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, 2002 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to__________________
Commission File Number 0-19511
MORGAN STANLEY SPECTRUM SELECT L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3619290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Demeter Management Corporation
c/o Managed Futures Department
825 Third Ave., 8th Floor, New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 876-4647
(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___________
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MORGAN STANLEY SPECTRUM SELECT L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2002
<caption>
PART I. FINANCIAL INFORMATION
<s> <c>
Item 1. Financial Statements
Statements of Financial Condition as of March 31, 2002
(Unaudited) and December 31, 2001..........................2
Statements of Operations for the Quarters Ended
March 31, 2002 and 2001 (Unaudited)........................3
Statements of Changes in Partners' Capital for the
Quarters Ended March 31, 2002 and 2001 (Unaudited).........4
Statements of Cash Flows for the Quarters Ended
March 31, 2002 and 2001 (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.........................................18-30
Part II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 31
Item 2. Changes in Securities and Use of Proceeds...........31-33
Item 6. Exhibits and Reports on Form 8-K....................34-36
</table>
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<table>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF FINANCIAL CONDITION
<caption>
March 31, December 31,
2002 2001
$ $
(Unaudited)
ASSETS
<s> <c> <c>
Equity in futures interests trading accounts:
Cash 227,243,564 235,183,061
Net unrealized gain on open contracts (MS & Co.) 10,609,371 7,164,265
Net unrealized loss on open contracts (MSIL) (42,135) (1,767,529)
Total net unrealized gain on open contracts 10,567,236 5,396,736
Net option premiums 156,975 167,063
Total Trading Equity 237,967,775 240,746,860
Subscriptions receivable 4,552,953 4,991,166
Interest receivable (Morgan Stanley DW) 274,937 305,356
Total Assets 242,795,665 246,043,382
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 2,681,270 2,595,426
Accrued brokerage fees (Morgan Stanley DW) 1,375,290 1,440,360
Accrued management fees 569,085 596,011
Total Liabilities 4,625,645 4,631,797
Partners' Capital
Limited Partners (10,302,774.074 and
9,966,639.126 Units, respectively) 235,564,020 238,821,840
General Partner (113,977.644 and
108,076.600 Units, respectively) 2,606,000 2,589,745
Total Partners' Capital 238,170,020 241,411,585
Total Liabilities and Partners' Capital 242,795,665 246,043,382
NET ASSET VALUE PER UNIT 22.86 23.96
<fn>
The accompanying notes are an integral part
of these financial statements.
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MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<caption>
For the Quarters Ended March 31,
2002 2001
$ $
REVENUES
<s> <c> <c>
Trading profit (loss)
Realized (10,944,219) 32,689,054
Net change in unrealized 5,170,500 (4,720,076)
Total Trading Results (5,773,719) 27,968,978
Interest Income (Morgan Stanley DW) 807,771 2,556,038
Total (4,965,948) 30,525,016
EXPENSES
Brokerage fees (Morgan Stanley DW) 4,290,269 4,082,437
Management fees 1,775,283 1,689,283
Incentive fees - 706,462
Total 6,065,552 6,478,182
NET INCOME (LOSS) (11,031,500) 24,046,834
NET INCOME (LOSS) ALLOCATION
Limited Partners (10,917,755) 23,771,302
General Partner (113,745) 275,532
NET INCOME (LOSS) PER UNIT
Limited Partners (1.10) 2.55
General Partner (1.10) 2.55
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
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<table>
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Quarters Ended March 31, 2002 and 2001
(Unaudited)
<caption>
Units of
Partnership Limited General
Interest Partners Partner Total
$ $ $
<s> <c> <c> <c> <c>
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
Partners' Capital,
December 31, 2001 10,074,715.726 238,821,840 2,589,745 241,411,585
Offering of Units 615,230.064 13,937,097 130,000 14,067,097
Net Loss - (10,917,755) (113,745) (11,031,500)
Redemptions (273,194.072) (6,277,162) - (6,277,162)
Partners' Capital,
March 31, 2002 10,416,751.718 235,564,020 2,606,000 238,170,020
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
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<table>
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<caption>
For the Quarters Ended March 31,
2002 2001
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<s> <c> <c>
Net income (loss) (11,031,500) 24,046,834
Noncash item included in net income (loss):
Net change in unrealized (5,170,500) 4,720,076
(Increase) decrease in operating assets:
Net option premiums 10,088 (394,160)
Interest receivable (Morgan Stanley DW) 30,419 37,224
Increase (decrease) in operating liabilities:
Accrued brokerage fees (Morgan Stanley DW) (65,070) 158,850
Accrued management fees (26,926) 65,731
Accrued incentive fees - 706,462
Net cash provided by (used for) operating activities (16,253,489) 29,341,017
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of Units 14,067,097 8,868,974
(Increase) decrease in subscriptions receivable 438,213 (2,026,564)
Increase in redemptions payable 85,844 52,696
Redemptions of Units (6,277,162) (5,339,244)
Net cash provided by financing activities 8,313,992 1,555,862
Net increase (decrease) in cash (7,939,497) 30,896,879
Balance at beginning of period 235,183,061 196,555,362
Balance at end of period 227,243,564 227,452,241
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
<page>
MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
The unaudited financial statements contained herein include, in
the opinion of management, all adjustments necessary for a fair
presentation of the results of operations and financial condition
of Morgan Stanley Spectrum Select L.P. (the "Partnership"). The
financial statements and condensed notes herein should be read in
conjunction with the Partnership's December 31, 2001 Annual Report
on Form 10-K.
1. Organization
Morgan Stanley Spectrum Select L.P. is a Delaware limited
partnership organized to engage primarily in the speculative
trading of futures contracts, options on futures contracts, and
forward contracts on physical commodities and other commodity
interests, including, but not limited to foreign currencies,
financial instruments, metals, energy and agricultural products.
The Partnership is one of the Morgan Stanley Spectrum Series of
funds, comprised of the Partnership, Morgan Stanley Spectrum
Commodity L.P., 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.
<page>
MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The general partner for the Partnership 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., Inc. ("MS & Co.") and
Morgan Stanley & Co. International Limited ("MSIL"). 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., Sunrise Capital Management, Inc., and
Northfield Trading L.P. (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. The Partnership pays brokerage fees to Morgan
Stanley DW.
3. Financial Instruments
The Partnership trades futures contracts, options on futures
contracts, and forward contracts on physical commodities and other
commodity interests, including, but not limited to foreign
currencies, financial instruments, metals, energy and agricultural
<page>
MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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;
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.
<page>
MORGAN STANLEY SPECTRUM SELECT L.P.
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, reported as a
component of "Equity in futures interests trading accounts" on the
statements of financial condition, and their longest contract
maturities were as follows:
Net Unrealized Gains (Losses)
on Open Contracts Longest Maturities
Exchange- Off-Exchange- Exchange- Off-Exchange-
Date Traded Traded Total Traded Traded
$ $ $
Mar. 31, 2002 11,286,987 (719,751) 10,567,236 Mar. 2003 Jun. 2002
Dec. 31, 2001 1,010,544 4,386,192 5,396,736 Dec. 2002 Mar. 2002
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
<page>
MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
them with respect to exchange-traded futures and futures-styled
options contracts, including an amount equal to the net unrealized
gains (losses) on all open futures and futures-styled options
contracts, which funds, in the aggregate, totaled $238,530,551 and
$236,193,605 at March 31, 2002 and December 31, 2001,
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 gains (losses) on open 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
<page>
MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
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.
<page>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership deposits its assets with Morgan
Stanley DW as non-clearing broker, and MS & Co. and MSIL as
clearing brokers in separate futures, forwards, and options
trading accounts established for each Trading Advisor, 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
<page>
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, nor 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.
<page>
Results of Operations
General. The Partnership's results depend on the Trading Advisors
and the ability of the Trading Advisors' 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 three month
periods ended March 31, 2002 and 2001, 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 and how
the Partnership has performed in the past.
For the Quarter Ended March 31, 2002
For the quarter ended March 31, 2002, the Partnership recorded
total trading losses, net of interest income, of $4,965,948 and
posted a decrease in net asset value per Unit. The most
significant losses of approximately 3.9% were recorded in the
currency markets primarily during February from previously
established short positions in the Swiss franc and the euro as the
value of these European currencies strengthened versus the U.S.
<page>
dollar due to the weakness in equities during the first half of
February and improved economic confidence in Europe. During
March, additional losses were recorded from short-term volatile
movement in the value of the Swiss franc and the euro relative to
the U.S. dollar. Losses were also recorded primarily during
January from previously established long positions in the British
pound as the value of the pound weakened versus the U.S. dollar,
weighed on by a sluggish economic growth rate in Great Britain.
In the global stock index futures markets, losses of approximately
1.1% were recorded primarily during February from Hang Seng Index
futures positions as prices moved without consistent direction
throughout the month. In the global interest rate futures
markets, losses of approximately 0.5% were recorded primarily
during February from previously established short positions in
Japanese government bond futures as prices reversed higher amid
the possibility of an anti-deflation plan from the Japanese
government. A portion of the Partnership's overall losses was
partially offset by gains of approximately 3.1% recorded in the
energy markets primarily during March from previously established
long positions in natural gas futures as prices climbed higher
amid a decline in supplies and weather-related factors in the U.S.
Northeast. Additional gains were recorded during March from
previously established long positions in crude oil futures as
prices continued their upward trend amid escalating tensions in
the Middle East and supply/demand factors. Total expenses for the
three months ended March 31, 2002 were $6,065,552, resulting in a
<page>
net loss of $11,031,500. The net asset value of a Unit decreased
from $23.96 at December 31, 2001 to $22.86 at March 31, 2002.
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
<page>
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.
<page>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures, forwards, and options. The
market-sensitive instruments held by the Partnership are acquired
for speculative trading purposes only and, as a result, all or
substantially all of the Partnership's assets are at risk of
trading loss. Unlike an operating company, the risk of market-
sensitive instruments is 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,
<page>
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 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
<page>
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 Partner-
ship'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.
<page>
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, 2002 and 2001. At
March 31, 2002 and 2001, the Partnership's total capitalization
was approximately $238 million and $248 million, respectively.
Primary Market March 31, 2002 March 31, 2001
Risk Category Value at Risk Value at Risk
Interest Rate (1.41)% (1.43)%
Equity (0.71) (0.48)
Currency (0.55) (0.65)
Commodity (1.62) (0.66)
Aggregate Value at Risk (2.66)% (1.87)%
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
<page>
lower as it takes into account correlation among different
positions and categories.
The table above represents the VaR of the Partnership's open
position at March 31, 2002 and 2001 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, 2001 through March 31, 2002.
Primary Market Risk Category High Low Average
Interest Rate (1.46)% (0.49)% (1.03)%
Equity (0.71) (0.28) (0.41)
Currency (1.98) (0.54) (1.11)
Commodity (1.62) (0.41) (0.85)
Aggregate Value at Risk (2.66)% (1.55)% (1.99)%
<page>
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 caused by market movements may
differ from those of the VaR model;
? VaR results reflect past trading positions while future risk
depends on future positions;
<page>
? 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, 2002, and 2001, and for the end of
the four quarterly reporting periods from April 1, 2001 through
March 31, 2002. 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.
<page>
At March 31, 2002, the Partnership's cash balance at Morgan
Stanley DW was approximately 85% 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 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
<page>
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, 2002, 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, 2002 was to the global interest rate sector. The
Partnership's exposure in the interest rate market complex was
primarily spread across the U.S., European and Japanese 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
<page>
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.
Demeter anticipates that G-7 and Australian interest rates will
remain the primary interest rate exposure of the Partnership for
the foreseeable future. The speculative futures positions held by
the Partnership may range from short to long-term instruments.
Consequently, changes in short, medium or long-term interest rates
may have an effect on the Partnership.
Equity. The second largest market exposure at March 31, 2002 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, 2002, the Partnership's
primary exposures were to the Hang Seng (China), DAX (Germany),
Nikkei (Japan), 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.
<page>
Currency. The third largest market exposure at March 31, 2002 was
to the currency complex. The Partnership's currency exposure is
to exchange rate fluctuations, primarily fluctuations which
disrupt the historical pricing relationships between different
currencies and currency pairs. Interest rate changes as well as
political and general economic conditions influence these
fluctuations. The Partnership trades a large number of
currencies, including cross-rates - i.e., positions between two
currencies other than the U.S. dollar. At March 31, 2002, the
Partnership's major exposures were to Japanese yen and 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 U.S.-based Partnership in
expressing VaR in a functional currency other than U.S. dollars.
Commodity
Energy. At March 31, 2002, 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 political
developments in the Middle East, weather patterns, and other
<page>
economic fundamentals. It is possible that volatility will
remain high. Significant profits and loses, which have been
experienced in the past, are expected to continue to be
experienced in these markets. Natural gas has exhibited
volatility in prices resulting from weather patterns and
supply and demand factors, and may continue in this choppy
pattern.
Soft Commodities and Agriculturals. At March 31, 2002, the
Partnership had exposure to the markets that comprise these
sectors. Most of the exposure was to coffee, corn and
soybean meal markets. Supply and demand inequalities, severe
weather disruption, and market expectations affect price
movements in these markets.
Metals. The Partnership's metals exposure at March 31, 2002
was to fluctuations in the price of precious metals, such as
gold and silver, and base metals, such as copper, nickel,
lead, zinc and aluminum. Economic forces, supply and demand
inequalities, geopolitical factors and market expectations
influence price movement in these markets. The Trading
Advisors have, from time to time, taken positions when
market opportunities develop. Demeter anticipates that the
Partnership will continue to be exposed to the precious and
base metals markets.
<page>
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at March 31, 2002:
Foreign Currency Balances. The Partnership's primary foreign
currency balances at March 31, 2002 were in Japanese yen and
euros. The Partnership controls the non-trading risk of
these balances by regularly converting them back into U.S.
dollars upon liquidation of their respective positions.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to
manage the risk of the Partnership's open positions in essentially
the same manner in all market categories traded. Demeter attempts
to manage market exposure by diversifying the Partnership's assets
among different Trading Advisors, 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.
<page>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
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
<page>
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-
conversion) 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. Through the Third Offering
58,860.329 Units (pre-conversion) were left unsold and ultimately
de-registered.
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.
<page>
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 Number 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 at a price equal to 100%
of the net asset value of a Unit as of the last day of each
month.
Through March 31, 2002, 21,788,494.281 Units of the Partnership
were sold, leaving 3,825,472.819 Units unsold. The aggregate
price of the Units sold through March 31, 2002 is $364,861,665.
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.
<page>
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 April
30, 2002, filed with the Securities and Exchange
Commission pursuant to Rule 424(b)(3) under the
Securities Act of 1933, on May 8, 2002.
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 6, 1999, 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.
3.04 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 Number
0-19511) for fiscal year ended December 31, 1998 filed on
March 31, 1999.
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 Number
0-19511) for fiscal year ended December 31, 1998 filed on
March 31, 1999.
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 Number
0-19511) for fiscal year ended December 31, 1998 filed on
March 31, 1999.
<page>
10.04 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 Number 0-19511) filed with
the Securities and Exchange Commission on April 25, 2001.
10.07 Form of 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 April 30, 2002, filed
with the Securities and Exchange Commission pursuant to
Rule 424(b)(3) under the Securities Act of 1933 on May 8,
2002.
10.10 Amended and Restated Escrow Agreement, dated as of March
10, 2000, 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 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 2, 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 April
30, 2002, filed with the Securities and Exchange
Commission pursuant to Rule 424(b)(3) under the
Securities Act of 1933 on May 8, 2002.
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.
10.13 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.
<page>
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 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.
(B) Reports on Form 8-K. - None
<page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Spectrum Select L.P.
(Registrant)
By: Demeter Management Corporation
(General Partner)
May 14, 2002 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.