UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________to_____________
Commission File Number 0-19511
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3619290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Demeter Management Corporation
Two World Trade Center, 62 Fl., New York, NY 10048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 392-5454
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check-mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___________
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2001
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Condition at March 31, 2001
(Unaudited) and December 31, 2000..........................2
Statements of Operations for the Quarters Ended
March 31, 2001 and 2000 (Unaudited)........................3
Statements of Changes in Partners' Capital for the
Quarters Ended March 31, 2001 and 2000
(Unaudited)................................................4
Statements of Cash Flows for the Quarters Ended
March 31, 2001 and 2000 (Unaudited) .......................5
Notes to Financial Statements (Unaudited)...............6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 12-17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.........................................18-31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 32
Item 2. Changes in Securities and Use of Proceeds.......... 32-34
Item 6. Exhibits and Reports on Form 8-K....................35-37
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
2001 2000
$ $
(Unaudited)
ASSETS
Equity in futures interests trading accounts:
Cash 227,452,241 196,555,362
Net unrealized gain on open contracts (MS & Co.) 21,492,549 26,063,382
Net unrealized loss on open contracts (MSIL) (660,328) (511,085)
Total net unrealized gain on open contracts 20,832,221 25,552,297
Net option premiums 394,160 _-____
Total Trading Equity 248,678,622 222,107,659
Subscriptions receivable 3,610,505 1,583,941
Interest receivable (Morgan Stanley DW) 852,730 889,954
Total Assets 253,141,857 224,581,554
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 2,163,225 2,110,529
Accrued brokerage fees (Morgan Stanley DW) 1,390,329 1,231,479
Accrued incentive fees 706,462 -
Accrued management fees 575,308 509,577
Total Liabilities 4,835,324 3,851,585
Partners' Capital
Limited Partners (9,396,876.548 and
9,255,010.627 Units, respectively) 245,483,150 218,182,118
General Partner (108,076.600 Units) 2,823,383 2,547,851
Total Partners' Capital 248,306,533 220,729,969
Total Liabilities and Partners' Capital 253,141,857 224,581,554
NET ASSET VALUE PER UNIT 26.12 23.57
<FN>
The accompanying notes are an integral part
of these financial statements.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
For the Quarters Ended March 31,
2001 2000
$ $
REVENUES
Trading profit (loss):
Realized 32,689,054 4,910,985
Net change in unrealized (4,720,076) (4,790,955)
Total Trading Results 27,968,978 120,030
Interest Income (Morgan Stanley DW) 2,556,038 2,284,949
Total 30,525,016 2,404,979
EXPENSES
Brokerage fees (Morgan Stanley DW) 4,082,437 3,919,970
Management fees 1,689,283 1,622,055
Incentive fees 706,462 ______-____
Total 6,478,182 5,542,025
NET INCOME (LOSS) 24,046,834 (3,137,046)
NET INCOME (LOSS) ALLOCATION
Limited Partners 23,771,302 (3,094,054)
General Partner 275,532 (42,992)
NET INCOME (LOSS) PER UNIT
Limited Partners 2.55 (0.32)
General Partner 2.55 (0.32)
<FN>
The accompanying notes are an integral part
of these financial statements.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Quarters Ended March 31, 2001 and 2000
(Unaudited)
Units of
Partnership Limited General
Interest Partners Partner Total
Partners' Capital,
December 31, 1999 9,716,887.432 $210,877,519 $2,928,155 $213,805,674
Offering of Units 517,227.165 11,415,053 - 11,415,053
Net Loss - (3,094,054) (42,992) (3,137,046)
Redemptions (468,714.690) (10,365,259) - (10,365,259)
Partners' Capital,
March 31, 2000 9,765,399.907 $208,833,259 $2,885,163 $211,718,422
Partners' Capital,
December 31, 2000 9,363,087.227 $218,182,118 $2,547,851 $220,729,969
Offering of Units 356,453.591 8,868,974 - 8,868,974
Net Income - 23,771,302 275,532 24,046,834
Redemptions (214,587.670) (5,339,244) - (5,339,244)
Partners' Capital,
March 31, 2001 9,504,953.148 $245,483,150 $2,823,383 $248,306,533
<FN>
The accompanying notes are an integral part
of these financial statements.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Quarters Ended March 31,
2001 2000
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 24,046,834 (3,137,046)
Noncash item included in net income (loss):
Net change in unrealized 4,720,076 4,790,955
(Increase) decrease in operating assets:
Net option premiums (394,160) 503,106
Interest receivable (Morgan Stanley DW) 37,224 (70,831)
Increase in operating liabilities:
Accrued brokerage fees (Morgan Stanley DW) 158,850 28,269
Accrued incentive fees 706,462 -
Accrued management fees 65,731 11,697
Net cash provided by operating activities 29,341,017 2,126,150
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of Units 8,868,974 11,415,053
Increase in subscriptions receivable (2,026,564) (1,407,992)
Increase in redemptions payable 52,696 200,132
Redemptions of Units (5,339,244) (10,365,259)
Net cash provided by (used for) financing activities 1,555,862 (158,066)
Net increase in cash 30,896,879 1,968,084
Balance at beginning of period 196,555,362 207,251,012
Balance at end of period 227,452,241 209,219,096
<FN>
The accompanying notes are an integral part
of these financial statements.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited financial statements contained herein include, in
the opinion of management, all adjustments necessary for a fair
presentation of the results of operations and financial condition
of Morgan Stanley Dean Witter Spectrum Select L.P. (the
"Partnership"). The financial statements and condensed notes
herein should be read in conjunction with the Partnership's
December 31, 2000 Annual Report on Form 10-K.
1. Organization
Morgan Stanley Dean Witter Spectrum Select L.P. is a Delaware
limited partnership organized to engage primarily in the
speculative trading of futures, forward and options contracts on
physical commodities and other commodity interests, including, but
not limited to, foreign currencies, financial instruments, metals,
energy and agricultural products. The Partnership is one of the
Morgan Stanley Dean Witter Spectrum Series of funds, comprised of
the Partnership, Morgan Stanley Dean Witter Spectrum Commodity
L.P., Morgan Stanley Dean Witter Spectrum Currency L.P., Morgan
Stanley Dean Witter Spectrum Global Balanced L.P., Morgan Stanley
Dean Witter Spectrum Strategic L.P. and Morgan Stanley Dean Witter
Spectrum Technical L.P.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The general partner is Demeter Management Corporation ("Demeter").
The non-clearing commodity broker is Morgan Stanley DW Inc.
("Morgan Stanley DW"). Dean Witter Reynolds Inc. changed its name
to Morgan Stanley DW Inc., effective April 2, 2001. The clearing
commodity brokers are Morgan Stanley & Co., Inc. ("MS & Co.") and
Morgan Stanley & Co. International Limited ("MSIL"). Prior to
October 2000, Carr Futures Inc. provided clearing and execution
services. Demeter, Morgan Stanley DW, MS & Co. and MSIL are
wholly-owned subsidiaries of Morgan Stanley Dean Witter & Co. The
trading advisors to the Partnership are EMC Capital Management,
Inc., Rabar Market Research, Inc. and Sunrise Capital Management,
Inc. (collectively, the "Trading Advisors").
2. Related Party Transactions
The Partnership's cash is on deposit with Morgan Stanley DW, MS &
Co. and MSIL in futures, forwards and options trading accounts to
meet margin requirements as needed. Morgan Stanley DW pays
interest on these funds based on a prevailing rate on U.S.
Treasury bills. Brokerage fees are paid to Morgan Stanley DW.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Financial Instruments
The Partnership trades futures, forward and options contracts on
physical commodities and other commodity interests, including but
not limited to foreign currencies, financial instruments, metals,
energy and agricultural products. Futures and forwards represent
contracts for delayed delivery of an instrument at a specified
date and price. Risk arises from changes in the value of these
contracts and the potential inability of counterparties to
perform under the terms of the contracts. There are numerous
factors which may significantly influence the market value of
these contracts, including interest rate volatility.
The Partnership accounts for its derivative investments in
accordance with the provisions of Statement of Financial
Accounting Standard 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;
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2) Requires no initial net investment or a smaller initial net
investment than would be required relative to changes in
market factors;
3) Terms require or permit net settlement.
Generally derivatives include futures, forward, swaps or option
contracts and other financial instruments with similar
characteristics such as caps, floors and collars.
The net unrealized gain on open contracts is reported as a
component of "Equity in futures interests trading accounts" on the
statements of financial condition and totaled $20,832,221 and
$25,552,297 at March 31, 2001 and December 31, 2000, respectively.
Of the $20,832,221 net unrealized gain on open contracts at March
31, 2001, $17,311,961 related to exchange-traded futures and
futures-styled option contracts and $3,520,260 related to off-
exchange-traded forward currency contracts.
Of the $25,552,297 net unrealized gain on open contracts at
December 31, 2000, $23,901,575 related to exchange-traded futures
and futures-styled options contracts and $1,650,722 related to
off-exchange-traded forward currency contracts.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Exchange-traded futures and futures-styled options contracts held
by the Partnership at March 31, 2001 and December 31, 2000 mature
through March 2002 and December 2001, respectively. Off-
exchange-traded forward currency contracts held by the
Partnership at March 31, 2001 and December 31, 2000 mature
through June 2001 and March 2001, respectively.
The Partnership has credit risk associated with counterparty non-
performance. The credit risk associated with the instruments in
which the Partnership is involved is limited to the amounts
reflected in the Partnership's statements of financial condition.
The Partnership also has credit risk because Morgan Stanley DW, MS
& Co. and MSIL act as the futures commission merchants or the
counterparties, with respect to most of the Partnership's assets.
Exchange-traded futures and futures-styled options contracts are
marked to market on a daily basis, with variations in value
settled on a daily basis. Each of Morgan Stanley DW, MS & Co. and
MSIL, as a futures commission merchant for the Partnership's
exchange-traded futures and futures-styled options contracts, are
required, pursuant to regulations of the Commodity Futures Trading
Commission ("CFTC"), to segregate from their own assets, and for
the sole benefit of their commodity customers, all funds held by
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
them with respect to exchange-traded futures and futures-styled
options contracts, including an amount equal to the net unrealized
gain on all open futures and futures-styled options contracts,
which funds, in the aggregate, totaled $244,764,202 and
$220,456,937 at March 31, 2001 and December 31, 2000,
respectively. With respect to the Partnership's off-exchange-
traded forward currency contracts, there are no daily settlements
of variations in value nor is there any requirement that an amount
equal to the net unrealized gain on forward contracts be
segregated. With respect to those off-exchange-traded forward
currency contracts, the Partnership is at risk to the ability of
MS & Co., the sole counterparty on all of such contracts, to
perform. The Partnership has a netting agreement with MS & Co.
This agreement, which seeks to reduce both the Partnership's and
MS & Co.'s exposure on off-exchange-traded forward currency
contracts, should materially decrease the Partnership's credit
risk in the event of MS & Co.'s bankruptcy or insolvency.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity - The Partnership deposits its assets with Morgan
Stanley DW as non-clearing broker and MS & Co. and MSIL as
clearing brokers in separate futures, forwards and options
accounts established for each Trading Advisor, which assets are
used as margin to engage in trading. The assets are held in
either non-interest-bearing bank accounts or in securities and
instruments permitted by the CFTC for investment of customer
segregated or secured funds. The Partnership's assets held by the
commodity brokers may be used as margin solely for the
Partnership's trading. Since the Partnership's sole purpose is to
trade in futures, forwards and options, it is expected that the
Partnership will continue to own such liquid assets for margin
purposes.
The Partnership's investment in futures, forwards and options may,
from time to time, be illiquid. Most U.S. futures exchanges limit
fluctuations in prices during a single day by regulations referred
to as "daily price fluctuations limits" or "daily limits". Trades
may not be executed at prices beyond the daily limit. If the
price for a particular futures or options contract has increased
or decreased by an amount equal to the daily limit, positions in
that futures or options contract can neither be taken nor
liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the
daily limit for several consecutive days with little or no
trading. These market conditions could prevent the Partnership
from promptly liquidating its futures or options contracts and
result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currency. 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.
The Partnership has never had illiquidity affect a material
portion of its assets.
Capital Resources - The Partnership does not have, or expect to
have, any capital assets. Redemptions, exchanges and sales of
additional units of limited partnership interest ("Unit(s)") in
the future will affect the amount of funds available for
investment in futures, forwards and options in subsequent periods.
It is not possible to estimate the amount and therefore the impact
of future redemptions of Units.
Results of Operations
General. The Partnership's results depend on its Trading Advisors
and the ability of each Trading Advisor's trading programs to take
advantage of price movements or other profit opportunities in the
futures, forwards and options markets. The following presents a
summary of the Partnership's operations for the quarters ended
March 31, 2001 and 2000, 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 its Trading Advisors' trading activities on
behalf of the Partnership as a whole and how the Partnership has
performed in the past.
For the Quarter Ended March 31, 2001
For the quarter ended March 31, 2001, the Partnership recorded
total trading revenues, including interest income of $30,525,016
and posted an increase in net asset value per Unit.
The most significant gains of approximately 8.8% were recorded
throughout the majority of the quarter in the global interest
rate futures markets from long positions in eurodollar futures as
prices rose amid a rattled stock market, shaky consumer
confidence, positive inflation data and interest rate cuts by the
U.S. Federal Reserve. Additional gains were recorded during
January from long positions in Japanese government bond futures
as prices moved higher on concerns regarding that country's
economy. In the currency markets, profits of approximately 3.4%
were recorded throughout the majority of the quarter from short
positions in the Japanese yen as the value of the yen weakened
relative to the U.S. dollar on continuing concerns for the
Japanese economy and in both anticipation and reaction to the
Bank of Japan's decision to reinstate its zero interest rate
policy. In the global stock index futures markets, gains of
approximately 2.1% were recorded throughout the majority of the
quarter from short positions in U.S., German and British stock
index futures as global stock prices continued to trend lower on
worries that the U.S. economic slowdown will ignite a global
downturn. In the metals markets, gains of approximately 0.7%
were recorded primarily during March from short positions in gold
and silver futures as prices were pressured lower on concerns
regarding the world economy and a disappointing gold auction
conducted by the Bank of England. These gains were partially
offset by losses of approximately 1.7% recorded throughout a
majority of the quarter in the energy markets from long positions
in natural gas futures as prices reversed their sharp upward
trend amid bearish inventory data and forecasts for warmer
weather. In the agricultural markets, losses of approximately
0.7% were experienced from long corn futures positions as prices
moved lower due to favorable South American weather. Total
expenses for the three months ended March 31, 2001 were
$6,478,182, resulting in net income of $24,046,834. The net
asset value of a Unit increased from $23.57 at December 31, 2000
to $26.12 at March 31, 2001.
For the Quarter Ended March 31, 2000
For the quarter ended March 31, 2000, the Partnership recorded
total trading revenues, including interest income, of $2,404,979
and, after expenses, posted a decrease in net asset value per
Unit. The most significant losses of approximately 1.8% were
recorded in the global interest rate futures markets from short
positions in U.S. Treasury bond futures as interest rates at the
longer end of the yield curve declined during the second half of
January, thus resulting in domestic bond prices being pushed
higher. Losses were also recorded from short positions in short-
to mid-term U.S. Treasury note futures as prices rose later in
February as the U.S. stock markets fluctuated and investors
shifted assets into two-year and five-year Treasury notes from
stocks and 30-year Treasury bonds. In the metals markets, losses
of approximately 1.0% were experienced from long positions in
aluminum and copper futures as prices reversed lower earlier in
February due primarily to technically based selling and dipped
lower again later in February led downward by falling prices of
other base metals. In the global stock index futures markets,
losses of approximately 0.4% were incurred from long positions in
Hang Seng Index futures as most global equity prices reversed
lower earlier in January amid fears of interest rate hikes.
Additional losses were experienced from short-term volatile price
movements in U.S. and European stock index futures throughout a
majority of January. Losses were also experienced during March
from long positions in European stock index futures as prices
declined. These losses were partially offset by gains of
approximately 1.7% recorded primarily during January and February
in the energy markets from long futures positions in crude oil
and its refined products as oil prices increased on concerns
about future output levels from the world's leading producer
countries amid dwindling stockpiles and increasing demand. In
the currency markets, gains of approximately 1.5% were recorded
primarily during January and March from short positions in the
euro, Europe's common currency, and the Swiss franc as the values
of these currencies weakened versus the U.S. dollar. The euro
dropped below parity with the U.S. dollar late in January, hurt
by skepticism about Europe's economic outlook and lack of public
support from European officials. Offsetting currency losses were
recorded during February from long British pound positions as the
value of the pound weakened versus the U.S. dollar on interest
rate increases by the U.S. Federal Reserve and talks of a merger
between two major telecommunications companies. Total expenses
for the three months ended March 31, 2000 were $5,542,025,
resulting in a net loss of $3,137,046. The net asset value of a
Unit decreased from $22.00 at December 31, 1999 to $21.68 at
March 31, 2000.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool involved 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
central, not incidental, to the Partnership's main business
activities.
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. Fluctuations in market risk based
upon these factors result in frequent changes in the fair value
of the Partnership's open positions, and, consequently, in its
earnings and cash flow.
The Partnership's total market risk is influenced by a wide
variety of factors, including the diversification among the
Partnership's open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the market
risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
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 may
cause future losses and volatility (i.e. "risk of ruin") that far
exceed the Partnership's experience to date or any reasonable
expectations based upon historical changes in market value.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the Partnership's
market risk exposures contain "forward-looking statements" within
the meaning of the safe harbor from civil liability provided for
such statements by the Private Securities Litigation Reform Act of
1995 (set forth in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934). All
quantitative disclosures in this section are deemed to be forward-
looking statements for purposes of the safe harbor, except for
statements of historical fact.
The Partnership accounts for open positions using 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, whether realized or unrealized, and its
cash flow. Profits and losses on open positions of exchange-
traded futures, forwards and options are settled daily through
variation margin.
The Partnership's risk exposure in the market sectors traded by
the Trading Advisors is estimated below in terms of Value at Risk
("VaR"). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership's
trading portfolio. The Partnership estimates VaR using a model
based upon historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
The VaR model takes into account linear exposures to price and
interest rate risk. Market risks that are incorporated in the
VaR model include 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 historical observation period of the Partnership's
VaR is approximately four years. 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.
VaR models, including the Partnership's, are continuously
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.
The Partnership's Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership's open positions as a percentage of total net assets
by primary market risk category at March 31, 2001 and 2000. At
March 31, 2001 and 2000, the Partnership's total capitalization
was approximately $248 million and $212 million, respectively.
Primary Market March 31, 2001 March 31, 2000
Risk Category Value at Risk Value at Risk
Interest Rate (1.43)% (0.58)%
Currency (0.65) (1.16)
Equity (0.48) (0.78)
Commodity (0.66) (0.78)
Aggregate Value at Risk (1.87)% (1.88)%
Aggregate Value at Risk represents the aggregate VaR of all the
Partnership's open positions and not the sum of the VaR of the
individual market categories listed above. Aggregate VaR will be
lower as it takes into account correlation among different
positions and categories.
The table above represents the VaR of the Partnership's open
positions at March 31, 2001 and 2000 only and is not necessarily
representative of either the historic or future risk of an
investment in the Partnership. Because the Partnership's only
business 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. Any changes in open positions could positively or
negatively materially impact market risk as measured by VaR.
The table below supplements the quarter-end VaR by presenting the
Partnership's high, low and average VaR, as a percentage of total
net assets for the four quarterly reporting periods from April 1,
2000 through March 31, 2001.
Primary Market Risk Category High Low Average
Interest Rate (2.33)% (0.87)% (1.45)%
Currency (1.16) (0.36) (0.69)
Equity (0.55) (0.22) (0.37)
Commodity (1.45) (0.59) (1.01)
Aggregate Value at Risk (2.65)% (1.68)% (2.06)%
Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership to typically be many times the total
capitalization of the Partnership. The value of the
Partnership's open positions thus creates a "risk of ruin" not
typically found in other investments. The relative size of the
positions held may cause the Partnership to incur losses greatly
in excess of VaR within a short period of time, given the effects
of the leverage employed and market volatility. The VaR tables
above, as well as the past performance of the Partnership, give
no indication of such "risk of ruin". In addition, VaR risk
measures should be viewed in light of the methodology's
limitations, which include 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 in response to market movements may
differ from those of the VaR model;
? VaR results reflect past 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.
The VaR tables above present the results of the Partnership's VaR
for each of the Partnership's market risk exposures and on an
aggregate basis at March 31, 2001 and for the end of the four
quarterly reporting periods from April 1, 2000 through March 31,
2001. Since VaR is based on historical data, VaR should not be
viewed as predictive of 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 not needed for margin. These balances and any market
risk they may represent are immaterial. At March 31, 2001, the
Partnership's cash balance at Morgan Stanley DW was approximately
87% of its total net asset value. A decline in short-term
interest rates will result in a decline in the Partnership's cash
management income. This cash flow risk is not considered
material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality and multiplier features of the Partnership's market-
sensitive instruments, in relation to the Partnership's net
assets.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures constitute
forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange
Act. The Partnership's primary market risk exposures as well as
the strategies used and to be used by Demeter and the Trading
Advisors for managing such exposures are subject to numerous
uncertainties, contingencies and risks, any one of which could
cause the actual results of the Partnership's risk controls to
differ materially from the objectives of such strategies.
Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant
fundamental factors, political upheavals, changes in historical
price relationships, an influx of new market participants,
increased regulation and many other factors could result in
material losses as well as in material changes to the risk
exposures and the risk management strategies of the Partnership.
Investors must be prepared to lose all or substantially all of
their investment in the Partnership.
The following were the primary trading risk exposures of the
Partnership at March 31, 2001, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Interest Rate. The primary market exposure of the Partnership at
March 31, 2001, was in the global interest rate complex. The
Partnership's exposure in the interest rate market complex was
primarily spread across the U.S., European, Japanese, 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 primary interest rate exposure is generally to
interest rate fluctuations in the United States and the other G-7
countries. The G-7 countries consist of France, U.S., Britain,
Germany, Japan, Italy and Canada. However, the Partnership also
takes futures positions in the government debt of smaller nations
- - e.g. Australia and Spain. Demeter anticipates that G-7,
Australian and Spanish interest rates will remain the primary
interest rate exposure of the Partnership for the foreseeable
future. The changes in interest rates, which have the most
effect on the Partnership, are changes in long-term, as opposed
to short-term, rates. Most of the speculative futures positions
held by the Partnership are in medium- to long-term instruments.
Consequently, even a material change in short-term rates would
have little effect on the Partnership, were the medium- to long-
term rates to remain steady.
Currency. The second largest market exposure at March 31, 2001,
was in the currency sector. The Partnership's currency exposure
was to exchange rate fluctuations, primarily fluctuations which
disrupt the historical pricing relationships between different
currencies and currency pairs. Interest rate changes as well as
political and general economic conditions influence these
fluctuations. The Partnership trades in a large number of
currencies, including cross-rates - i.e., positions between two
currencies other than the U.S. dollar. For the first quarter of
2001, the Partnership's major exposures were to euro currency
crosses and 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 profile of the Partnership's currency
sector will change significantly in the future. The currency
trading VaR figure includes foreign margin amounts converted into
U.S. dollars with an incremental adjustment to reflect the
exchange rate risk inherent to the dollar-based Partnership in
expressing VaR in a functional currency other than dollars.
Equity. The primary equity exposure at March 31, 2001, was to
equity price risk in the G-7 countries. The stock index futures
traded by the Partnership are by law limited to futures on
broadly-based indices. At March 31, 2001, the Partnership's
primary exposures were to the DAX (Germany), Nikkei (Japan),
NASDAQ (U.S.) and S&P 500 (U.S.) stock indices. The Partnership
is primarily exposed to the risk of adverse price trends or
static markets in the U.S., European, and Japanese indices.
Static markets would not cause major market changes but would
make it difficult for the Partnership to avoid being "whipsawed"
into numerous small losses.
Commodity.
Metals. The Partnership's primary metals market exposure at
March 31, 2001, was to fluctuations in the price of gold and
silver. Although certain Trading Advisors will, from time
to time, trade base metals such as copper, aluminum, zinc,
nickel, tin, and lead, the principal market exposures of the
Partnership have consistently been to precious metals, gold
and silver. Market exposure to precious metals was evident
as gold prices were volatile during the quarter. Silver
prices remained volatile over this period, and the Trading
Advisors have, from time to time, taken positions as they
have perceived market opportunities to develop.
Soft Commodities and Agriculturals. At March 31, 2001, the
Partnership had exposure to the coffee, orange juice,
soybeans and its related products and sugar markets. Supply
and demand inequalities, severe weather disruption, and
market expectations affect price movements in these markets.
Energy. At March 31, 2001, the Partnership's energy
exposure was shared primarily by futures contracts in the
crude oil and natural gas markets. Price movements in these
markets result from political developments in the Middle
East, weather patterns, and other economic fundamentals. It
is possible that volatility will remain high. Significant
profits and losses, which have been experienced in the past,
are expected to continue to be experienced in this market.
Natural gas has exhibited volatility in prices resulting
from weather patterns and supply and demand factors and may
continue in this choppy pattern.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at March 31, 2001:
Foreign Currency Balances. The Partnership's primary
foreign currency balances were in Japanese yen, euros,
Australian dollars and Canadian dollars. The Partnership
controls the non-trading risk of these balances by regularly
converting these balances back into dollars upon liquidation
of the respective position.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to
manage the risk of the Partnership's open positions in
essentially the same manner in all market categories traded.
Demeter attempts to manage market exposure by diversifying the
Partnership's assets among different Trading Advisors, each of
whose strategies focus on different market sectors and trading
approaches, and 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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Please refer to Legal Proceedings previously disclosed in the
Partnership's Form 10-K for the year ended December 31, 2000.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Partnership initially registered 60,000 Units (prior to the
100 for one Unit conversion on April 30, 1998) pursuant to a
Registration Statement on Form S-1, which became effective on May
17, 1991 (SEC File Number 33-39667), and 10,000 (pre-conversion)
Units at a supplemental closing pursuant to a new Registration
Statement on Form S-1, which became effective on August 23, 1991
(SEC File No. 33-42380). The offering commenced on May 17, 1991
and terminated as of August 31, 1991, with 60,853.334 Units sold.
The aggregate price of the offering amount registered was
$69,380,300, based upon the initial offering price of $1,000 per
Unit and $938.03 per Unit at the supplemental closing (the
initial closing and supplemental closing, hereinafter, the
"Initial Offering"). The aggregate offering price of the Units
sold during the Initial Offering was $60,268,482.
The Partnership registered an additional 75,000 Units (pre-
conversion) pursuant to a new Registration Statement of Form S-1,
which became effective on August 31, 1993 (SEC File Number 33-
65072) (the "Second Offering"). The Second Offering commenced on
August 31, 1993 and terminated as of September 30, 1993, with
74,408.337 Units sold. The aggregate price of the Second
Offering amount registered was $102,744,000, based upon an
initial offering price of $1,369.92. The aggregate price of the
Units sold during the Second Offering was $116,617,866.
The Partnership registered an additional 60,000 Units (pre-con-
version) pursuant to another Registration Statement on Form S-1,
which became effective on October 17, 1996 (SEC File Number 333-
1918), (the "Third Offering"). The Third Offering commenced on
October 17, 1996 and terminated as of March 3, 1997, with
10,878.000 Units sold. The aggregate price of the Third Offering
amount registered was $98,247,000, based upon an initial offering
price of $1,637.45. The aggregate price of the Units sold during
the Third Offering was $22,308,326.
The Partnership registered an additional 1,500,000 Units pursuant
to another Registration Statement on Form S-1, which became
effective on May 11, 1998 (SEC File Number 333-47829).
Commencing with the April 30, 1998 monthly closing, each
previously outstanding Unit was converted into 100 Units.
The Partnership registered an additional 5,000,000 Units pursuant
to another Registration Statement on Form S-1, which became
effective on January 21, 1999 (File No. 333-68773).
The Partnership registered an additional 4,500,000 Units pursuant
to another Registration Statement on Form S-1, which became
effective on February 28, 2000 (SEC File Number 333-90467).
The managing underwriter for the Partnership is Morgan Stanley
DW.
Units are being sold at monthly closings as of the last day of
each month at a price equal to 100% of the net asset value of a
Unit as of the date of such monthly closing.
Through March 31, 2001, 19,858,840.323 Units of the Partnership
were sold, leaving 5,755,126.777 Units unsold. The aggregate
price of the Units sold through March 31, 2001 is $318,532,007.
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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
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 March 23,
2001, filed with the Securities and Exchange Commission
pursuant to Rule 424(b)(3) under the Securities Act of
1933.
3.02 Certificate of Limited Partnership, dated March 21, 1991,
is incorporated by reference to Exhibit 3.02 of the
Partnership's Registration Statement on Form S-1 (File No.
33-39667) filed with the Securities and Exchange
Commission on March 27, 1991.
3.03 Amended Certificate of Limited Partnership, dated April
28, 1998, is incorporated by reference to Exhibit 3.03 of
the Partnership's Form 10-K (File No. 0-19511) for fiscal
year ended December 31, 1998.
10.01 Amended and Restated Management Agreement, dated as of
June 1, 1998, among the Partnership, Demeter Management
Corporation, 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.
10.02 Amended and Restated Management Agreement, dated as of
June 1, 1998, among the Partnership, Demeter Management
Corporation, 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.
10.03 Amended and Restated Management Agreement, dated as of
June 1, 1998, among the Partnership, Demeter Management
Corporation, 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.
10.07 Subscription and Exchange Agreement and Power of Attorney
to be executed by each purchaser of Units is incorporated
by reference to Exhibit B of the Partnership's Prospectus,
dated March 23, 2001, filed with the Securities and
Exchange Commission pursuant to Rule 424(b)(3) under the
Securities Act of 1933.
10.10 Form of Amended and Restated Escrow Agreement among the
Partnership, Morgan Stanley Dean Witter Spectrum Strategic
L.P., Morgan Stanley Dean Witter Spectrum Global Balanced
L.P., Morgan Stanley Dean Witter Spectrum Technical L.P.,
Morgan Stanley Dean Witter Spectrum Currency L.P., Morgan
Stanley Dean Witter Spectrum Commodity L.P., Demeter
Management Corporation, Dean Witter Reynolds Inc., and
Chemical Bank 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, 1999.
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 March 23,
2001, filed with the Securities and Exchange Commission
pursuant to Rule 424(b)(3) under the Securities Act of
1933.
10.12 Amended and Restated Customer Agreement between the
Registrant and Dean Witter Reynolds Inc., dated October
16, 2000, is incorporated by reference to Exhibit 10.12 of
the Partnership's Registration Statement on Form S-1 (File
No. 333-90467) filed with the Securities and Exchange
Commission on March 14, 2001.
10.13 Commodity Futures Customer Agreement among the Registrant,
Morgan Stanley & Co. Incorporated, and Dean Witter
Reynolds Inc., dated June 6, 2000, is incorporated by
reference to Exhibit 10.13 of the Partnership's
Registration Statement on Form S-1 (File No. 333-90467)
filed with the Securities and Exchange Commission on March
14, 2001.
10.14 Form of Customer Agreement among the Registrant, Morgan
Stanley & Co. International Limited, and Morgan Stanley &
Co. Incorporated, dated June 6, 2000, is incorporated by
reference to Exhibit 10.14 of the Partnership's
Registration Statement on Form S-1 (File No. 333-90467)
filed with the Securities and Exchange Commission on March
14, 2001.
10.15 Foreign Exchange and Options Master Agreement between the
Registrant and Morgan Stanley & Co. Incorporated., dated
April 30, 2000, is incorporated by reference to Exhibit
10.15 of the Partnership's Registration Statement on Form
S-1 (File No. 333-90467) filed with the Securities and
Exchange Commission on March 14, 2001.
10.16 Management Agreement, dated May 1, 2001, among the
Partnership, Demeter Management Corporation, 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.
(B) Reports on Form 8-K.
Effective May 1, 2001, the Partnership entered into a
management agreement with Northfield Trading L.P.
("Northfield"), adding Northfield as its fourth trading
Advisor.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Dean Witter Spectrum
Select L.P. (Registrant)
By: Demeter Management Corporation
(General Partner)
May 14, 2001 By: /s/ Raymond E. Koch
Raymond E. Koch
Chief Financial Officer
The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.