00% (a 6.00% annual rate) of Net Assets as of the first day of each month. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) Such brokerage fees currently cover all brokerage fees, transaction fees and costs, and ordinary administrative and continuing offering expenses. OPERATING EXPENSES. The Partnerships incur monthly management fees and may incur incentive fees. All common administrative and continuing offering expenses including legal, auditing, accounting, filing fees, and other related expenses are borne by Morgan Stanley DW through the brokerage fees paid by the Partnerships. CONTINUING OFFERING. Units of each Partnership are offered at a price equal to 100% of the Net Asset Value per Unit as of the close of business on the last day of each month. No selling commissions or charges related to the continuing offering of Units are paid by the limited partners or the Partnerships. Morgan Stanley DW pays all such costs. REDEMPTIONS. Limited partners may redeem some or all of their Units at 100% of the Net Asset Value per Unit as of the end of the last day of any month that is at least six months after the closing at which a person first becomes a limited partner. The Request for Redemption must be delivered to a limited partner's local Morgan Stanley Branch Office in time for it to be forwarded and received by Demeter no later than 3:00 p.m., New York City time, on the last day of the month in which the redemption is to be effective. Redemptions must be made in whole Units, in a minimum amount of 50 Units required for each redemption, unless a limited partner is redeeming his entire interest in a Partnership. Units redeemed on or prior to the last day of the twelfth month from the date of purchase will be subject to a redemption charge equal to 2% of the Net Asset Value of a Unit on the Redemption Date. Units redeemed after the last day of the twelfth month and on or prior to the last day of the twenty-fourth month from the date of purchase will be subject to a redemption charge equal to 1% of the Net Asset Value of a Unit on the Redemption Date. Units redeemed after the last day of the twenty-fourth month from the date of purchase will not be subject to a redemption charge. The foregoing redemption charges are paid to Morgan Stanley DW. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) EXCHANGES. On the last day of the first month which occurs more than six months after a person first becomes a limited partner in any of the Partnerships, and at the end of each month thereafter, limited partners may exchange their Units among the Partnerships (subject to certain restrictions outlined in the Limited Partnership Agreements) without paying additional charges. DISTRIBUTIONS. Distributions, other than redemptions of Units, are made on a pro-rata basis at the sole discretion of Demeter. No distributions have been made to date. Demeter does not intend to make any distributions of the Partnerships' profits. 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 each Partnership's revenues and expenses for income tax purposes. DISSOLUTION OF THE PARTNERSHIPS. Spectrum Currency, Spectrum Global Balanced, Spectrum Strategic, and Spectrum Technical will terminate on December 31, 2035 and Spectrum Select will terminate on December 31, 2025, regardless of financial condition at such time, or at an earlier date if certain conditions occur as defined in each Partnership's Limited Partnership Agreement. LITIGATION SETTLEMENT. Spectrum Global Balanced, Spectrum Select, Spectrum Strategic, and Spectrum Technical received notification of a preliminary entitlement to payment from the Sumitomo Copper Litigation Settlement Administrator, and the Partnerships received settlement award payments in the amounts of $0, $45,665, $173, and $3,018, respectively, during July 2004 and $2,230, $85,000, $454, and $4,209, respectively, during November 2005. Spectrum Global Balanced received a settlement award payment in the amount of $2,296 during October 2004. Any amounts received are accounted for in the period received, for the benefit of the limited partners at the date of receipt. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) RECLASSIFICATIONS. Certain prior year amounts relating to cash balances were reclassified on the Statements of Cash Flows to conform to 2006 and 2005 presentation. Such reclassifications have no impact on the Partnerships' reported net income (loss). -------------------------------------------------------------------------------- 2. RELATED PARTY TRANSACTIONS The Partnerships pay brokerage fees to Morgan Stanley DW as described in Note 1. Spectrum Global Balanced, Spectrum Select, Spectrum Strategic, and Spectrum Technical's cash is on deposit with Morgan Stanley DW, MS&Co., and MSIL, and Spectrum Currency's cash is on deposit with Morgan Stanley DW and MS&Co., in futures interests trading accounts to meet margin requirements as needed. Morgan Stanley DW pays interest on these funds as described in Note 1. -------------------------------------------------------------------------------- 3. TRADING ADVISORS Demeter, on behalf of each Partnership, retains certain commodity trading advisors to make all trading decisions for the Partnerships. The trading advisors for each Partnership at December 31, 2006 were as follows: Morgan Stanley Spectrum Currency L.P. John W. Henry & Company, Inc. Sunrise Capital Partners, LLC Morgan Stanley Spectrum Global Balanced L.P. SSARIS Advisors, LLC Morgan Stanley Spectrum Select L.P. EMC Capital Management, Inc. ("EMC") Northfield Trading L.P. ("Northfield") Rabar Market Research, Inc. ("Rabar") Sunrise Capital Management, Inc. ("Sunrise") Graham Capital Management, L.P. ("Graham") Morgan Stanley Spectrum Strategic L.P. Blenheim Capital Management, L.L.C. ("Blenheim") Eclipse Capital Management, Inc. ("Eclipse") FX Concepts (Trading Advisor), Inc. ("FX Concepts"), effective November 1, 2004 MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) Effective April 30, 2004, Allied Irish Capital Management Ltd. was terminated as a trading advisor for Spectrum Strategic. Morgan Stanley Spectrum Technical L.P. Campbell & Company, Inc. ("Campbell") Chesapeake Capital Corporation ("Chesapeake") John W. Henry & Company, Inc. ("JWH") Winton Capital Management Limited ("Winton") Compensation to the trading advisors by the Partnerships consists of a management fee and an incentive fee as follows: MANAGEMENT FEE. The management fee for Spectrum Currency is accrued at a rate of 1/12 of 2% per month of Net Assets allocated to each trading advisor on the first day of each month (a 2% annual rate). The management fee for Spectrum Global Balanced is accrued at a rate of 5/48 of 1% per month of Net Assets allocated to its sole trading advisor on the first day of each month (a 1.25% annual rate). The management fee for Spectrum Select is accrued at a rate of 1/4 of 1% per month of Net Assets allocated to Northfield and Sunrise on the first day of each month (a 3% annual rate), 5/24 of 1% per month of Net Assets allocated to EMC and Rabar on the first day of each month (a 2.5% annual rate), and 1/12 of 2% per month of Net Assets allocated to Graham on the first day of each month (a 2% annual rate). Effective November 1, 2006, the monthly management fee payable to EMC and Rabar was reduced from 1/4 of 1% (a 3% annual rate) to 5/24 of 1% (a 2.5% annual rate) of Net Assets. The management fee for Spectrum Strategic is accrued at a rate of 1/12 of 3% per month of Net Assets allocated to Blenheim and Eclipse on the first day of each month (a 3% annual rate) and 1/12 of 2% per month of Net Assets allocated to FX Concepts on the first day of each month (a 2% annual rate). MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) The management fee for Spectrum Technical is accrued at the rate of 1/12 of 2% per month of Net Assets allocated to JWH and Winton on the first day of each month (a 2% annual rate) and 1/12 of 3% per month of Net Assets allocated to Campbell and Chesapeake on the first day of each month (a 3% annual rate). INCENTIVE FEE. Spectrum Currency pays a monthly incentive fee equal to 20% of the trading profits experienced with respect to each trading advisor's allocated Net Assets as of the end of each calendar month. Spectrum Global Balanced pays a monthly incentive fee equal to 15% of the trading profits experienced with respect to the sole trading advisor's allocated Net Assets as of the end of each calendar month. Spectrum Select pays a monthly incentive fee equal to 17.5% of the trading profits experienced with respect to the Net Assets allocated to EMC and Rabar as of the end of each calendar month, 15% of the trading profits experienced with respect to the Net Assets allocated to each of Northfield and Sunrise as of the end of each calendar month, and 20% of the trading profits experienced with respect to the Net Assets allocated to Graham as of the end of each calendar month. Effective November 1, 2006, the monthly incentive fee payable to EMC and Rabar was increased from 15% to 17.5% of the trading profits experienced with respect to the Net Assets as of the end of each calendar month. Spectrum Strategic pays a monthly incentive fee equal to 15% of the trading profits experienced with respect to the Net Assets allocated to each of Blenheim and Eclipse as of the end of each calendar month and 20% of the trading profits experienced with respect to the Net Assets allocated to FX Concepts as of the end of each calendar month. Spectrum Technical pays a monthly incentive fee equal to 20% of the trading profits experienced with respect to the Net Assets allocated to each of Campbell, JWH, and Winton as of the end of each calendar month and 19% of the trading profits experienced with respect to the Net Assets allocated to Chesapeake as of the end of each calendar month. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) Trading profits represent the amount by which profits from futures, forwards, and options trading exceed losses after brokerage and management fees are deducted. For all Partnerships with trading losses, no incentive fee is paid in subsequent months until all such losses are recovered. Cumulative trading losses are adjusted on a pro-rata basis for the net amount of each month's subscriptions and redemptions. -------------------------------------------------------------------------------- 4. FINANCIAL INSTRUMENTS The Partnerships trade 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 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. The Partnerships' contracts are accounted for on a trade-date basis and marked to market on a daily basis. The Partnerships account for their 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. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) 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 at December 31, 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: SPECTRUM CURRENCY
NET UNREALIZED GAINS ON OPEN CONTRACTS LONGEST MATURITIES ----------------------------- ------------------- OFF- OFF- EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE- YEAR TRADED TRADED TOTAL TRADED TRADED ---- --------- --------- --------- --------- --------- $ $ $ 2006 -- 4,534,033 4,534,033 -- Mar. 2007 2005 -- 6,202,194 6,202,194 -- Mar. 2006
SPECTRUM GLOBAL BALANCED
NET UNREALIZED GAINS ON OPEN CONTRACTS LONGEST MATURITIES ----------------------------- ------------------- OFF- OFF- EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE- YEAR TRADED TRADED TOTAL TRADED TRADED ---- --------- --------- --------- --------- --------- $ $ $ 2006 1,191,766 -- 1,191,766 Jun. 2007 -- 2005 581,983 20,655 602,638 Mar. 2006 Mar. 2006
SPECTRUM SELECT
NET UNREALIZED GAINS ON OPEN CONTRACTS LONGEST MATURITIES ------------------------------- ------------------- OFF- OFF- EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE- YEAR TRADED TRADED TOTAL TRADED TRADED ---- ---------- --------- ---------- --------- --------- $ $ $ 2006 10,738,293 1,223,318 11,961,611 Jun. 2008 Mar. 2007 2005 16,351,481 1,834,323 18,185,804 Jun. 2007 Mar. 2006
SPECTRUM STRATEGIC
NET UNREALIZED GAINS/ (LOSSES) ON OPEN CONTRACTS LONGEST MATURITIES --------------------------------- ------------------- OFF- OFF- EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE- YEAR TRADED TRADED TOTAL TRADED TRADED ---- ---------- ---------- ---------- --------- --------- $ $ $ 2006 14,262,116 2,787,875 17,049,991 Dec. 2008 May 2007 2005 16,488,302 (3,002,519) 13,485,783 Jun. 2010 Jul. 2006
MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) SPECTRUM TECHNICAL
NET UNREALIZED GAINS/ (LOSSES) ON OPEN CONTRACTS LONGEST MATURITIES --------------------------------- ------------------- OFF- OFF- EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE- YEAR TRADED TRADED TOTAL TRADED TRADED ---- ---------- ---------- ---------- --------- --------- $ $ $ 2006 21,920,150 9,897,197 31,817,347 Jun. 2008 Mar. 2007 2005 26,727,989 (4,663,853) 22,064,136 Jun. 2007 Mar. 2006
The Partnerships have credit risk associated with counterparty nonperformance. As of the date of the financial statements, the credit risk associated with the instruments in which the Partnerships trade is limited to the amounts reflected in the Partnerships' Statements of Financial Condition. The Partnerships also have credit risk because Morgan Stanley DW, MS&Co., MSIL, and/or MSCG act as the futures commission merchants or the counterparties, with respect to most of the Partnerships' 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. Morgan Stanley DW, MS&Co., and MSIL, each as a futures commission merchant for each 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, 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 the aggregate, totaled at December 31, 2006 and 2005 respectively, $41,074,269 and $44,956,486 for Spectrum Global Balanced, $547,628,371 and $542,760,780 for Spectrum Select, $207,351,885 and $178,269,302 for Spectrum Strategic, and $754,343,175 and $746,142,887 for Spectrum Technical. With respect to each 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 MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) any requirement that an amount equal to the net unrealized gains (losses) on such contracts be segregated. However, each 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 Morgan Stanley DW for the benefit of MS&Co. With respect to those off-exchange-traded forward currency contracts, the Partnerships are 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 Partnerships are at risk to the ability of MSCG, the sole counterparty on all such contracts to perform. Each Partnership has a netting agreement with the counterparties. These agreements, which seek to reduce both the Partnerships' and the counterparties' exposure on off-exchange-traded forward currency contracts, should materially decrease the Partnerships' credit risk in the event of MS&Co.'s or MSCG's bankruptcy or insolvency. -------------------------------------------------------------------------------- 5. FINANCIAL HIGHLIGHTS SPECTRUM CURRENCY
2006 2005 2004 ------- -------- ------- PER UNIT OPERATING PERFORMANCE: NET ASSET VALUE, JANUARY 1: $ 11.78 $ 14.41 $ 15.66 ------- -------- ------- NET OPERATING RESULTS: Interest Income 0.41 0.28 0.13 Expenses (0.73) (0.82) (0.89) Realized Profit (Loss) 0.02 (1.54) (1.21) Unrealized Profit (Loss) (0.10) (0.55) 0.72 ------- -------- ------- Net Loss (0.40) (2.63) (1.25) ------- -------- ------- NET ASSET VALUE, DECEMBER 31: $ 11.38 $ 11.78 $ 14.41 ======= ======== ======= FOR THE CALENDAR YEAR: RATIOS TO AVERAGE NET ASSETS: Net Investment Loss (2.9)% (4.4)% (5.6)% Expenses before Incentive Fees 6.7 % 6.8 % 6.4 % Expenses after Incentive Fees 6.7 % 6.8 % 6.5 % Net Loss (4.9)% (21.4)% (5.3)% TOTAL RETURN BEFORE INCENTIVE FEES (3.4)% (18.3)% (7.9)% TOTAL RETURN AFTER INCENTIVE FEES (3.4)% (18.3)% (8.0)% INCEPTION-TO-DATE RETURN 13.8 % COMPOUND ANNUALIZED RETURN 2.0 %
MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) SPECTRUM GLOBAL BALANCED
2006 2005 2004 ------- ------- ------- PER UNIT OPERATING PERFORMANCE: NET ASSET VALUE, JANUARY 1: $ 15.23 $ 14.61 $ 15.47 ------- ------- ------- NET OPERATING RESULTS: Interest Income 0.74 0.43 0.18 Expenses (0.91) (0.85) (0.87) Realized Profit 0.33 1.11 0.34 Unrealized Profit (Loss) 0.21 (0.07) (0.51) Proceeds from Litigation Settlement -- 0.00 0.00 ------- ------- ------- Net Income (Loss) 0.37 0.62 (0.86) ------- ------- ------- NET ASSET VALUE, DECEMBER 31: $ 15.60 $ 15.23 14.61 ======= ======= ======= FOR THE CALENDAR YEAR: RATIOS TO AVERAGE NET ASSETS: Net Investment Loss (1.1)% (2.9)% (4.6)% Expenses before Incentive Fees 5.9 % 5.9 % 5.9 % Expenses after Incentive Fees 5.9 % 5.9 % 5.9 % Net Income (Loss) 2.5 % 3.9 % (6.0)% TOTAL RETURN BEFORE INCENTIVE FEES 2.4 % 4.2 % (5.6)% TOTAL RETURN AFTER INCENTIVE FEES 2.4 % 4.2 % (5.6)% INCEPTION-TO-DATE RETURN 56.0 % COMPOUND ANNUALIZED RETURN 3.7 %
SPECTRUM SELECT
2006 2005 2004 -------- ------- -------- PER UNIT OPERATING PERFORMANCE: NET ASSET VALUE, JANUARY 1: $ 27.45 $ 28.88 $ 30.31 -------- ------- -------- NET OPERATING RESULTS: Interest Income 1.08 0.63 0.28 Expenses (2.54) (2.54) (3.20) Realized Profit 3.40 0.33 2.70 Unrealized Profit (Loss) (0.33) 0.15 (1.21) Proceeds from Litigation Settlement -- 0.00 0.00 -------- ------- -------- Net Income (Loss) 1.61 (1.43) (1.43) -------- ------- -------- NET ASSET VALUE, DECEMBER 31: $ 29.06 $ 27.45 $ 28.88 ======== ======= ======== FOR THE CALENDAR YEAR: RATIOS TO AVERAGE NET ASSETS: Net Investment Loss (5.0)% (7.2)% (10.1)% Expenses before Incentive Fees 8.8 % 9.5 % 9.9 % Expenses after Incentive Fees 8.8 % 9.5 % 11.1 % Net Income (Loss) 5.7 % (5.3)% (4.5)% TOTAL RETURN BEFORE INCENTIVE FEES 5.9 % (5.0)% (3.6)% TOTAL RETURN AFTER INCENTIVE FEES 5.9 % (5.0)% (4.7)% INCEPTION-TO-DATE RETURN 190.6 % COMPOUND ANNUALIZED RETURN 7.2 %
MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (concluded) SPECTRUM STRATEGIC
2006 2005 2004 ------- ------- ------- PER UNIT OPERATING PERFORMANCE: NET ASSET VALUE, JANUARY 1: $ 14.18 $ 14.56 $ 14.31 ------- ------- ------- NET OPERATING RESULTS: Interest Income 0.58 0.31 0.15 Expenses (1.83) (1.44) (1.52) Realized Profit (Loss) 3.92 (0.10) 2.10 Unrealized Profit (Loss) 0.30 0.85 (0.48) Proceeds from Litigation Settlement -- 0.00 0.00 ------- ------- ------- Net Income (Loss) 2.97 (0.38) 0.25 ------- ------- ------- NET ASSET VALUE, DECEMBER 31: $ 17.15 $ 14.18 $ 14.56 ======= ======= ======= FOR THE CALENDAR YEAR: RATIOS TO AVERAGE NET ASSETS: Net Investment Loss (7.8)% (8.4)% (9.3)% Expenses before Incentive Fees 8.6 % 9.4 % 8.6 % Expenses after Incentive Fees 11.4 % 10.8 % 10.3 % Net Income (Loss) 18.6 % (3.3)% 0.8 % TOTAL RETURN BEFORE INCENTIVE FEES 24.1 % (1.4)% 3.5 % TOTAL RETURN AFTER INCENTIVE FEES 20.9 % (2.6)% 1.7 % INCEPTION-TO-DATE RETURN 71.5 % COMPOUND ANNUALIZED RETURN 4.5 %
SPECTRUM TECHNICAL
2006 2005 2004 -------- ------- -------- PER UNIT OPERATING PERFORMANCE: NET ASSET VALUE, JANUARY 1: $ 22.36 $ 23.63 $ 22.64 -------- ------- -------- NET OPERATING RESULTS: Interest Income 0.87 0.51 0.21 Expenses (2.21) (2.10) (2.53) Realized Profit 2.25 0.48 3.96 Unrealized Profit (Loss) 0.30 (0.16) (0.65) Proceeds from Litigation Settlement -- 0.00 0.00 -------- ------- -------- Net Income (Loss) 1.21 (1.27) 0.99 -------- ------- -------- NET ASSET VALUE, DECEMBER 31: $ 23.57 $ 22.36 $ 23.63 ======== ======= ======== FOR THE CALENDAR YEAR: RATIOS TO AVERAGE NET ASSETS: Net Investment Loss (5.8)% (7.3)% (10.5)% Expenses before Incentive Fees 8.6 % 9.3 % 9.5 % Expenses after Incentive Fees 9.5 % 9.6 % 11.4 % Net Income (Loss) 5.1 % (5.4)% 5.6 % TOTAL RETURN BEFORE INCENTIVE FEES 6.4 % (5.0)% 6.2 % TOTAL RETURN AFTER INCENTIVE FEES 5.4 % (5.4)% 4.4 % INCEPTION-TO-DATE RETURN 135.7 % COMPOUND ANNUALIZED RETURN 7.3 %
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