UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the year ended December 31, 2005 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ________________ to ___________________
Commission File Number 0-19511
MORGAN STANLEY SPECTRUM SELECT L.P.
(Exact name of registrant as specified in its Limited Partnership Agreement)
DELAWARE 13-3619290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Demeter Management Corporation
330 Madison Avenue, 8th Floor
New York, NY 10017
(Address of principal executive offices) (Zip Code)
Registrant?s telephone number, including area code (212) 905-2700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check-mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
Indicate by check-mark if the registrant is not
required to file reports pursuant
to Section 13 or Section 15(d) of the Act. Yes No X
Indicate by check-mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _____
Indicate by check-mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant?s
knowledge, in definitive proxy
or information statements incorporated by
reference in Part III of this Form 10-K
or any amendment of this Form 10-K. [X]
Indicate by check-mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of ?accelerated
filer and large accelerated filer? in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer___ Accelerated filer____ Non-accelerated filer __X__
Indicate by check-mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes No X
State the aggregate market value of the Units of Limited Partnership Interest
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which Units were sold as of the last
business day of the registrant?s most recently completed second fiscal quarter:
$552,204,538 at June 30, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2005
<caption> Page No.
<s> <c>
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . . . 1
Part I .
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . .2?6
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . .6
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . .6
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . 6-7
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders. . . .7
Part II.
Item 5. Market for the Registrant's Partnership Units
and Related Security Holder Matters . . . . . . . . . . 8-10
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 12?30
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . .30-44
Item 8. Financial Statements and Supplementary Data. . . . . . . .45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . .45
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . .46-48
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . 48
Part III.
Item 10. Directors and Executive Officers of the Registrant. . 49-54
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . .54
Item 12. Security Ownership of Certain Beneficial Owners
and Management. .. . . . . . . . . . . . . . . . . . . . 55
Item 13. Certain Relationships and Related Transactions. . . . . . 55
Item 14. Principal Accounting Fees and Services . . . . . . . . 56-57
Part IV.
Item 15. Exhibits and Financial Statement Schedules. . . . . . .58?59
</table>
<page> DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
as follows:
Documents Incorporated Part of Form 10-K
Partnership?s Prospectus dated
April 25, 2005 I
Partnership's Supplement to the
Prospectus dated December 15, 2005 I
Annual Report to Morgan Stanley
Spectrum Series Limited Partners
for the year ended December 31,
2005 II, III, and IV
<page> PART I
Item 1. BUSINESS
(a) General Development of Business. Morgan Stanley Spectrum
Select L.P. (the "Partnership") is a Delaware limited partnership
organized in 1991 to engage primarily in the speculative trading of
futures contracts, options on futures contracts, and forward
contracts on physical commodities and other commodity interests,
including, but not limited to, foreign currencies, financial
instruments, metals, energy, and agricultural products. The
Partnership commenced trading operations on August 1, 1991. The
Partnership is one of the Morgan Stanley Spectrum series of funds,
comprised of the Partnership, Morgan Stanley Spectrum Currency
L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley
Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P.
(collectively, the ?Spectrum Series?).
The Partnership?s general partner is Demeter Management Corporation
(?Demeter?). The non-clearing commodity broker is Morgan Stanley DW
Inc. (?Morgan Stanley DW?). The clearing commodity brokers are
Morgan Stanley & Co. Incorporated (?MS & Co.?) and Morgan Stanley &
Co. International Limited (?MSIL?). Demeter, Morgan Stanley DW, MS
& Co., and MSIL are wholly-owned subsidiaries of Morgan Stanley.
The trading advisors to the Partnership are EMC Capital Management,
Inc., Northfield Trading
<page> L.P., Rabar Market Research, Inc., Sunrise Capital
Management, Inc., and Graham Capital Management, L.P.
(individually, a ?Trading Advisor?, or collectively, the ?Trading
Advisors?).
Units of limited partnership interest (?Unit(s)?) are sold at
monthly closings at a purchase price equal to 100% of the net
asset value per Unit as of the close of business on the last day
of each month.
The managing underwriter for the Partnership is Morgan Stanley
DW.
The Partnership began the year at a net asset value per Unit of
$28.88 and returned -5.0% to $27.45 on December 31, 2005. For a
more detailed description of the Partnership's business, see
subparagraph (c).
(b) Financial Information about Segments. For financial infor-
mation reporting purposes, the Partnership is deemed to engage in
one industry segment, the speculative trading of futures,
forwards, and options on such contracts. The relevant financial
information is presented in Items 6 and 8.
<page>
(c) Narrative Description of Business. The Partnership is in the
business of speculative trading of futures, forwards, and options
pursuant to trading instructions provided by the Trading Advisors.
For a detailed description of the different facets of the
Partnership's business, see those portions of the Partnership's
prospectus, dated April 25, 2005 (the ?Prospectus?), and the
Partnership's supplement to the Prospectus dated December 15, 2005
(the "Supplement"), incorporated by reference in this Form 10-K,
set forth below.
Facets of Business
1. Summary 1. "Summary" (Pages 1-9 of the
Prospectus and Page S-1
of the Supplement).
2. Futures, Options, and 2. "The Futures, Options, and
Forwards Markets Forwards Markets" (Pages
147-151 of the Prospectus).
3. Partnership?s Trading 3. ?Use of Proceeds? (Pages 26-28
Arrangements and of the Prospectus and Page
Policies S-5 of the Supplement), ?The
Trading Advisors? (Pages 70-
125 of the Prospectus and
Pages S-33 ? S-40 of the
Supplement).
<page>
4. Management of the Part- 4. ?The Trading Advisors ?
nership Management Agreements? (Page
70 of the Prospectus), ?The
General Partner? (Pages 66-
69 of the Prospectus and
Page S-32 of the Supple-
ment), ?The Commodity
Brokers? (Pages 127-128 of
the Prospectus) and ?The
Limited Partnership Agree-
ments? (Pages 130-133 of
the Prospectus).
5. Taxation of the Partner- 5. ?Material Federal Income Tax
ship?s Limited Partners Considerations? and ?State
and Local Income Tax
Aspects? (Pages 139-145 of
the Prospectus and Page
S-42 of the Supplement).
(d) Financial Information about Geographic Areas. The Partnership
has not engaged in any operations in foreign countries; however,
the Partnership (through the commodity brokers) enters into forward
contract transactions where foreign banks are the contracting party
and trades futures, forwards, and options on foreign exchanges.
(e) Available Information. The Partnership files an annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to these reports with the Securities
and Exchange Commission (?SEC?). You may read and copy any
document filed by the Partnership at the SEC?s Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for information on the Public Reference
<page> Room. The Partnership does not maintain an internet
website, however, the SEC maintains a website that contains annual,
quarterly, and current reports, proxy statements, and other
information that issuers (including the Partnership) file
electronically with the SEC. The SEC?s website address is
http://www.sec.gov.
Item 1A. RISK FACTORS
The Partnership is in the business of speculative trading of
futures, forwards, and options. For a detailed description of the
risks that may affect the business of the Partnership or the
limited partnership interests offered by the Partnership, see those
portions of the Partnership?s Prospectus and the Partnership?s
Supplement, incorporated by reference in this Form 10-K, set forth
in the ?Risk Factors? section of the Prospectus at pages 10-15 and
the ?Risk Factors? section of the Supplement at pages S-2 ? S-4.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 2. PROPERTIES
The Partnership?s executive and administrative offices are located
within the offices of Morgan Stanley DW. The Morgan Stanley DW
<page> offices utilized by the Partnership are located at 330
Madison Avenue, 8th Floor, New York, NY 10017.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<page> PART II
Item 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED
SECURITY HOLDER MATTERS
(a) Market Information. There is no established public trading
market for Units of the Partnership.
(b) Holders. The number of holders of Units at December 31, 2005
was approximately 49,167.
(c) Distributions. No distributions have been made by the
Partnership since it commenced trading operations on August 1,
1991. Demeter has sole discretion to decide what distributions, if
any, shall be made to investors in the Partnership. Demeter
currently does not intend to make any distributions of the
Partnership?s profits.
(d) Securities Sold; Consideration. Units are continuously sold at
monthly closings at a purchase price equal to 100% of the net asset
value per Unit as of the close of business on the last day of each
month.
The aggregate price of the Units sold through December 31, 2005 was
$855,401,799.
<page>
(e) Underwriter. The managing underwriter for the Partnership is
Morgan Stanley DW.
(f) Use of Proceeds.
SEC
Registration Statement on Form S-1 Units Registered Effective Date
File Number
Initial Registration 60,000.000 May 17, 1991 33-39667
Supplemental Closing 10,000.000 August 23, 1991 33-42380
Additional Registration 75,000.000 August 31, 1993 33-65072
Additional Registration 60,000.000 October 27, 1997 333-01918
Pre-conversion 205,000.000
Units sold through 10/17/97 146,139.671
Units unsold through 10/17/97 58,860.329
(Ultimately de-registered)
Commencing with April 30, 1998 monthly closing and with becoming a
member of the Spectrum Series of funds, each previously outstanding
Unit of the Partnership was converted into 100 Units, totaling
14,613,967.100 (pre-conversion).
Additional Registration 1,500,000.000 May 11, 1998 333-47829
Additional Registration 5,000,000.000 January 21, 1999 333-68773
Additional Registration 4,500,000.000 February 28, 2000 333-90467
Additional Registration 1,000,000.000 April 30, 2002 333-84656
Additional Registration 7,000,000.000 April 28, 2003 333-104005
Additional Registration 23,000,000.000 April 28, 2004 333-113393
Total Units Registered 42,000,000.000
Units sold post conversion 24,546,407.004
Units unsold through 12/31/05 17,453,592.996
Total Units sold
through 12/31/05 39,160,374.104
(pre and post conversion)
<page>
Since no expenses are chargeable against proceeds, 100% of the
proceeds of the offering have been applied to the working capital
of the Partnership for use in accordance with the ?Use of Proceeds?
section of the Prospectus and the Supplement included as part of
the above referenced Registration Statements.
<page> <table> Item 6. SELECTED FINANCIAL DATA (in dollars)
<caption>
For the Years Ended December 31, __
2005 2004 2003 2002 2001 .
<s> <c> <c> <c> <c> <c>
Total Trading Results
including interest
income 23,039,815 33,923,907 74,213,042 67,605,728 30,468,895
Net Income (Loss) (29,214,513) (23,311,900) 34,186,905 40,823,199 3,165,349
Net Income (Loss)
Per Unit (Limited
& General Partners) (1.43) (1.43) 2.66 3.69 0.39
Total Assets 550,467,763 595,823,205 449,549,242 299,604,379 246,043,382
Total Limited
Partners' Capital 527,198,790 579,155,164 436,666,633 292,226,000 238,821,840
Net Asset Value
Per Unit 27.45 28.88 30.31 27.65 23.96
</table>
<page> Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership deposits its assets with Morgan Stanley
DW as non-clearing broker, and MS & Co. and MSIL as clearing
brokers in separate futures, forwards, and options trading accounts
established for each Trading Advisor. Such assets are used as
margin to engage in trading and may be used as margin solely for
the Partnership?s trading. The assets are held in either non-
interest bearing bank accounts or in securities and instruments
permitted by the Commodity Futures Trading Commission for
investment of customer segregated or secured funds. Since the
Partnership?s sole purpose is to trade in futures, forwards, and
options, it is expected that the Partnership will continue to own
such liquid assets for margin purposes.
The Partnership?s investment in futures, forwards, and options may,
from time to time, be illiquid. Most U.S. futures exchanges limit
fluctuations in prices during a single day by regulations referred
to as ?daily price fluctuations limits? or ?daily limits?. Trades
may not be executed at prices beyond the daily limit. If the price
for a particular futures or options contract has increased or
decreased by an amount equal to the daily limit, positions in that
futures or options contract can neither be taken nor liquidated
unless traders are willing to 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 currencies. The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets, subjecting it to substantial
losses. Either of these market conditions could result in
restrictions on redemptions. For the periods covered by this
report, illiquidity has not materially affected the Partnership?s
assets.
There are no known material trends, demands, commitments, events,
or uncertainties at the present time that are reasonably likely to
result in the Partnership?s liquidity increasing or decreasing in
any material way.
Capital Resources. The Partnership does not have, nor expects to
have, any capital assets. Redemptions, exchanges, and sales of
Units in the future will affect the amount of funds available for
<page> investments in futures, forwards, and options in subsequent
periods. It is not possible to estimate the amount, and therefore
the impact, of future inflows and outflows of Units.
There are no known material trends, favorable or unfavorable, that
would affect, nor any expected material changes to, the
Partnership?s capital resource arrangements at the present time.
Off-Balance Sheet Arrangements and Contractual Obligations. The
Partnership does not have any off-balance sheet arrangements, nor
does it have contractual obligations or commercial commitments to
make future payments that would affect its liquidity or capital
resources.
Results of Operations
General. The Partnership's results depend on the Trading Advisors
and the ability of each Trading Advisor?s trading program(s) to
take advantage of price movements in the futures, forwards, and
options markets. The following presents a summary of the
Partnership's operations for each of the three years in the period
ended December 31, 2005, 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
<page> or will be profitable in the future. Consequently, the
results of operations of the Partnership are difficult to discuss
other than in the context of the Trading Advisors' trading
activities on behalf of the Partnership during the period in
question. Past performance is no guarantee of future results.
The Partnership?s results of operations set forth in the Financial
Statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require
the use of certain accounting policies that affect the amounts
reported in these Financial Statements, including the following:
The contracts the Partnership trades are accounted for on a trade-
date basis and marked to market on a daily basis. The difference
between their cost and market value is recorded on the Statements
of Operations as ?Net change in unrealized trading profit (loss)?
for open (unrealized) contracts, and recorded as ?Realized trading
profit (loss)? when open positions are closed out. The sum of
these amounts, along with the ?Proceeds from Litigation
Settlement?, constitutes the Partnership?s trading results. The
market value of a futures contract is the settlement price on the
exchange on which that futures contract is traded on a particular
day. The value of foreign currency forward contracts is based on
the spot rate as of the close of business. Interest income, as
well as management fees, incentive fees, and brokerage fees
expenses of the Partnership are recorded on an accrual basis.
<page> Demeter believes that, based on the nature of the
operations of the Partnership, no assumptions relating to the
application of critical accounting policies other than those
presently used could reasonably affect reported amounts.
The Partnership recorded total trading results including interest
income totaling $23,039,815 and expenses totaling $52,254,328,
resulting in a net loss of $29,214,513 for the year ended December
31, 2005. The Partnership?s net asset value per Unit decreased
from $28.88 at December 31, 2004 to $27.45 at December 31, 2005.
Total redemptions and subscriptions for the year were $115,415,285
and $92,326,015, respectively, and the Partnership?s ending capital
was $533,002,342 at December 31, 2005, a decrease of $52,303,783
from ending capital at December 31, 2004 of $585,306,125.
The most significant trading losses of approximately 5.5% were
recorded in the currency markets during the first and third
quarter, as well as during December, from positions in foreign
currencies versus the U.S. dollar. During January, long positions
in the euro versus the U.S. dollar incurred losses after the U.S.
dollar?s value reversed sharply higher amid conflicting economic
data, improvements in U.S. trade deficit numbers, and speculation
for higher U.S. interest rates. The U.S. dollar?s value also
<page> advanced in response to expectations that the Chinese
government would announce postponement of Chinese yuan re-valuation
for the foreseeable future. Additional losses were recorded during
February from short positions in the euro versus the U.S. dollar as
the U.S. dollar weakened in response to concern for the
considerable U.S. Current-Account deficit expressed by U.S. Federal
Reserve Chairman Alan Greenspan. The value of the U.S. dollar was
further weakened during the remainder of February by a larger-than-
expected drop in January leading economic indicators and news that
South Korea?s Central Bank would be reducing its U.S. dollar
currency reserves. Long European currency positions versus the
U.S. dollar also recorded losses during March after the value of
the U.S. dollar reversed sharply higher benefiting from higher U.S.
interest rates and consumer prices. During August, long U.S.
dollar positions against the British pound and euro resulted in
losses as the value of the U.S. dollar declined amid higher crude
oil prices, lower durable goods orders, the U.S. trade imbalance,
and economic warnings from U.S. Federal Reserve Chairman Alan
Greenspan. During December, the largest losses were incurred from
long U.S. dollar positions versus the euro after the euro?s value
increased during mid-month on the possibility that the European
Central Bank would raise interest rates in 2006. Additional losses
resulted from long U.S. dollar positions versus the South African
rand and both the Australian and the New Zealand dollars as their
values reversed higher with gold prices. Sector losses also
stemmed from short <page> U.S. dollar positions against the British
pound. Partnership losses of approximately 0.9% were recorded in
the global interest rate markets primarily during the third quarter
from long positions in U.S. interest rate futures. During July,
long positions experienced losses as prices declined following a
rise in interest rates and after the U.S. Labor Department released
its June employment report. During September, long positions
incurred additional losses as prices weakened after it was revealed
that measurements of Hurricane Katrina?s economic impact were not
weak enough to deter the U.S. Federal Reserve from its policy of
raising interest rates. Smaller Partnership losses of
approximately 0.6% were incurred in the agricultural markets
primarily during the second and third quarter from long futures
positions in wheat and corn. During April, long futures positions
in wheat resulted in losses as prices fell in response to favorable
weather in growing regions and reduced foreign demand. During July
and August, long positions in corn futures experienced losses after
prices weakened in response to higher silo rates and forecasts for
supply increases. A portion of the Partnership?s overall losses
for the year was offset by gains of approximately 4.4% established
in the global stock index markets during the
third and fourth quarter from positions in Japanese and European
stock index futures. During July, long positions in Pacific Rim
and European stock index futures benefited after positive economic
<page> data out of the U.S. and Japan pushed global equity prices
higher. Prices continued to strengthen after China reformed its
U.S. dollar currency peg policy. Strong corporate earnings out of
the European Union, Japan, and the U.S. resulted in optimistic
investor sentiment and pushed prices further. During September,
long positions in Japanese stock index futures experienced gains as
prices increased on positive comments from Bank of Japan Governor
Toshihiko Fukui, who said the Japanese economy was in the process
of emerging from a soft patch. Additional sector gains resulted
from long positions in European stock index futures as oil prices
declined and investors embraced signs that the global economy could
move forward despite Hurricane Katrina's devastation of the U.S.
Gulf Coast. During the fourth quarter, long positions in Japanese
and European stock index futures supplied gains as prices increased
in response to falling energy prices, strong corporate earnings,
and positive economic data out of the U.S. European stock markets
also found support from the possibility of an end to U.S. interest
rate increases. Partnership gains of approximately 3.3% were
recorded in metals during the third and fourth quarter from long
futures positions in copper, aluminum, and zinc as prices
strengthened amid supply tightness and strong demand from China,
India, and the Middle East. In the energy markets, gains of
approximately 1.0% were achieved primarily during August from long
futures positions in natural gas and crude
<page> oil and its related products as prices rose on supply and
demand concerns. After Hurricane Katrina struck the Gulf of
Mexico, prices advanced further to touch record highs.
The Partnership recorded total trading results including interest
income totaling $33,923,907 and expenses totaling $57,235,807,
resulting in a net loss of $23,311,900 for the year ended December
31, 2004. The Partnership?s net asset value per Unit decreased from
$30.31 at December 31, 2003 to $28.88 at December 31, 2004. Total
redemptions and subscriptions for the year were $43,132,131 and
$210,227,672, respectively, and the Partnership?s ending capital
was $585,306,125 at December 31, 2004, an increase of $143,783,641
from ending capital at December 31, 2003 of $441,522,484.
The most significant trading gains of approximately 4.7% were
recorded in the energy markets, primarily during February, May,
throughout the third quarter, and in October, from long futures
positions in crude oil and its related products as prices advanced
upwards amid concerns for market supply, falling inventory levels,
and heavy market demand. Additional Partnership gains of
approximately 1.7% achieved in the agricultural markets, primarily
during the first quarter, resulted from long futures positions in
corn, soybeans, and soybean-related products as prices for these
commodities finished higher amid strong, steady demand from Asia.
<page> In the metals markets, gains of approximately 1.5% were
recorded primarily during the first quarter from long futures
positions in base metals as prices moved higher in response to
increased demand from China coupled with a weaker U.S. dollar.
Long futures positions in industrial metals held during October
were also profitable due to the drop in the U.S. dollar prompted by
the investment community?s perception that the Bush Administration
would not take steps to stem the U.S. dollar?s decline. Relatively
smaller Partnership gains of approximately 0.8% resulted from
trading in the currency markets, primarily during October and
November. Long positions in the euro and Swiss franc versus the
U.S. dollar benefited from a declining U.S. dollar trend triggered
by prospects for lower U.S. interest rates, higher oil prices,
concern for the growing U.S. Current-Account deficit, and beliefs
that the Bush Administration would not act to curb the decline in
the U.S. dollar. A portion of the Partnership?s overall gains for
the year was offset by losses of approximately 2.5% incurred in the
global interest rate sector, particularly during the second and
third quarter, from positions in U.S. and Australian interest rate
futures. During January, long positions in U.S. interest rate
futures experienced losses as prices declined following comments
from the U.S. Federal Reserve
concerning a shift in the U.S. Federal Reserve?s interest rate
policy. Short positions in Australian interest rate futures
deepened sector losses as prices reversed higher during the final
week of January. During April, long U.S. interest rate futures
<page> positions incurred losses as prices tumbled following the
release of stronger-than-expected U.S. jobs data. During May,
short positions in global bond futures experienced losses as prices
moved higher during the latter half of the month due to uncertainty
in global equity prices, weaker-than-expected economic data,
stronger energy prices, and geopolitical concerns. During June,
short positions experienced losses as prices rallied on weaker-
than-expected economic reports and expectations that the U.S.
Federal Reserve would not aggressively tighten U.S. interest rates.
During July, short positions in U.S. interest rate futures
recorded losses as prices moved higher after the release of
disappointing U.S. unemployment data. Additional losses were
incurred from newly established long U.S. interest rate futures
positions after prices moved lower following U.S. Federal Reserve
Chairman Alan Greenspan?s upbeat assessment of the U.S. economy.
During September, long positions in U.S. interest rate futures
resulted in losses as prices declined due to expectations for
rising U.S. interest rates prompted by the release of positive U.S.
economic data. Smaller Partnership losses of approximately
0.4% resulted from trading in the global stock index sector,
primarily during the second and third quarter, via positions in
Asian equity index futures. During the second quarter, long
positions in these markets incurred losses as global equity prices
were negatively impacted by geopolitical concerns and expanding
energy prices. Newly established short Asian equity index
<page> positions experienced losses as prices rebounded during the
second quarter amid a slight pullback in oil prices and strong
earnings from technology companies. During the third quarter, long
Asian equity index positions experienced losses as prices reversed
lower due to the release of disappointing U.S. employment data,
surging energy prices, and new warnings concerning potential
terrorist attacks.
The Partnership recorded total trading results including interest
income totaling $74,213,042 and expenses totaling $40,026,137,
resulting in net income of $34,186,905 for the year ended December
31, 2003. The Partnership?s net asset value per Unit increased from
$27.65 at December 31, 2002 to $30.31 at December 31, 2003. Total
redemptions and subscriptions for the year were $30,542,924 and
$142,500,704, respectively, and the Partnership?s ending
capital was $441,522,484 at December 31, 2003, an increase of
$146,144,685 from ending capital at December 31, 2002 of
$295,377,799.
The most significant trading gains of approximately 12.2% were
recorded in the currency markets during January from long
positions in the euro versus the U.S. dollar as the value of the
European currency strengthened against the U.S. dollar amid
renewed fears of a military conflict with Iraq, increased
tensions with North Korea, and weak U.S. economic data. During
<page> May, gains were supplied by long positions in the euro
versus the U.S. dollar as the value of the euro strengthened amid
uncertainty regarding the Bush Administration?s economic policy,
renewed fears of potential terrorist attacks against U.S.
interests, and investor preference for non-U.S. dollar assets.
Additional currency gains were recorded by long positions in the
Australian dollar versus the U.S. dollar as the value of the
Australian currency strengthened in response to continued
weakness in the U.S. currency, rising gold prices, and relatively
high interest rates in Australia. During November and December,
long positions in the euro, British pound, and Australian and New
Zealand dollars versus the U.S. dollar generated additional
gains. The U.S. dollar tumbled to a six-year low against the
Australian and New Zealand dollars and a five-year low against
the British pound. Additionally, the euro soared past the $1.20
mark, its highest level against the U.S. dollar since its
introduction in January 1999. The U.S. dollar?s weakness was
caused by a variety of factors, including concerns regarding the
growing U.S. current trade account and budget deficits, the U.S.
Federal Reserve?s policy of maintaining low interest rates,
widening interest rate differentials relative to other countries,
and renewed fears of global terrorism. In the metals markets,
gains of approximately 5.9% were achieved primarily during the
fourth quarter by long futures positions in copper and nickel.
<page> Industrial metals prices rallied during October in
response to increased demand, especially from China, as well as
to growing investor sentiment that the global economy was on the
path to recovery. During December, copper and nickel prices rose
to six and fourteen-year highs, respectively, benefiting from
increased demand from China and the strengthening of the global
economy. Gains of approximately 2.6% in the global stock index
markets were supplied by long positions in Asian stock index
futures during August as Asian equity prices drew strength from
robust Japanese economic data and rising prices in the U.S.
equity markets. Long U.S. equity index futures positions
profited after the release of favorable economic data during
October, as well as in December. In the agricultural markets,
gains of approximately 1.7% resulted from long futures positions
in soybeans and its related products during September as prices
reacted positively in response to robust U.S. export sales data
and smaller U.S. crop assessments.
Then in October, long futures positions in cotton and soybeans
generated gains as increased demand from China and tight market
supplies lifted prices. A portion of the Partnership?s overall
gains for the year was offset by losses of approximately 1.1% in
the global interest rate markets incurred primarily during the
last four months of the year. The Partnership experienced losses
from short European futures positions. Prices reversed higher
<page> amid investor demand for safe-haven investments following
renewed volatility in global equity markets, continued
geopolitical instability in the Middle East, and comments from
the U.S. Federal Reserve regarding the continuation of low U.S.
interest rates. In the energy sector, losses of approximately
0.8% partially offset Partnership?s gains for the year. Long
positions in crude oil futures resulted in losses during March as
prices reversed sharply lower amid market anticipation of a swift
military victory for Coalition forces against Iraq. During
September, losses were suffered from short positions in crude oil
futures as prices unexpectedly reversed higher following OPEC?s
announcement for output reductions and curbs in production.
During October, short crude oil positions experienced further
losses as prices moved higher in response to supply fears spurred
by Middle East tensions early in the month, as well as strike
threats in Nigeria, one of the world?s major oil producers.
For an analysis of unrealized gains and (losses) by contract type
and a further description of 2005 trading results, refer to the
Partnership?s Annual Report to Limited Partners for the year ended
December 31, 2005, which is incorporated by reference to Exhibit
13.01 of this Form 10-K.
The Partnership's gains and losses are allocated among its partners
for income tax purposes.
<page> Market Risk.
Financial Instruments. The Partnership is a party to financial
instruments with elements of off-balance sheet market and credit
risk. The Partnership trades futures contracts, options on
futures contracts, and forward contracts on physical commodities
and other commodity interests, including, but not limited to,
foreign currencies, financial instruments, metals, energy, and
agricultural products. In entering into these contracts, the
Partnership is subject to the market risk that such contracts may
be significantly influenced by market conditions, such as
interest rate volatility, resulting in such contracts being less
valuable. If the markets should move against all of the positions
held by the Partnership at the same time, and if the Trading
Advisors were unable to offset positions of the Partnership, the
Partnership could lose all of its assets and the limited partners
would realize a 100% loss.
In addition to the Trading Advisors? internal controls, the Trading
Advisors must comply with the Partnership?s trading policies that
include standards for liquidity and leverage that must be
maintained. The Trading Advisors and Demeter monitor the
Partnership's trading activities to ensure compliance with the
trading policies and Demeter can require the Trading Advisors to
modify positions of the Partnership if Demeter believes they
violate the Partnership's trading policies.
<page>
Credit Risk.
In addition to market risk, in entering into futures, forward, and
options contracts there is a credit risk to the Partnership that
the counterparty on a contract will not be able to meet its
obligations to the Partnership. The ultimate counterparty or
guarantor of the Partnership for futures, forward, and options
contracts traded in the United States and most foreign exchanges on
which the Partnership trades is the clearinghouse associated with
such exchange. In general, a clearinghouse is backed by the
membership of the exchange and will act in the event of non-
performance by one of its members or one of its member?s customers,
which should significantly reduce this credit risk.
There is no assurance that a clearinghouse, exchange, or other
exchange member will meet its obligations to the Partnership, and
Demeter and the commodity brokers will not indemnify the
Partnership against a default by such parties. Further, the law is
unclear as to whether a commodity broker has any obligation to
protect its customers from loss in the event of an exchange or
clearinghouse defaulting on trades effected for the broker?s
customers. In cases where the Partnership trades off-exchange
forward contracts with a counterparty, the sole recourse of the
Partnership will be the forward contract?s counterparty.
<page> Demeter deals with these credit risks of the Partnership
in several ways. First, Demeter monitors the Partnership?s
credit exposure to each exchange on a daily basis. The commodity
brokers inform the Partnership, as with all their customers, of
the Partnership?s net margin requirements for all its existing
open positions, and Demeter has installed a system which permits
it to monitor the Partnership?s potential net credit exposure,
exchange by exchange, by adding the unrealized trading gains on
each exchange, if any, to the Partnership?s margin liability
thereon.
Second, the Partnership?s trading policies limit the amount of its
Net Assets that can be committed at any given time to futures
contracts and require a minimum amount of diversification in the
Partnership?s trading, usually over several different products and
exchanges. Historically, the Partnership?s exposure to any one
exchange has typically amounted to only a small percentage of its
total Net Assets and on those relatively few occasions where the
Partnership?s credit exposure climbs above such level,
Demeter deals with the situation on a case by case basis, carefully
weighing whether the increased level of credit exposure remains
appropriate. Material changes to the trading policies may
be made only with the prior written approval of the limited
partners owning more than 50% of Units then outstanding.
<page> Third, with respect to forward contract trading, the
Partnership trades with only those counterparties which Demeter,
together with Morgan Stanley DW, have determined to be
creditworthy. The Partnership presently deals with MS & Co. as the
sole counterparty on forward contracts.
For additional information, see the ?Financial Instruments?
section under ?Notes to Financial Statements? in the
Partnership?s Annual Report to Limited Partners for the year
ended December 31, 2005, which is incorporated by reference to
Exhibit 13.01 of this Form 10-K.
Inflation has not been a major factor in the Partnership?s
operations.
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures, forwards, and options. The
market-sensitive instruments held by the Partnership are acquired
for speculative trading purposes only and, as a result, all or
substantially all of the Partnership?s assets are at risk of
trading loss. Unlike an operating company, the risk of market-
sensitive instruments is inherent to the primary business
activity of the Partnership.
<page>
The futures, forwards, and options traded by the Partnership
involve varying degrees of related market risk. Market risk is
often dependent upon changes in the level or volatility of interest
rates, exchange rates, and prices of financial instruments and
commodities, factors that result in frequent changes in the fair
value of the Partnership?s open positions, and consequently in its
earnings, whether realized or unrealized, and cash flow. Gains and
losses on open positions of exchange-traded futures, forwards, and
options are settled daily through variation margin. Gains and
losses on off-exchange-traded forward currency contracts are
settled upon termination of the contract, however,
the Partnership is required to meet margin requirements equal to
the net unrealized loss on open contracts in the Partnership
accounts with the counterparty, which is accomplished by daily
maintenance of the cash balance in a custody account held at Morgan
Stanley DW for the benefit of MS & Co.
The Partnership?s total market risk may increase or decrease as
it is influenced by a wide variety of factors, including, but not
limited to, the diversification among the Partnership?s open
positions, the volatility present within the markets, and the
liquidity of the markets.
<page> 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 Partnership?s past performance is no guarantee of its future
results. Any attempt to numerically quantify the Partnership?s
market risk is limited by the uncertainty of its speculative
trading. The Partnership?s speculative trading and use of leverage
may cause future losses and volatility (i.e., ?risk of
ruin?) that far exceed the Partnership?s experiences to date under
the ?Partnership?s Value at Risk in Different Market Sectors?
section and significantly exceed the Value at Risk (?VaR?) tables
disclosed.
Limited partners will not be liable for losses exceeding the
current net asset value of their investment.
Quantifying the Partnership?s Trading Value at Risk
The following quantitative disclosures regarding the Partner-
ship?s market risk exposures contain ?forward-looking statements?
within the meaning of the safe harbor from civil liability
provided for such statements by the Private Securities Litigation
<page> Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934). All quantitative disclosures in this section are
deemed to be forward-looking statements for purposes of the safe
harbor, except for statements of historical fact.
The Partnership accounts for open positions on the basis of mark
to market accounting principles. Any loss in the market value of
the Partnership?s open positions is directly reflected in the
Partnership?s earnings and cash flow.
The Partnership?s risk exposure in the market sectors traded by the
Trading Advisors is estimated below in terms of VaR. The
Partnership estimates VaR using a model based upon historical
simulation (with a confidence level of 99%) which involves
constructing a distribution of hypothetical daily changes in the
value of a trading portfolio. The VaR model takes into account
linear exposures to risks including equity and commodity prices,
interest rates, foreign exchange rates, and correlation among these
variables. The hypothetical changes in portfolio value are
based on daily percentage changes observed in key market indices or
other market factors (?market risk factors?) to which the portfolio
is sensitive. The one-day 99% confidence level of the
Partnership?s VaR corresponds to the negative change in portfolio
value that, based on observed market risk factors, would have been
<page> exceeded once in 100 trading days, or one day in 100. VaR
typically does not represent the worst case outcome. Demeter uses
approximately four years of daily market data (1,000 observations)
and re-values its portfolio (using delta-gamma approximations) for
each of the historical market moves that occurred over this time
period. This generates a probability distribution of daily
?simulated profit and loss? outcomes. The VaR is the appropriate
percentile of this distribution. For example, the 99% one-day VaR
would represent the 10th worst outcome from Demeter?s simulated
profit and loss series.
The Partnership?s VaR computations are based on the risk
representation of the underlying benchmark for each instrument or
contract and do not distinguish between exchange and non-exchange
dealer-based instruments. They are also not based on exchange
and/or dealer-based maintenance margin requirements.
VaR models, including the Partnership?s, are 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. Please further
note that VaR as described above may not be comparable to
similarly-titled measures used by other entities.
<page>
The Partnership?s Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership?s open positions as a percentage of total Net Assets
by primary market risk category at December 31, 2005 and 2004.
At December 31, 2005 and 2004, the Partnership?s total
capitalization was approximately $533 million and $585 million,
respectively.
Primary Market December 31, 2005 December 31, 2004
Risk Category Value at Risk Value at Risk
Equity (1.95)% (2.63)%
Currency (0.82) (1.94)
Interest Rate (0.45) (1.57)
Commodity (0.87) (0.58)
Aggregate Value at Risk (2.86)% (3.56)%
The VaR for a market category represents the one-day downside risk
for the aggregate exposures associated with this market category.
The Aggregate Value at Risk listed above represents the VaR of the
Partnership?s open positions across all the market categories, and
is less than the sum of the VaRs for all such market categories due
to the diversification benefit across asset classes.
Because the business of the Partnership is the speculative
trading of futures, forwards, and options, the composition of its
<page>
trading portfolio can change significantly over any given time
period, or even within a single trading day, which could
positively or negatively materially impact market risk as
measured by VaR.
The table below supplements the December 31, 2005 VaR set forth
above by presenting the Partnership?s high, low, and average VaR,
as a percentage of total Net Assets for the four quarter-end
reporting periods from January 1, 2005 through December 31, 2005.
Primary Market Risk Category High Low Average
Equity (2.51)% (1.45)% (2.03)%
Currency (1.94) (0.69) (1.12)
Interest Rate (2.49) (0.31) (1.06)
Commodity (1.21) (0.71) (0.96)
Aggregate Value at Risk (3.18)% (2.65)% (2.90)%
Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio?s aggregate market risk
exposure, incorporating a range of varied market risks; reflect
risk reduction due to portfolio diversification or hedging
activities; and can cover a wide range of portfolio assets.
However, VaR risk measures should be viewed in light of the
methodology?s limitations, which include, but may not be limited to
the following:
<page>
* past changes in market risk factors will not always result in
accurate predictions of the distributions and correlations of
future market movements;
* changes in portfolio value caused by market movements may
differ from those of the VaR model;
* VaR results reflect past market fluctuations applied to
current trading positions while future risk depends on future
positions;
* VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
* the historical market risk factor data used for VaR estimation
may provide only limited insight into losses that could be
incurred under certain unusual market movements.
In addition, the VaR tables above, as well as the past
performance of the Partnership, give no indication of the
Partnership?s potential ?risk of ruin?.
The VaR tables provided present the results of the Partnership?s
VaR for each of the Partnership?s market risk exposures and on an
aggregate basis at December 31, 2004, and for the four quarter-
end reporting periods during calendar year 2005. VaR is not
necessarily representative of the Partnership?s historic risk,
<page> nor should it be used to predict the Partnership?s future
financial performance or its ability to manage or monitor risk.
There can be no assurance that the Partnership?s actual losses on
a particular day will not exceed the VaR amounts indicated above
or that such losses will not occur more than once in 100 trading
days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances. These balances and any market risk they may represent
are immaterial.
The Partnership also maintains a substantial portion of its
available assets in cash at Morgan Stanley DW; as of December 31,
2005, such amount is equal to approximately 93% of the
Partnership?s net asset value. A decline in short-term
interest rates would result in a decline in the Partnership?s
cash management income. This cash flow risk is not considered to
be material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality, and multiplier features of the Partnership?s market-
<page> 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.
<page> The following were the primary trading risk exposures of
the Partnership at December 31, 2005, by market sector. It may
be anticipated, however, that these market exposures will vary
materially over time.
Equity. The largest market exposure of the Partnership at
December 31, 2005 was to equity price risk in the G-7 countries.
The G-7 countries consist of France, the U.S., Britain, Germany,
Japan, Italy, and Canada. The stock index futures traded by the
Partnership are by law limited to futures on broadly-based
indices. At December 31, 2005, the Partnership?s primary
exposures were to the S&P 500 E-MINI (U.S.), DAX (Germany),
S&P/MIB (Italy), CAC 40 (France), NIKKEI (Japan), NASDAQ 100 E-
MINI (U.S.), FTSE 100 (Britian), and IBEX 35 (Spain) stock
indices. The Partnership is exposed to the risk of adverse price
trends or static markets in the European, U.S., Asian, and
Australian stock indices. Static markets would not cause major
market changes, but would make it difficult for the Partnership
to avoid trendless price movements, resulting in numerous small
losses.
Currency. The second largest market exposure of the Partnership
at December 31, 2005 was to the currency sector. The
Partnership?s currency market exposure was to exchange rate
fluctuations, primarily fluctuations which disrupt the historical
<page> 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 December 31, 2005, the Partnership?s major
exposures were to the euro, Japanese yen, British pound, Canadian
dollar, and Norwegian krone currency crosses, as well as to
outright U.S. dollar positions. Outright positions consist of
the U.S. dollar vs. other currencies. These other currencies
include major and minor currencies. Demeter does not anticipate
that the risk associated with the Partnership?s currency trades
will change significantly in the future.
Interest Rate. The third largest market exposure of the
Partnership at December 31, 2005, was to the global interest rate
sector. Exposure was primarily spread across European, U.S.,
Canadian, 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
interest rate exposure is generally to interest rate fluctuations
<page> in the U.S. and the other G-7 countries. However, the
Partnership also takes futures positions in the government debt
of smaller countries ? e.g., Australia. Demeter anticipates that
the G-7 countries interest rates and Australian interest rates
will remain the primary interest rate exposures of the
Partnership for the foreseeable future. The speculative futures
positions held by the Partnership may range from short to long-
term instruments. Consequently, changes in short, medium, or
long-term interest rates may have an effect on the Partnership.
Commodity.
Soft Commodities and Agriculturals. At December 31, 2005,
the Partnership had market exposure to the markets that
comprise these sectors. Most of the exposure was to the
sugar, soybean products, wheat, corn, and live cattle
markets. Supply and demand inequalities, severe weather
disruptions, and market expectations affect price movements
in these markets.
Metals. At December 31, 2005, the Partnership had market
exposure in the metals sector. The Partnership's metals
exposure was to fluctuations in the price of base metals,
such as aluminum, copper, zinc, lead, and nickel, and
precious metals, such as silver, gold, and platinum.
Economic forces, supply and demand inequalities,
<page> geopolitical factors, and market expectations
influence price movements in these markets. The Trading
Advisors utilize the trading system(s) to take positions
when market opportunities develop, and Demeter anticipates
that the Partnership will continue to do so.
Energy. At December 31, 2005, the Partnership had market
exposure in the energy sector. The Partnership?s energy
exposure was shared primarily by futures contracts in crude
oil and its related products, and natural gas. Price
movements in these markets result from geopolitical
developments, particularly in the Middle East, as well as
weather patterns, and other economic fundamentals.
Significant profits and losses, which have been experienced
in the past, are expected to continue to be experienced in
the future. Natural gas has exhibited volatility in prices
resulting from weather patterns and supply and demand
factors and will likely continue in this choppy pattern.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at December 31, 2005:
Foreign Currency Balances. The Partnership?s primary foreign
currency balances at December 31, 2005 were in euros, Hong
<page> Kong dollars, Japanese yen, British pounds,
Australian dollars, and Swiss francs. The Partnership
controls the non-trading risk of foreign currency balances
by regularly converting them back into U.S. dollars upon
liquidation of their respective positions.
Qualitative Disclosure Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to
manage the risk of the Partnership?s open positions in
essentially the same manner in all market categories traded.
Demeter attempts to manage market exposure by diversifying the
Partnership?s assets among different Trading Advisors in a multi-
advisor Partnership, each of whose strategies focus on different
market sectors and trading approaches, and by monitoring the
performance of the Trading Advisors daily. In addition, the
Trading Advisors establish diversification guidelines, often set
in terms of the maximum margin to be committed to positions in
any one market sector or market-sensitive instrument.
Demeter monitors and controls the risk of the Partnership?s non-
trading instrument, cash. Cash is the only Partnership
investment directed by Demeter, rather than the Trading Advisors.
<page>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are incorporated by reference to the
Partnership's Annual Report, which is filed as Exhibit 13.01
hereto.
Supplementary data specified by Item 302 of Regulation S-K:
Summary of Quarterly Results (Unaudited)
Quarter Total Trading Results Net Net Income/
Ended including interest income Income/(Loss) (Loss) Per Unit
2005
March 31 $(35,305,346) $ (49,599,774) $ (2.43)
June 30 15,493,277 1,766,194 0.07
September 30 19,873,375 7,636,287 0.37
December 31 22,978,509 10,982,780 0.56
Total $ 23,039,815 $ (29,214,513) $ (1.43)
2004
March 31 $ 61,318,726 $ 43,063,158 $ 2.88
June 30 (89,312,298) (102,519,477) (6.05)
September 30 (17,696,888) (30,110,417) (1.63)
December 31 79,614,367 66,254,836 3.37
Total $ 33,923,907 $ (23,311,900) $ (1.43)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACOUNTING AND FINANCIAL DISCLOSURE
None.
<page>
Item 9A. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this annual report, the
President and Chief Financial Officer of Demeter, the general
partner of the Partnership, have evaluated the effectiveness
of the Partnership?s disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act),
and have judged such controls and procedures to be effective.
(b) There have been no material changes during the period covered
by this annual report in the Partnership?s internal control
over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act) or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.
Management?s Report on Internal Control Over Financial Reporting
Demeter is responsible for the management of the Partnership.
Management of Demeter (?Management?) is responsible for
establishing and maintaining adequate internal control over
financial reporting. The internal control over financial
reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of <page>
Financial Statements for external purposes in accordance with
generally accepted accounting principles.
The Partnership?s internal control over financial reporting
includes those policies and procedures that:
* Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Partnership;
* Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of Financial Statements in
accordance with generally accepted accounting principles, and
that the Partnership?s transactions are being made only in
accordance with authorizations of Management and directors;
and
* Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
the Partnership?s assets that could have a material effect on
the Financial Statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
<page> inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of the Partnership?s
internal control over financial reporting as of December 31,
2005. In making this assessment, Management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework.
Based on our assessment and those criteria, Management believes
that the Partnership maintained effective internal control over
financial reporting as of December 31, 2005.
Deloitte & Touche LLP, the Partnership?s independent registered
public accounting firm, has issued an attestation report on
Management?s assessment of the Partnership?s internal control over
financial reporting and on the effectiveness of the Partnership?s
internal control over financial reporting. This report, which
expresses an unqualified opinion on Management?s assessment and on
the effectiveness of the Partnership?s internal control over
financial reporting, appears under ?Report of Independent
Registered Public Accounting Firm? in the Partnership?s Annual
Report to Limited Partners for the year ended December 31, 2005.
Item 9B. OTHER INFORMATION
None.
<page> PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are no directors or executive officers of the Partnership.
The Partnership is managed by Demeter.
Directors and Officers of the General Partner
The directors and executive officers of Demeter are as follows:
Effective May 1, 2005, Mr. Raymond A. Harris resigned his position
as a Director of Demeter.
Effective May 1, 2005, Mr. Todd Taylor resigned his position as a
Director of Demeter.
Effective May 1, 2005, Mr. William D. Seugling resigned his
position as a Director of Demeter.
Effective May 1, 2005, Ms. Louise M. Wasso-Jonikas resigned her
position as a Director of Demeter.
Mr. Jeffrey A. Rothman, age 44, is the Chairman of the Board of
Directors and President of Demeter. Mr. Rothman is the Managing
Director of Morgan Stanley Alternative Investments Group,
responsible for overseeing all aspects of the firm?s Managed
<page> Futures Department. Mr. Rothman has been with the Managed
Futures Department for nineteen years. Throughout his career, Mr.
Rothman has helped with the development, marketing, and
administration of approximately 40 commodity pools. Mr. Rothman is
an active member of the Managed Funds Association and has recently
served on its Board of Directors. Mr. Rothman has a B.A. degree in
Liberal Arts from Brooklyn College, New York.
Mr. Richard A. Beech, age 54, is a Director of Demeter. Mr. Beech
has been associated with the futures industry for over 25 years. He
has been at Morgan Stanley DW since August 1984, where he is
presently an Executive Director in the Fixed Income Department.
Mr. Beech began his career at the Chicago Mercantile Exchange,
where he became the Chief Agricultural Economist doing market
analysis, marketing, and compliance. Prior to joining Morgan
Stanley DW, Mr. Beech worked at two investment banking firms in
operations, research, managed futures, and sales management. Mr.
Beech has a B.S. degree in Business Administration from Ohio State
University and an M.B.A. degree from Virginia Polytechnic Institute
and State University.
Ms. Shelley Hanan, age 45, is a Director of Demeter. Ms. Hanan
joined Morgan Stanley in 1984. She eventually became the Regional
Manager of the Southwest for Private Wealth Management and a Senior
Representative for the Morgan Stanley Foundation in
<page> Southern California. Her focus was senior relationship
management of the firm?s largest private clients in the Southwest.
Since January 2005, Ms. Hanan has held the position of Chief
Operating Officer of the U.S. Client Coverage Group and is a
Managing Director. Ms. Hanan graduated from the University of
California at San Diego with a B.A. in Psychology.
Mr. Frank Zafran, age 51, is a Director of Demeter. Mr. Zafran is
a Managing Director of Morgan Stanley and, in November 2005, was
named Managing Director of Wealth Solutions. Previously, Mr.
Zafran was Chief Administrative Officer of Morgan Stanley?s Client
Solutions Division. Mr. Zafran joined the firm in 1979 and has held
various positions in Corporate Accounting and the Insurance
Department, including Senior Operations Officer ? Insurance
Division, until his appointment in 2000 as Director of 401(k) Plan
Services, responsible for all aspects of 401(k) Plan Services
including marketing, sales, and operations. Mr. Zafran received a
B.S. degree in Accounting from Brooklyn College, New York.
Mr. Douglas J. Ketterer, age 40, is a Director of Demeter. Mr.
Ketterer is a Managing Director at Morgan Stanley and is head of
the Managed Money Group. The Managed Money Group is comprised of a
number of departments (including the Alternative Investments Group,
Consulting Services Group, and Mutual Fund Department)
<page> which offer products and services through Morgan Stanley?s
Global Wealth Management Group. Mr. Ketterer joined Morgan Stanley
in 1990 and has served in many roles in the corporate
finance/investment banking, asset management, and distribution
divisions of the firm. Mr. Ketterer received his M.B.A. from New
York University?s Leonard N. Stern School of Business and his B.S.
in Finance from the University at Albany?s School of Business.
Mr. Harry Handler, age 47, is a Director of Demeter. Mr. Handler
serves as an Executive Director for Morgan Stanley in the Global
Wealth Management Group. Mr. Handler works in the Investment
Solutions Division as Chief Infrastructure and Risk Officer.
Additionally, Mr. Handler also serves as Chairman of the Morgan
Stanley DW Best Execution Committee and manages the Global Wealth
Management Group Stock Lending business. In his prior position,
Mr. Handler was a Systems Director in Information Technology, in
charge of Equity and Fixed Income Trading Systems along with the
Special Products, such as Unit Trusts, Managed Futures, and
Annuities. Prior to his transfer to the Information Technology
Area, Mr. Handler managed the Foreign Currency and Precious Metals
Trading Desk for Dean Witter, a predecessor company to Morgan
Stanley. He also held various positions in the Futures Division
where he helped to build the Precious Metals Trading Operation of
Dean Witter. Before joining Dean Witter, Mr. Handler worked at
Mocatta Metals as an Assistant to the Chairman. His roles at
<page> Mocatta Metals included stints on the Futures Order Entry
Desk and the Commodities Exchange Trading Floor. Additional work
included building a computerized Futures Trading System and writing
a history of the Company. Mr. Handler graduated on the Dean?s List
from the University of Wisconsin-Madison with a B.A. degree and a
double major in History and Political Science.
Mr. Kevin Perry, age 36, is the Chief Financial Officer of
Demeter. Mr. Perry currently serves as an Executive Director and
Controller within the Global Wealth Management Group at Morgan
Stanley. Mr. Perry joined Morgan Stanley in October 2000 and is
also Chief Financial Officer of Morgan Stanley Trust National
Association. Prior to joining Morgan Stanley, Mr. Perry worked
as an auditor and consultant in the financial services practice
of Ernst & Young LLP from October 1991 to October 2000. Mr.
Perry received a B.S. degree in Accounting from the University of
Notre Dame in 1991 and is a Certified Public Accountant.
All of the foregoing directors have indefinite terms.
The Audit Committee
The Partnership is operated by its general partner, Demeter, and
does not have an audit committee. The entire Board of Directors of
Demeter serves as the audit committee. None of the directors are
considered to be ?independent? as that term is used in Item
<page>
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of
1934, as amended. The Board of Directors of Demeter has
determined that Mr. Kevin Perry is the audit committee financial
expert.
Code of Ethics
The Partnership has not adopted a code of ethics that applies to
the Partnership?s principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions. The Partnership is operated by its
general partner, Demeter. The President, Chief Financial Officer,
and each member of the Board of Directors of Demeter are employees
of Morgan Stanley and are subject to the code of ethics adopted by
Morgan Stanley, the text of which can be viewed on Morgan Stanley?s
website at http://www.morganstanley.com/ourcommitment/
codeofconduct.html.
Item 11. EXECUTIVE COMPENSATION
The Partnership has no directors and executive officers. As a
limited partnership, the business of the Partnership is managed by
Demeter, which is responsible for the administration of the
business affairs of the Partnership but receives no compensation
for such services.
<page>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners - At December
31, 2005, there were no persons known to be beneficial owners of
more than 5 percent of the Units.
(b) Security Ownership of Management - At December 31, 2005,
Demeter owned 211,461.769 Units of general partnership interest,
representing a 1.09 percent interest in the Partnership.
(c) Changes in Control ? None.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to Note 2 - "Related Party Transactions" of "Notes to
Financial Statements", in the accompanying Annual Report to Limited
Partners for the year ended December 31, 2005, which is
incorporated by reference to Exhibit 13.01 of this Form 10-K. In
its capacity as the Partnership's retail commodity broker, Morgan
Stanley DW received commodity brokerage fees (paid and accrued by
the Partnership) of $36,601,881 for the year ended December 31,
2005.
<page>
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Morgan Stanley DW, on behalf of the Partnership, pays all
accounting fees. The Partnership reimburses Morgan Stanley DW
through the brokerage fees it pays, as discussed in the Notes to
Financial Statements in the Annual Report to the Limited Partners
for the year ended December 31, 2005.
(1) Audit Fees. The aggregate fees for professional services
rendered by Deloitte & Touche LLP in connection with their audit of
the Partnership?s Financial Statements and review of the Financial
Statements included in the Quarterly Reports on Form 10-Q, audit
of Management?s assessments on the effectiveness of the internal
control over financial reporting, and in connection with statutory
and regulatory filings were approximately $58,938 for the year
ended December 31, 2005 and $57,138 for the year ended December 31,
2004.
(2) Audit-Related Fees. None.
(3) Tax Fees. The Partnership did not pay Deloitte & Touche LLP
any amounts in 2005 and 2004 for professional services in
connection with tax compliance, tax advice, and tax planning. The
Partnership engaged another unaffiliated professional firm to
provide services in connection with tax compliance, tax advice, and
tax planning.
<page>
(4) All Other Fees. None.
The Board of Directors of Demeter serves as the audit committee
with respect to the Partnership. The Board of Directors of Demeter
has not established pre-approval policies and procedures with
respect to the engagement of audit or permitted non-audit services
rendered to the Partnership. Consequently, all audit and permitted
non-audit services provided by Deloitte & Touche LLP that are borne
by Morgan Stanley DW through the brokerage fees paid for by the
Partnership are approved by Morgan Stanley?s Board Audit Committee
and the Board of Directors of Demeter.
<page> PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Listing of Financial Statements
The following Financial Statements and report of independent
registered public accounting firm, all appearing in the
accompanying Annual Report to Limited Partners for the year
ended December 31, 2005 are incorporated by reference to
Exhibit 13.01 of this Form 10-K:
? Report of Deloitte & Touche LLP, independent registered
public accounting firm, for the years ended December 31,
2005, 2004, and 2003.
? Statements of Financial Condition, including the Schedules
of Investments, as of December 31, 2005 and 2004.
? Statements of Operations, Changes in Partners? Capital, and
Cash Flows for the years ended December 31, 2005, 2004, and
2003.
? Notes to Financial Statements.
With the exception of the aforementioned information and the
information incorporated in Items 7, 8, and 13, the Annual
Report to Limited Partners for the year ended December 31, 2005
is not deemed to be filed with this report.
2. Listing of Financial Statements Schedules
No Financial Statement schedules are required to be filed with
this report.
<page>
3. Exhibits
For the exhibits incorporated by reference or filed herewith to
this report, refer to Exhibit Index on Page E-1 to E-4.
<page> SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MORGAN STANLEY SPECTRUM SELECT L.P.
(Registrant)
BY: Demeter Management Corporation,
General Partner
March 31, 2006 BY: /s/ Jeffrey A. Rothman
Jeffrey A. Rothman,
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Demeter Management Corporation.
BY: /s/ Jeffrey A. Rothman March 31, 2006
Jeffrey A. Rothman, President
/s/ Richard A. Beech March 31, 2006
Richard A. Beech, Director
/s/ Shelley Hanan March 31, 2006
Shelley Hanan, Director
/s/ Frank Zafran March 31, 2006
Frank Zafran, Director
/s/ Douglas J. Ketterer March 31, 2006
Douglas J. Ketterer, Director
/s/ Harry Handler March 31, 2006
Harry Handler, Director
/s/ Kevin Perry March 31, 2006
Kevin Perry, Chief Financial Officer
<page> EXHIBIT INDEX
ITEM
3.01 Form of Amended and Restated Limited Partnership Agreement
of the Partnership, is incorporated by reference to
Exhibit A of the Partnership?s Prospectus, dated April 25,
2005, filed with the Securities and Exchange Commission
pursuant to Rule 424(b)(3) under the Securities Act of
1933 on April 29, 2005.
3.02 Certificate of Limited Partnership, dated March 19, 1991,
is incorporated by reference to Exhibit 3.02 of the
Partnership?s Registration Statement on Form S-1 (File No.
333-47829) filed with the Securities and Exchange
Commission on March 12, 1998.
3.03 Certificate of Amendment of Certificate of Limited
Partnership, dated April 28, 1998 (changing its name from
Dean Witter Select Futures Fund L.P.), is incorporated by
reference to Exhibit 3.03 of the Partnership's 10-K for
fiscal year ended December 31, 1998 filed with the
Securities and Exchange Commission on March 31, 1999.
3.04 Certificate of Amendment of Certificate of Limited
Partnership, dated April 6, 1999, (changing its name from
Dean Witter Spectrum Select L.P.), is incorporated by
reference to Exhibit 3.03 of the Partnership's
Registration Statement on Form S-1 (File No. 333-68773)
filed with the Securities and Exchange Commission on April
12, 1999.
3.05 Certificate of Amendment of Certificate of Limited
Partnership, dated November 1, 2001 (changing its name
from Morgan Stanley Dean Witter Spectrum Select L.P.), is
incorporated by reference to Exhibit 3.01 of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on November 1, 2001.
10.01 Amended and Restated Management Agreement, dated as of
June 1, 1998, among the Partnership, Demeter, and Rabar
Market Research, Inc. is incorporated by reference to
Exhibit 10.01 of the Partnership's Form 10-K (File No.
0-19511) for fiscal year ended December 31, 1998 filed
with the Securities and Exchange Commission on March 31,
1999.
E-1
<page>
10.02 Amended and Restated Management Agreement, dated as of
June 1, 1998, among the Partnership, Demeter, and EMC
Capital Management, Inc., is incorporated by reference to
Exhibit 10.02 of the Partnership's Form 10-K (File No. 0-
19511) for fiscal year ended December 31, 1998 filed with
the Securities and Exchange Commission on March 31, 1999.
10.03 Amended and Restated Management Agreement, dated as of
June 1, 1998, among the Partnership, Demeter, and Sunrise
Capital Management, Inc., is incorporated by reference to
Exhibit 10.03 of the Partnership's Form 10-K (File No.
0-19511) for fiscal year ended December 31, 1998 filed
with the Securities and Exchange Commission on March 31,
1999.
10.04 Management Agreement, dated as of January 1, 2004, among
the Partnership, Demeter, and Graham Capital Management,
L.P., is incorporated by reference to Exhibit 10.04 of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on March 10, 2004.
10.07 Form of Subscription and Exchange Agreement and Power of
Attorney to be executed by purchasers of Units is
incorporated by reference to Exhibit B of the
Partnership?s Prospectus, dated April 25, 2005, filed with
the Securities and Exchange Commission pursuant to Rule
424(b)(3) under the Securities Act of 1933 on April 29,
2005.
10.10 Amended and Restated Escrow Agreement, among the
Partnership, Morgan Stanley Spectrum Strategic L.P.,
Morgan Stanley Spectrum Global Balanced L.P., Morgan
Stanley Spectrum Technical L.P., Morgan Stanley Spectrum
Currency L.P., Morgan Stanley Spectrum Commodity L.P.,
Morgan Stanley DW, and The Chase Manhattan Bank as escrow
agent, dated March 10, 2000, is incorporated by reference
to Exhibit 10.10 of the Partnership's Registration
Statement on Form S-1 (File No. 333-90467) filed with the
Securities and Exchange Commission on November 5, 2001.
10.11 Form of Subscription Agreement Update Form to be executed
by purchasers of Units is incorporated by reference to
Exhibit C of the Partnership?s Prospectus, dated April 25,
2005, filed with the Securities and Exchange Commission
pursuant to Rule 424(b)(3) under the Securities Act of
1933 on April 29, 2005.
E-2
<page>
10.12 Amended and Restated Customer Agreement between the
Partnership and Morgan Stanley DW, dated as of October
16, 2000, is incorporated by reference to Exhibit 10.01
of the Partnership?s Form 8-K (File No. 0-19511) filed
with the Securities and Exchange Commission on November
1, 2001.
10.12(a)Amendment No. 1 to the Amended and Restated Customer
Agreement between the Partnership and Morgan Stanley DW
Inc., dated July 1, 2005, is incorporated by reference
to Exhibit 10.12(a) of the Partnership?s Form 10-Q (File
No. 0-19511) filed with the Securities and Exchange
Commission on August 10, 2005.
10.13 Commodity Futures Customer Agreement between MS & Co.
and the Partnership, and acknowledged and agreed to by
Morgan Stanley DW, dated as of June 6, 2000, is
incorporated by reference to Exhibit 10.02 of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on November 1, 2001.
10.14 Customer Agreement between the Partnership and MSIL,
dated as of June 6, 2000, is incorporated by reference
to Exhibit 10.04 of the Partnership?s Form 8-K (File No.
0-19511) filed with the Securities and Exchange
Commission on November 1, 2001.
10.15 Foreign Exchange and Options Master Agreement between MS
& Co. and the Partnership, dated as of April 30, 2000,
is incorporated by reference to Exhibit 10.05 of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on November 1, 2001.
10.16 Management Agreement, dated as of May 1, 2001, among the
Partnership, Demeter, and Northfield Trading L.P., is
incorporated by reference to Exhibit 10.01 of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on April 25, 2001.
10.17 Securities Account Control Agreement among the
Partnership, MS & Co., and Morgan Stanley DW, dated as
of May 1, 2000, is incorporated by reference to Exhibit
10.03 of the Partnership?s Form 8-K (File No. 0-19511)
filed with the Securities and Exchange Commission on
November 1, 2001.
13.01 December 31, 2005 Annual Report to Limited Partners is
filed herewith.
E-3
<page>
31.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
E-4
Morgan Stanley
Spectrum Series
December 31, 2005
Annual Report
[LOGO] Morgan Stanley
MORGAN STANLEY SPECTRUM SERIES
HISTORICAL FUND PERFORMANCE
Presented below is the percentage change in Net Asset Value per Unit from the
start of every calendar year each Fund has traded. Also provided is the
inception-to-date return and the compound annualized return since inception for
each Fund. Past performance is no guarantee of future results.
INCEPTION-
TO-DATE
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 RETURN
FUND % % % % % % % % % % % % % % % %
- -------------------------------------------------------------------------------------------------------------------------------
Spectrum Currency. -- -- -- -- -- -- -- -- -- 11.7 11.1 12.2 12.4 (8.0) (18.3) 17.8
(6 mos.)
- -------------------------------------------------------------------------------------------------------------------------------
Spectrum Global
Balanced......... -- -- -- (1.7) 22.8 (3.6) 18.2 16.4 0.8 0.9 (0.3) (10.1) 6.2 (5.6) 4.2 52.3
(2 mos.)
- -------------------------------------------------------------------------------------------------------------------------------
Spectrum Select... 31.2 (14.4) 41.6 (5.1) 23.6 5.3 6.2 14.2 (7.6) 7.1 1.7 15.4 9.6 (4.7) (5.0) 174.5
(5 mos.)
- -------------------------------------------------------------------------------------------------------------------------------
Spectrum Strategic -- -- -- 0.1 10.5 (3.5) 0.4 7.8 37.2 (33.1) (0.6) 9.4 24.0 1.7 (2.6) 41.8
(2 mos.)
- -------------------------------------------------------------------------------------------------------------------------------
Spectrum Technical -- -- -- (2.2) 17.6 18.3 7.5 10.2 (7.5) 7.8 (7.2) 23.3 23.0 4.4 (5.4) 123.6
(2 mos.)
- -------------------------------------------------------------------------------------------------------------------------------
COMPOUND
ANNUALIZED
RETURN
FUND %
- -----------------------------
Spectrum Currency. 3.0
- -----------------------------
Spectrum Global
Balanced......... 3.8
- -----------------------------
Spectrum Select... 7.3
- -----------------------------
Spectrum Strategic 3.2
- -----------------------------
Spectrum Technical 7.5
- -----------------------------
DEMETER MANAGEMENT CORPORATION
330 Madison Avenue, 8th Floor
New York, NY 10017
(212) 905-2700
MORGAN STANLEY SPECTRUM SERIES
ANNUAL REPORT
2005
Dear Limited Partner:
This marks the sixth annual report for Morgan Stanley Spectrum Currency L.P.,
the twelfth annual report for Morgan Stanley Spectrum Global Balanced L.P.,
Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical
L.P., and the fifteenth annual report for Morgan Stanley Spectrum Select L.P.
The Net Asset Value per Unit for each of the five Morgan Stanley Spectrum funds
("Fund(s)") as of December 31, 2005 was as follows:
% CHANGE
FUNDS N.A.V. FOR YEAR
----------------------------------------
Spectrum Currency $11.78 (18.3)%
----------------------------------------
Spectrum Global Balanced $15.23 4.2%
----------------------------------------
Spectrum Select $27.45 (5.0)%
----------------------------------------
Spectrum Strategic $14.18 (2.6)%
----------------------------------------
Spectrum Technical $22.36 (5.4)%
----------------------------------------
Since its inception in July 2000, Spectrum Currency has increased by 17.8% (a
compound annualized return of 3.0%). Since their inception in November 1994,
Spectrum Global Balanced has increased by 52.3% (a compound annualized return
of 3.8%), Spectrum Strategic has increased by 41.8% (a compound annualized
return of 3.2%), and Spectrum Technical has increased by 123.6% (a compound
annualized return of 7.5%). Since its inception in August 1991, Spectrum Select
has increased by 174.5% (a compound annualized return of 7.3%).
Detailed performance information for each Fund is located in the body of the
financial report. For each Fund, we provide a trading results by sector chart
that portrays trading gains and trading losses for the year in each sector in
which the Fund participates. In the case of Spectrum Currency, we provide the
trading gains and trading losses for the five major currencies in which the
Fund participates, and composite information for all other "minor" currencies
traded within the Fund.
The trading results by sector charts indicate the year's composite percentage
returns generated by the specific assets dedicated to trading within each
market sector in which each Fund participates. Please note that there is not an
equal amount of assets in each market sector, and the specific allocations of
assets by a Fund to each sector will vary over time within a predetermined
range. Below each chart is a description of the factors that influenced trading
gains and trading losses within each Fund during the year.
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation, 330 Madison Avenue, 8th Floor, New
York, NY 10017 or your Morgan Stanley Financial Advisor.
I hereby affirm, that to the best of my knowledge and belief, the information
contained in this report is accurate and complete. Past performance is no
guarantee of future results.
Sincerely,
/s/ Jeffrey A. Rothman
Jeffrey A. Rothman
Chairman of the Board of Directors and President
Demeter Management Corporation
General Partner for
Morgan Stanley Spectrum Currency L.P.
Morgan Stanley Spectrum Global Balanced L.P.
Morgan Stanley Spectrum Select L.P.
Morgan Stanley Spectrum Strategic L.P.
Morgan Stanley Spectrum Technical L.P.
This page intentionally left blank.
MORGAN STANLEY SPECTRUM CURRENCY L.P.
[CHART]
Year ended December 31, 2005
----------------------------
Australian dollar -2.95%
British pound -9.48%
Euro -1.86%
Japanese yen 12.46%
Swiss franc 1.40%
Minor currencies -12.86%
Note:Reflects trading results only and does not include fees or interest income.
Minor currencies may include, but are not limited to, the South African
rand, Thai baht, Greek drachma, Singapore dollar, Mexican peso, New
Zealand dollar, Australian dollar, Polish zloty, Brazilian real, Norwegian
krone, and Czech koruna.
FACTORS INFLUENCING ANNUAL TRADING LOSSES:
.. Losses resulted from positions in European currencies against the U.S.
dollar. Early in the first quarter, losses resulted from long positions in
the British pound, Norwegian krone, euro, Czech koruna, and Polish zloty
versus the U.S. dollar after the U.S. dollar's value reversed sharply higher
amid an increase in U.S. interest rates and consumer prices. The U.S.
dollar's value also advanced in response to expectations that the Chinese
government would announce postponement of its re-valuation of the Chinese
yuan. During February, losses were incurred from short European currency
positions after the U.S. dollar's value weakened in response to concern for
the considerable U.S. Current-Account deficit as expressed by U.S. Federal
Reserve Chairman Alan Greenspan. During early March, short European currency
positions continued to experience losses as their values moved higher amid a
sharp rise in German industrial production. Further losses were recorded
from newly established long European currency positions versus the U.S.
dollar as the U.S. dollar's value reversed sharply higher amid an increase
in U.S. interest rates and consumer prices. During the second quarter, long
British pound positions incurred losses as the pound's value declined after
British Prime Minister Tony Blair's Labour Party won re-election with a
reduced government majority, and then
MORGAN STANLEY SPECTRUM CURRENCY L.P.
FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
moved lower later in the quarter on growing speculation that the interest rate
differential between the U.S. and the U.K. would tighten. During July, long
British pound positions experienced additional losses as the value of the
pound dropped sharply on geopolitical concerns after a terror attack on the
London public transportation system. During August, short British pound
positions incurred losses as the value of the U.S. dollar declined amid
higher crude oil prices, lower durable goods orders, the U.S. trade
imbalance, and economic warnings from U.S. Federal Reserve Chairman Alan
Greenspan. During September, losses were recorded from long positions in the
British pound, Norwegian krone, and Czech koruna, as the value of the U.S.
dollar advanced amid bolstered expectations that the U.S. Federal Reserve
would continue to raise interest rates. During the fourth quarter, long
British pound positions versus the U.S. dollar incurred further losses as the
pound's value weakened after the Bank of England indicated that a cut in its
interest rates would likely take place in March of 2006. Short positions in
European currencies, particularly the euro, Norwegian krone, and Czech
koruna, versus the U.S. dollar also experienced losses as their values moved
higher in response to a rise in the euro-zone Organization for Economic
Cooperation & Development's leading indicator of 106 in August from a July
figure of 105.5. European currency values also moved higher with the euro,
which was boosted by expectations that the European Central Bank might raise
interest rates.
.. Additional losses were recorded from positions in the South African rand and
both the Australian and New Zealand dollars (collectively, the "Commodity
Currencies"). During the first quarter, losses stemmed from both long and
short positions in these currencies versus the U.S. dollar as the Commodity
Currencies values traded counter to the U.S. dollar. During the second
quarter, long positions in the Australian dollar versus the U.S. dollar
incurred losses as the Australian dollar declined amid falling gold prices.
During the third quarter, short positions in the Australian and New Zealand
dollars versus the U.S. dollar recorded losses as the values of the
Commodity Currencies moved higher on strong economic data out of the region.
During September, losses were recorded from long Australian and New Zealand
dollar positions as the value of the U.S. dollar advanced amid bolstered
expectations that the U.S. Federal Reserve would continue to raise interest
rates. Also forcing the New Zealand dollar lower were fears for an economic
slow-down in New Zealand during 2006. During October, long positions in the
Commodity Currencies versus the U.S. dollar resulted in losses as their
values weakened in response to volatile gold prices. The Australian dollar
was also pressured lower after the Reserve Bank of Australia kept its
overnight interest rate
MORGAN STANLEY SPECTRUM CURRENCY L.P.
FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
unchanged. During November, short positions in the South African rand and
Australian dollar incurred losses as their values reversed higher on stronger
gold prices. Finally during December, long positions in both the New Zealand
and Australian dollars experienced losses amid weaker-than-expected economic
growth data combined with a lack of confidence for further interest rate
hikes from the Reserve Bank of New Zealand.
.. Losses were also recorded primarily during the first quarter from positions
in the Singapore dollar versus the U.S. dollar. During February, long
positions in the Singapore dollar against the U.S. dollar incurred losses
early in the month as the U.S. dollar's value benefited from positive
economic sentiment. Newly established short Singapore dollar positions also
incurred losses later in the month after the U.S. dollar weakened due to a
larger-than-expected drop in January leading economic indicators and news
that South Korea's Central Bank planned to reduce its U.S. dollar currency
reserves. During March, long positions in the Singapore dollar versus the
U.S. dollar resulted in losses as the value of the U.S. dollar reversed
sharply higher amid an increase in U.S. interest rates and U.S. consumer
prices. Positions in the Singapore dollar against the U.S. dollar held
during the third quarter also contributed to losses.
FACTORS INFLUENCING ANNUAL TRADING GAINS:
.. Gains were achieved from short positions in the Japanese yen against the
U.S. dollar. During March, gains resulted as the U.S. dollar advanced
against the yen due to an increase in U.S. interest rate. Short Japanese yen
positions held during the second quarter also recorded gains as the yen's
value declined during May and June in response to weak Japanese economic
data. During July, gains resulted after the U.S. dollar's value strengthened
against the yen on significant interest rate differentials between the U.S.
and Japan. Market participants also drove the U.S. dollar higher against the
yen during July following the release of strong U.S. economic data and news
that the U.S. Current-Account deficit had narrowed. During September, short
Japanese yen positions profited after the yen's value declined in the wake
of weak Japanese economic data. During the fourth quarter, short Japanese
yen positions continued to record gains as the yen's value trended lower
against the U.S. dollar after the potential for higher U.S. interest rates
continued to bolster the value of the U.S. dollar. The Japanese yen was also
pulled lower on investor sentiment that future action by the Chinese
government regarding further Chinese yuan re-valuation was farther away than
previously expected.
MORGAN STANLEY SPECTRUM CURRENCY L.P.
FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)
.. Additional gains resulted during the second quarter from short positions in
the Swiss franc versus the U.S. dollar after the U.S. dollar increased
during May as China downplayed rumors of a move toward a flexible exchange
rate and the franc moved lower on weaker-than-expected French economic data,
the rejection of a proposed European Union constitution by French voters,
and speculation that future European Constitution referendums would result
in similar outcomes. During June, short franc positions continued to profit
as European currency values declined amid market pessimism for future
European integration, the release of weak European economic data, and
greater-than-expected capital outflows into U.S. markets.
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
[CHART]
Year ended December 31, 2005
----------------------------
Currencies -3.21%
Interest Rates 0.87%
Stock Indices 9.97%
Energies 0.29%
Metals 0.05%
Agriculturals -0.62%
Note: Reflects trading results only and does not include fees or interest
income.
FACTORS INFLUENCING ANNUAL TRADING GAINS:
.. Gains were recorded in the global stock indices sector, primarily during the
third and fourth quarter of the year, from long positions in Pacific Rim and
European stock index futures. During July, gains were recorded as prices
increased amid positive economic data out of the U.S. and Japan. Prices
continued to strengthen after China reformed its U.S. dollar currency peg
policy. Finally, strong corporate earnings out of the European Union
resulted in optimistic investor sentiment and pushed prices higher. During
September, long Japanese stock index futures positions experienced gains as
prices increased on positive comments from Bank of Japan Governor Toshihiko
Fukui. Additional sector gains resulted from long positions in European
stock index futures as prices rose amid declining oil prices and signs that
the global economy could move forward despite Hurricane Katrina's
devastation of the U.S. Gulf Coast. During the fourth quarter, long
positions in Japanese and European stock index futures continued to benefit
largely in response to falling energy prices, strong corporate earnings, and
positive economic data out of the U.S. Strong investor optimism for
continued improvement in the Japanese economy during 2006 also benefited
prices.
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)
.. Additional gains were recorded in the global interest rate markets primarily
during the second and fourth quarter of the year from positions in European
interest rate futures. During the second quarter, long positions in European
interest rate futures achieved gains as prices moved higher amid concerns
for euro-zone economic growth, speculation for reductions in European
interest rates by the European Central Bank, and rejections of a proposed
European Union constitution. During the fourth quarter, short positions in
European interest rate futures initially benefited as prices weakened on
concerns for potential increases in euro-zone interest rates by the European
Central Bank. Prices continued to fall later during the quarter despite
European Central Bank rates being left unchanged at 2%. Further selling
pressure resulted following the European Central Bank President Jean-Claude
Trichet's comments confirming that the European Central Bank would continue
to gauge measurements sensitive to the risk of suddenly rising inflation.
.. The energy sector supplied gains, achieved primarily during August, from
long futures positions in natural gas as prices first climbed higher on
supply and demand concerns and then strengthened further after Hurricane
Katrina struck the Gulf of Mexico.
.. Smaller gains recorded in metals occurred during the fourth quarter from
long futures positions in copper as prices increased on news of strong
demand from India, China, and the Middle East combined with weak global
supplies.
FACTORS INFLUENCING ANNUAL TRADING LOSSES:
.. Losses were incurred in the currency markets primarily during the first and
third quarter, as well as during December. During the first quarter, losses
stemmed from long positions in the Singapore dollar versus the U.S. dollar
as the U.S. dollar advanced further due to expectations that the Chinese
government would announce postponement of Chinese yuan re-valuation for the
foreseeable future. Additional losses resulted during January from positions
in the U.S. dollar index, as well as positions in various foreign currencies
versus the U.S. dollar, such as the British pound and Australian dollar.
During January, short U.S. dollar positions versus the South African rand
and euro also resulted in losses after the U.S. dollar's value reversed
sharply higher amid conflicting economic data, improvements in U.S. trade
deficit data, and speculation for higher U.S. interest rates. Short
positions in the Singapore dollar and euro versus the U.S. dollar
experienced losses during February as the U.S. dollar's value declined amid
news of disappointing U.S. economic data and proposed U.S. dollar reductions
in foreign central bank currency reserves. Losses resulted during March from
long
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
positions in the Singapore dollar and euro versus the U.S. dollar, as well as
from outright short positions in the U.S. dollar index, after the value of
the U.S. dollar reversed sharply higher supported by market expectations for
and the eventual increase in the U.S. federal funds rate by the U.S. Federal
Reserve. The value of the U.S. dollar strengthened further following the
release of a larger-than-expected increase in February consumer prices.
During the third quarter, losses were incurred from long U.S. dollar
positions against the Singapore dollar, New Zealand dollar, and euro as the
value of the U.S. dollar declined amid higher crude oil prices, lower durable
goods orders, the U.S. trade imbalance, and economic warnings from U.S.
Federal Reserve Chairman Alan Greenspan. Additional losses stemmed from short
euro cross- rate positions against the Norwegian krone after the euro's value
moved higher in response to U.S. dollar weakness. During December, losses
were incurred from short U.S. dollar positions against both the New Zealand
and Australian dollars following weaker-than-expected economic growth data
combined with a lack of confidence for further interest rate hikes from the
Reserve Bank of New Zealand.
.. Smaller losses resulted in the agricultural markets from long futures
positions in corn held during the first quarter after prices declined amid a
stronger U.S. dollar and technically-based selling. Additional losses
resulted from long futures positions in cocoa held during the third quarter
as prices moved lower on new hopes for political stability in the Ivory
Coast. Long futures positions in cotton experienced losses during May as
prices moved lower on supply increases. During December, short futures
positions in corn, soybeans and its related products incurred losses after
prices advanced on reports of strong demand and news of weaker-than-expected
supplies.
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MORGAN STANLEY SPECTRUM SELECT L.P.
[CHART]
Year ended December 31, 2005
----------------------------
Currencies -5.51%
Interest Rates -0.91%
Stock Indices 4.35%
Energies 1.00%
Metals 3.35%
Agriculturals -0.62%
Note: Reflects trading results only and does not include fees or interest
income.
FACTORS INFLUENCING ANNUAL TRADING LOSSES:
.. Losses were recorded in the currency markets during the first and third
quarter, as well as during December, from positions in foreign currencies
versus the U.S. dollar. During January, long positions in the euro versus
the U.S. dollar incurred losses after the U.S. dollar's value reversed
sharply higher amid conflicting economic data, improvements in U.S. trade
deficit numbers, and speculation for higher U.S. interest rates. The U.S.
dollar's value also advanced in response to expectations that the Chinese
government would announce postponement of Chinese yuan re-valuation for the
foreseeable future. Additional losses were recorded during February from
short positions in the euro versus the U.S. dollar as the U.S. dollar
weakened in response to concern for the considerable U.S. Current-Account
deficit expressed by the U.S. Federal Reserve Chairman Alan Greenspan. The
value of the U.S. dollar was further weakened during the remainder of
February by a larger-than-expected drop in January leading economic
indicators and news that South Korea's Central Bank would be reducing its
U.S. dollar currency reserves. Long European currency positions versus the
U.S. dollar also recorded losses during March after the value of the U.S.
dollar reversed sharply higher benefiting from higher U.S. interest rates
and consumer prices. During August, long U.S. dollar positions against the
British pound and euro resulted in losses as the value of the U.S. dollar
MORGAN STANLEY SPECTRUM SELECT L.P.
FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
declined amid higher crude oil prices, lower durable goods orders, the U.S.
trade imbalance, and economic warnings from U.S. Federal Reserve Chairman
Alan Greenspan. During December, the largest losses were incurred from long
U.S. dollar positions versus the euro after the euro's value increased during
mid-month on the possibility that the European Central Bank would raise
interest rates in 2006. Additional losses resulted from long U.S. dollar
positions versus the South African rand and both the Australian and New
Zealand dollars as their values reversed higher with gold prices. Sector
losses also stemmed from short U.S. dollar positions against the British
pound.
.. Losses were also recorded in the global interest rate markets primarily
during the third quarter from long positions in U.S. interest rate futures.
During July, long positions experienced losses as prices declined following
a rise in interest rates and after the U.S. Labor Department released its
June employment report. During September, long positions incurred additional
losses as prices weakened after it was revealed that measurements of
Hurricane Katrina's economic impact were not weak enough to deter the U.S.
Federal Reserve from its policy of raising interest rates.
.. Smaller losses were incurred in the agricultural markets primarily during
the second and third quarter from long futures positions in wheat and corn.
During April, long futures positions in wheat resulted in losses as prices
fell in response to favorable weather in growing regions and reduced foreign
demand. During July and August, long positions in corn futures experienced
losses after prices weakened in response to higher silo rates and forecasts
for supply increases.
MORGAN STANLEY SPECTRUM SELECT L.P.
FACTORS INFLUENCING ANNUAL TRADING GAINS:
.. Gains established in the global stock index markets occurred during the
third and fourth quarter from positions in Japanese and European stock index
futures. During July, long positions in Pacific Rim and European stock index
futures benefited after positive economic data out of the U.S. and Japan
pushed global equity prices higher. Prices continued to strengthen after
China reformed its U.S. dollar currency peg policy. Strong corporate
earnings out of the European Union, Japan, and the U.S. resulted in
optimistic investor sentiment and pushed prices further. During September,
long positions in Japanese stock index futures experienced gains as prices
increased on positive comments from Bank of Japan Governor Toshihiko Fukui,
who said the Japanese economy was in the process of emerging from a soft
patch. Additional sector gains resulted from long positions in European
stock index futures as oil prices declined and investors embraced signs that
the global economy could move forward despite Hurricane Katrina's
devastation of the U.S. Gulf Coast. During the fourth quarter, long
positions in Japanese and European stock index futures supplied gains as
prices increased in response to falling energy prices, strong corporate
earnings, and positive economic data out of the U.S. European stock markets
also found support from the possibility of an end to U.S. interest rate
increases.
.. Additional gains were recorded in metals during the third and fourth quarter
from long futures positions in copper, aluminum, and zinc as prices
strengthened amid supply tightness and strong demand from China, India, and
the Middle East.
.. In the energy markets, gains were achieved primarily during August from long
futures positions in natural gas, crude oil and its related products as
prices rose on supply and demand concerns. After Hurricane Katrina struck
the Gulf of Mexico, prices advanced further to touch record highs.
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MORGAN STANLEY SPECTRUM STRATEGIC L.P.
[CHART]
Year ended December 31, 2005
----------------------------
Currencies -11.19%
Interest Rates 0.42%
Stock Indices 1.26%
Energies 1.12%
Metals 6.87%
Agriculturals 2.45%
Note: Reflects trading results only and does not include fees or interest
income.
FACTORS INFLUENCING ANNUAL TRADING LOSSES:
.. Losses were incurred in the currency markets throughout much of the year
from U.S. dollar positions versus a variety of foreign currencies. During
January, long positions in the Japanese yen and Australian dollar versus the
U.S. dollar incurred losses after the U.S. dollar's value reversed higher
amid improvements in U.S. trade deficit numbers, higher U.S. interest rates,
and China's reluctance to re-value the yuan. Short positions in the Swiss
franc and Japanese yen against the U.S. dollar experienced losses during
February as the U.S. dollar weakened amid concerns for the U.S.
Current-Account deficit, a larger-than-expected drop in January leading
economic indicators, and news that South Korea's Central Bank planned to
reduce its U.S. dollar currency reserves. During March, long positions in
the Canadian dollar, Japanese yen, Australian dollar, Swiss franc, and euro
versus the U.S. dollar experienced losses after the U.S. dollar reversed
higher, benefiting from increases in U.S. interest rates. During April,
losses were recorded from positions in most major currencies relative to the
U.S. dollar as the U.S. dollar's value remained volatile due to speculation
on the U.S. Federal Reserve's interest rate policy, high oil prices, and
weak U.S. economic data. During May, losses were recorded from long
positions in the Japanese yen, Swiss franc, Canadian dollar, and Australian
dollar versus the U.S. dollar as the U.S. dollar increased after China
downplayed rumors of a move toward a flexible exchange rate. Later in the
month, most
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
foreign currencies declined with the euro, which dropped in response to
weaker-than-expected French economic data. During June, losses stemmed from
positions in the Australian dollar versus the U.S. dollar as the value of the
Australian currency moved without consistent direction amid a rise in gold
prices during early June and concerns over global commodity demand in the
latter part of the month. Additional losses stemmed from long Japanese yen
positions during mid-June, as well as from short Canadian dollar positions.
During July, losses were incurred from short positions in the euro and Swiss
franc after the euro advanced amid new signals that the European Central Bank
would stand firm against calls to cut interest rates. Additional losses
followed the release of positive U.S. economic data, particularly from long
positions in the British pound and Australian dollar against the U.S. dollar.
During August, long U.S. dollar positions against the Canadian dollar,
Australian dollar, Japanese yen, euro, and Swiss franc, recorded losses as
the value of the U.S. dollar declined amid higher crude oil prices, lower
durable goods orders, the U.S. trade imbalance, and economic warnings from
U.S. Federal Reserve Chairman Alan Greenspan. During the fourth quarter,
losses resulted from short positions in European currencies, particularly the
euro and Swiss franc, versus the U.S. dollar as their values moved higher in
response to a rise in the euro-zone Organization for Economic Cooperation &
Development's leading indicator of 106 in August from a July figure of 105.5.
European currency values also moved higher with the euro, which was boosted
by expectations that the European Central Bank might raise interest rates
next year. Additional losses resulted from long positions in the Canadian
dollar versus the U.S. dollar. Finally, losses were also incurred from long
positions in the Australian dollar versus the U.S. dollar, as the Australian
dollar initially weakened in response to volatile gold prices, as well as
from short U.S. dollar positions against the British pound.
FACTORS INFLUENCING ANNUAL TRADING GAINS:
.. Gains were recorded in metals primarily during the third and fourth quarter
from long futures positions in base metals. During the third quarter, long
futures positions in zinc, aluminum, and copper were profitable as prices
strengthened amid supply tightness and strong demand from China. Long
futures positions in zinc, aluminum, and copper continued to record gains
during the fourth quarter as prices trended higher on news of consistently
strong demand from India, China, and the Middle East combined with tight
market supply.
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)
.. In the agricultural markets, gains were recorded primarily during November
and December from long futures positions in sugar after prices rose in
response to divisions among European Union countries over a proposal to cut
sugar export prices.
.. Gains were recorded in global stock indices primarily during July,
September, and November from long positions in European and Pacific Rim
stock index futures. During July, Japanese equity prices initially increased
on positive economic data out of Japan and better-than-expected Japanese
corporate earnings. Prices strengthened further after China reformed its
U.S. dollar currency peg policy. During September, long positions in
Japanese stock index futures experienced gains as prices increased on
positive comments from Bank of Japan Governor Toshihiko Fukui, who said the
Japanese economy was in the process of emerging from a soft patch. During
November, long positions in European and Japanese stock index futures
experienced gains as markets reacted positively to weak energy prices and
strong U.S. equity prices. European markets prices were also pulled higher
on strong corporate earnings, while Japanese equity markets were buoyed by
optimism about the future of the Japanese economy.
.. Gains were recorded in the energy markets primarily during the third quarter
from long futures positions in crude oil and its related products. During
July, prices surged on possible supply disruptions in the Gulf of Mexico
caused by Hurricane Dennis. Prices continued to move higher towards the end
of the month in response to news of several refinery fires in Texas and
Louisiana, declining U.S. inventories, and passage by the U.S. Congress of
President George Bush's energy bill. During August, long futures positions
continued to benefit as prices climbed higher on supply and demand concerns.
After Hurricane Katrina struck the Gulf of Mexico, prices advanced further
to touch new record highs.
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)
.. Smaller gains were achieved in the global interest rate markets during the
second and fourth quarter from positions in European and Japanese interest
rate futures. During the second quarter, long positions in European interest
rate futures positions benefited from rising prices supported by weakness in
equity markets, disappointing European economic data, speculation that
certain hedge funds experienced significant trading losses, rejections by
the European Central Bank to alter interest rates, and concerns for the
future of the European integration process. Later in the quarter, prices
strengthened amid a sharp reduction in Swedish interest rates, the release
of weaker-than-expected French consumer spending, and higher oil prices.
Long Japanese interest rate futures positions also benefited after prices
increased during April due to weaker Japanese equity markets and then
continued to rise during June after the release of weak Japanese economic
data. During the fourth quarter, short positions in short-term European
interest rate futures experienced gains as euribor prices trended lower
following the European Central Bank President Jean-Claude Trichet's comments
confirming that the European Central Bank would continue to gauge
measurements sensitive to the risk of suddenly rising inflation.
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
[CHART]
Year ended December 31, 2005
----------------------------
Currencies -3.28%
Interest Rates -1.86%
Stock Indices 3.88%
Energies 1.30%
Metals 5.61%
Agriculturals -4.41%
Note: Reflects trading results only and does not include fees or interest
income.
FACTORS INFLUENCING ANNUAL TRADING LOSSES:
.. Losses were incurred in the agricultural markets throughout a majority of
the year from futures positions in lean hogs, soybeans and its related
products, wheat, and live cattle. During the first quarter, losses were
experienced from long futures positions in lean hogs as prices weakened on
news of a reduction in demand. Additional losses were experienced from short
futures positions in the soybean complex and wheat as prices reversed higher
on news of extremely cold weather in the U.S. growing regions and rumors of
a reduction on world output during 2005. Long lean hog futures experienced
further losses during March as prices declined on speculative selling.
During the second quarter, long futures positions in lean hogs and live
cattle also incurred losses as prices finished lower on news of a reduction
in foreign export demand. Long futures positions in lean hogs continued to
incur losses as prices moved lower during May in response to continued
weakening demand. During the third quarter, losses stemmed from short
futures positions in lean hogs and live cattle, as well as from long futures
positions in the soybean complex. During July, short futures positions in
live cattle recorded losses after prices reversed higher in response to
lower slaughter rates. During August, losses resulted from long futures
positions in the soybean complex as prices reversed lower due to forecasts
for supply increases. Short futures positions in lean hogs also incurred
losses
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
during August after prices rose in response to reports of lower slaughter
rates. During September, losses stemmed from short futures positions in live
cattle as prices rose amid higher slaughter rates caused by increases in
market demand.
.. In the currency markets, losses resulted primarily during the first quarter,
August, and December. During the first quarter, losses were recorded from
long positions in the British pound and Swiss franc versus the U.S. dollar
after the U.S. dollar's value advanced in response to speculation that China
would move toward a flexible exchange and amid expectations for higher U.S.
interest rates. During August, long U.S. dollar positions against the
British pound and Swiss franc recorded losses as the value of the U.S.
dollar declined amid higher crude oil prices, lower durable goods orders,
the U.S. trade imbalance, and economic warnings from U.S. Federal Reserve
Chairman Alan Greenspan. During December, long positions in both the
Australian and New Zealand dollars versus the U.S. dollar experienced losses
as the values of both of these commodity currencies decreased with higher
gold prices.
.. Smaller losses were experienced in the global interest rate markets
primarily during the third quarter and December from positions in Australian
and U.S. interest rate futures. During July, long positions in U.S. interest
rate futures resulted in losses as prices reversed lower following a rise in
interest rates and after the U.S. Labor Department released its June
employment report. During August, short positions in U.S. fixed-income
futures incurred losses as prices reversed higher on worries about the
global economic impact of Hurricane Katrina and growing speculation that the
U.S. Federal Reserve would stop raising interest rates sooner than
previously thought. During September, long positions in Australian bond
futures recorded losses as prices declined after Australia's largest ever
annual jobs gain initiated speculation that the Reserve Bank of Australia
would perhaps reconsider its stance on interest rates. Additional losses
stemmed from long positions in U.S. fixed-income futures. During December,
short positions in U.S. interest rate futures experienced losses as prices
advanced after the U.S. Federal Open Market Committee's policy meeting,
where policy makers dropped references to "accommodation" in the
accompanying policy statement causing bond market participants to speculate
that the 18-month tightening cycle of U.S. interest rates was possibly
nearing its end.
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
FACTORS INFLUENCING ANNUAL TRADING GAINS:
.. Gains were achieved in metals during the third and fourth quarter from long
futures positions in copper, zinc, aluminum, gold, and silver. During the
third quarter, long futures positions in base and precious metals recorded
profits as prices moved higher in response to supply tightness and strong
global demand. During the fourth quarter, long futures positions in base and
precious metals continued to supply gains as prices trended higher on
consistently strong demand from India, China, and the Middle East.
.. Gains were recorded in global stock indices primarily during the third
quarter from long positions in European and Pacific Rim stock index futures
as prices increased amid positive economic data out of the U.S. and Japan, a
strong U.S. jobs number, and better-than-expected Japanese corporate
earnings. Prices continued to strengthen after China reformed its U.S.
dollar currency peg policy. Strong corporate earnings out of the European
Union and the U.S. also pushed prices higher. During September, long
positions in European stock index futures benefited as oil prices declined
and investors embraced signs that the global economy could move forward
despite Hurricane Katrina's devastation of the U.S. Gulf Coast. Additional
gains resulted from long positions in Japanese stock index futures as prices
increased on positive comments from Bank of Japan Governor Toshihiko Fukui,
who said the Japanese economy was in the process of emerging from a soft
patch.
.. In the energy markets, gains resulted primarily during August from long
futures positions in crude oil, its related products, and natural gas as
prices climbed higher throughout the month on supply and demand concerns.
After Hurricane Katrina struck the Gulf of Mexico, prices advanced further
to touch new record highs.
Managed futures investments are speculative, involve a high degree of risk, use
significant leverage, are generally illiquid, have substantial charges, are
subject to conflicts of interest, and are suitable only for the risk capital
portion of an investor's portfolio. Before investing in any managed futures
investment, qualified investors should read the prospectus or offering
documents carefully for additional information with respect to charges,
expenses, and risks. Past performance is no guarantee of future results.
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MORGAN STANLEY SPECTRUM SERIES
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Demeter Management Corporation ("Demeter"), the general partner of Morgan
Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P.,
Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P.,
and Morgan Stanley Spectrum Technical L.P. (individually, a "Partnership", or
collectively, the "Partnerships"), is responsible for the management of the
Partnerships.
Management of Demeter ("Management") is responsible for establishing and
maintaining adequate internal control over financial reporting. The internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles.
The Partnerships' internal control over financial reporting includes those
policies and procedures that:
.. Pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
Partnerships;
.. Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that the Partnerships' transactions are
being made only in accordance with authorizations of Management and
directors; and
.. Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Partnerships' assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of each Partnership's internal control
over financial reporting as of December 31, 2005. In making this assessment,
Management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework. Based on our assessment and those criteria, Management believes that
each Partnership maintained effective internal control over financial reporting
as of December 31, 2005.
Deloitte & Touche LLP, the Partnerships' independent registered public
accounting firm, has issued an audit report on Management's assessment of the
Partnerships' internal control over financial reporting and on the
effectiveness of the Partnerships' internal control over financial reporting.
This report, which expresses unqualified opinions on Management's assessment
and on the effectiveness of the Partnerships' internal control over financial
reporting, appears under "Report of Independent Registered Public Accounting
Firm" on the following page.
/s/ Jeffrey A. Rothman
Jeffrey A. Rothman
President
/s/ Kevin Perry
Kevin Perry
Chief Financial Officer
New York, New York
March 21, 2006
MORGAN STANLEY SPECTRUM SERIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Limited Partners and the General Partner of Morgan Stanley Spectrum
Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley
Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan
Stanley Spectrum Technical L.P.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Morgan
Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P.,
Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P.,
and Morgan Stanley Spectrum Technical L.P. (collectively, the "Partnerships")
maintained effective internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Partnerships' management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Partnerships' internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A compa-
ny's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Partnerships maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Partnerships
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the financial statements as of and
for the year ended December 31, 2005 of the Partnerships and our report dated
March 21, 2006 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
New York, New York
March 21, 2006
MORGAN STANLEY SPECTRUM SERIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Limited Partners and the General Partner of Morgan Stanley Spectrum
Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley
Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan
Stanley Spectrum Technical L.P. :
We have audited the accompanying statements of financial condition of Morgan
Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P.,
Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P.,
and Morgan Stanley Spectrum Technical L.P. (collectively, the "Partnerships"),
including the schedules of investments, as of December 31, 2005 and 2004, and
the related statements of operations, changes in partners' capital, and cash
flows for each of the three years in the period ended December 31, 2005. These
financial statements are the responsibility of the Partnerships' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Morgan Stanley Spectrum Currency L.P.,
Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select
L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum
Technical L.P. at December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 1, in 2005 the Partnerships modified their
classification of cash within the statements of financial condition and the
related statements of cash flows.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Partnerships' internal control over financial reporting as of December 31,
2005, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 21, 2006 expressed an unqualified opinion
on management's assessment of the effectiveness of the Partnerships' internal
control over financial reporting and an unqualified opinion on the
effectiveness of the Partnerships' internal control over financial reporting.
/s/ Deloitte & Touche LLP
New York, New York
March 21, 2006
MORGAN STANLEY SPECTRUM CURRENCY L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
------------------------
2005 2004
------------ -----------
$ $
ASSETS
Equity in futures interests trading accounts:
Unrestricted cash 207,952,625 253,222,567
Restricted cash -- 169,680
------------ -----------
Total Cash 207,952,625 253,392,247
Net unrealized gain on open contracts (MS & Co.) 6,202,194 16,647,953
------------ -----------
Total Trading Equity 214,154,819 270,040,200
Subscriptions receivable 1,355,204 6,690,404
Interest receivable (Morgan Stanley DW) 559,983 315,539
------------ -----------
Total Assets 216,070,006 277,046,143
============ ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 6,346,278 2,499,153
Accrued brokerage fees (Morgan Stanley DW) 862,131 1,007,999
Accrued management fees 374,840 438,261
------------ -----------
Total Liabilities 7,583,249 3,945,413
------------ -----------
PARTNERS' CAPITAL
Limited Partners (17,508,991.514 and 18,755,238.476 Units,
respectively) 206,199,270 270,231,305
General Partner (194,237.343 and 199,150.709 Units, respectively) 2,287,487 2,869,425
------------ -----------
Total Partners' Capital 208,486,757 273,100,730
------------ -----------
Total Liabilities and Partners' Capital 216,070,006 277,046,143
============ ===========
NET ASSET VALUE PER UNIT 11.78 14.41
============ ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2005 2004 2003
------------- ----------- -----------
$ $ $
INVESTMENT INCOME
Interest income (Morgan Stanley
DW) 5,391,828 2,064,338 1,006,410
------------- ----------- -----------
EXPENSES
Brokerage fees (Morgan Stanley DW) 10,921,579 10,011,029 6,109,327
Management fees 4,748,514 4,352,622 2,656,229
Incentive fees -- 177,763 2,623,290
------------- ----------- -----------
Total Expenses 15,670,093 14,541,414 11,388,846
------------- ----------- -----------
NET INVESTMENT LOSS (10,278,265) (12,477,076) (10,382,436)
------------- ----------- -----------
TRADING RESULTS
Trading profit (loss):
Realized (28,979,835) (11,200,944) 27,952,154
Net change in unrealized (10,445,759) 11,769,313 (772,909)
------------- ----------- -----------
Total Trading Results (39,425,594) 568,369 27,179,245
------------- ----------- -----------
NET INCOME (LOSS) (49,703,859) (11,908,707) 16,796,809
============= =========== ===========
NET INCOME (LOSS) ALLOCATION:
Limited Partners (49,177,845) (11,774,885) 16,514,538
General Partner (526,014) (133,822) 282,271
NET INCOME (LOSS) PER UNIT:
Limited Partners (2.63) (1.25) 1.73
General Partner (2.63) (1.25) 1.73
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
----------------------
2005 2004
----------- ----------
$ $
ASSETS
Equity in futures interests trading accounts:
Unrestricted cash 41,897,899 44,914,117
Restricted cash 2,476,604 3,978,399
----------- ----------
Total Cash 44,374,503 48,892,516
----------- ----------
Net unrealized gain on open contracts (MS&Co.) 562,409 932,265
Net unrealized gain (loss) on open contracts (MSIL) 40,229 (114,942)
----------- ----------
Total net unrealized gain on open contracts 602,638 817,323
----------- ----------
Total Trading Equity 44,977,141 49,709,839
Subscriptions receivable 295,999 640,161
Interest receivable (Morgan Stanley DW) 149,040 83,972
----------- ----------
Total Assets 45,422,180 50,433,972
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 851,645 582,712
Accrued brokerage fees (Morgan Stanley DW) 171,976 188,436
Accrued management fees 46,733 51,206
----------- ----------
Total Liabilities 1,070,354 822,354
----------- ----------
PARTNERS' CAPITAL
Limited Partners (2,879,808.149 and
3,359,662.807 Units, respectively) 43,870,162 49,068,822
General Partner (31,618.331 and
37,164.331 Units, respectively) 481,664 542,796
----------- ----------
Total Partners' Capital 44,351,826 49,611,618
----------- ----------
Total Liabilities and Partners' Capital 45,422,180 50,433,972
=========== ==========
NET ASSET VALUE PER UNIT 15.23 14.61
=========== ==========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2005 2004 2003
------------ ---------- ----------
$ $ $
INVESTMENT INCOME
Interest income (Morgan Stanley DW) 1,370,806 625,965 525,817
------------ ---------- ----------
EXPENSES
Brokerage fees (Morgan Stanley DW) 2,126,114 2,332,241 2,328,615
Management fees 577,754 633,766 632,782
------------ ---------- ----------
Total Expenses 2,703,868 2,966,007 2,961,397
------------ ---------- ----------
NET INVESTMENT LOSS (1,333,062) (2,340,042) (2,435,580)
------------ ---------- ----------
TRADING RESULTS
Trading profit (loss):
Realized 3,338,207 1,049,835 3,711,981
Net change in unrealized (214,685) (1,729,717) 1,801,107
------------ ---------- ----------
3,123,522 (679,882) 5,513,088
Proceeds from Litigation Settlement 2,230 2,296 --
------------ ---------- ----------
Total Trading Results 3,125,752 (677,586) 5,513,088
------------ ---------- ----------
NET INCOME (LOSS) 1,792,690 (3,017,628) 3,077,508
============ ========== ==========
NET INCOME (LOSS) ALLOCATION:
Limited Partners 1,769,412 (2,985,362) 3,043,649
General Partner 23,278 (32,266) 33,859
NET INCOME (LOSS) PER UNIT:
Limited Partners 0.62 (0.86) 0.90
General Partner 0.62 (0.86) 0.90
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
------------------------
2005 2004
------------ -----------
$ $
ASSETS
Equity in futures interests trading accounts:
Unrestricted cash 475,166,952 488,346,785
Restricted cash 51,242,347 75,488,462
------------ -----------
Total Cash 526,409,299 563,835,247
------------ -----------
Net unrealized gain on open contracts (MSIL) 9,166,796 3,053,732
Net unrealized gain on open contracts
(MS&Co.) 9,019,008 12,072,891
------------ -----------
Total net unrealized gain on open contracts 18,185,804 15,126,623
Net option premiums -- 3,366,493
------------ -----------
Total Trading Equity 544,595,103 582,328,363
Subscriptions receivable 4,455,213 12,736,861
Interest receivable (Morgan Stanley DW) 1,417,447 757,981
------------ -----------
Total Assets 550,467,763 595,823,205
============ ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 13,439,853 5,692,215
Accrued brokerage fees (Morgan Stanley DW) 2,730,072 3,468,754
Accrued management fees 1,295,496 1,356,111
------------ -----------
Total Liabilities 17,465,421 10,517,080
------------ -----------
PARTNERS' CAPITAL
Limited Partners (19,209,338.858 and
20,050,871.818 Units, respectively) 527,198,790 579,155,164
General Partner (211,461.769 and
212,951.775 Units, respectively) 5,803,552 6,150,961
------------ -----------
Total Partners' Capital 533,002,342 585,306,125
------------ -----------
Total Liabilities and Partners' Capital 550,467,763 595,823,205
============ ===========
NET ASSET VALUE PER UNIT 27.45 28.88
============ ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2005 2004 2003
------------- ----------- -----------
$ $ $
INVESTMENT INCOME
Interest income (Morgan Stanley DW) 12,876,956 4,952,656 2,843,612
------------- ----------- -----------
EXPENSES
Brokerage fees (Morgan Stanley DW) 36,601,881 36,680,599 25,658,616
Management fees 15,652,447 14,450,217 10,617,352
Incentive fees -- 6,104,991 3,750,169
------------- ----------- -----------
Total Expenses 52,254,328 57,235,807 40,026,137
------------- ----------- -----------
NET INVESTMENT LOSS (39,377,372) (52,283,151) (37,182,525)
------------- ----------- -----------
TRADING RESULTS
Trading profit (loss):
Realized 7,018,678 50,580,928 52,485,483
Net change in unrealized 3,059,181 (21,655,342) 18,883,947
------------- ----------- -----------
10,077,859 28,925,586 71,369,430
Proceeds from Litigation Settlement 85,000 45,665 --
------------- ----------- -----------
Total Trading Results 10,162,859 28,971,251 71,369,430
------------- ----------- -----------
NET INCOME (LOSS) (29,214,513) (23,311,900) 34,186,905
============= =========== ===========
NET INCOME (LOSS) ALLOCATION:
Limited Partners (28,920,794) (23,067,010) 33,822,853
General Partner (293,719) (244,890) 364,052
NET INCOME (LOSS) PER UNIT:
Limited Partners (1.43) (1.43) 2.66
General Partner (1.43) (1.43) 2.66
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-------------------------
2005 2004
------------ -----------
$ $
ASSETS
Equity in futures interests trading accounts:
Unrestricted cash 142,187,180 161,592,256
Restricted cash 19,593,820 16,808,205
------------ -----------
Total Cash 161,781,000 178,400,461
------------ -----------
Net unrealized gain (loss) on open contracts (MS&Co.) 7,823,513 (226,980)
Net unrealized gain on open contracts (MSIL) 5,662,270 2,886,349
------------ -----------
Total net unrealized gain on open contracts 13,485,783 2,659,369
Net option premiums (568) 263,288
------------ -----------
Total Trading Equity 175,266,215 181,323,118
Subscriptions receivable 1,351,545 5,084,126
Interest receivable (Morgan Stanley DW) 445,924 238,656
------------ -----------
Total Assets 177,063,684 186,645,900
============ ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 4,515,005 1,725,329
Accrued incentive fees 1,704,356 188,744
Accrued brokerage fees (Morgan Stanley DW) 837,558 1,080,805
Accrued management fees 381,027 409,897
------------ -----------
Total Liabilities 7,437,946 3,404,775
------------ -----------
PARTNERS' CAPITAL
Limited Partners (11,834,304.588 and
12,446,331.591 Units, respectively) 167,774,452 181,218,795
General Partner (130,584.135 and
138,896.135 Units, respectively) 1,851,286 2,022,330
------------ -----------
Total Partners' Capital 169,625,738 183,241,125
------------ -----------
Total Liabilities and Partners' Capital 177,063,684 186,645,900
============ ===========
NET ASSET VALUE PER UNIT 14.18 14.56
============ ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2005 2004 2003
------------- ----------- -----------
$ $ $
INVESTMENT INCOME
Interest income (Morgan Stanley DW) 4,008,536 1,602,712 741,890
------------- ----------- -----------
EXPENSES
Brokerage fees (Morgan Stanley DW) 11,407,747 9,860,579 6,611,238
Management fees 4,685,477 4,006,640 2,735,685
Incentive fees 2,251,786 2,751,859 2,123,832
------------- ----------- -----------
Total Expenses 18,345,010 16,619,078 11,470,755
------------- ----------- -----------
NET INVESTMENT LOSS (14,336,474) (15,016,366) (10,728,865)
------------- ----------- -----------
TRADING RESULTS
Trading profit (loss):
Realized (2,036,361) 21,527,423 30,251,636
Net change in unrealized 10,826,414 (5,262,416) 990,641
------------- ----------- -----------
8,790,053 16,265,007 31,242,277
Proceeds from Litigation Settlement 454 173 --
------------- ----------- -----------
Total Trading Results 8,790,507 16,265,180 31,242,277
------------- ----------- -----------
NET INCOME (LOSS) (5,545,967) 1,248,814 20,513,412
============= =========== ===========
NET INCOME (LOSS) ALLOCATION:
Limited Partners (5,489,130) 1,239,931 20,281,103
General Partner (56,837) 8,883 232,309
NET INCOME (LOSS) PER UNIT:
Limited Partners (0.38) 0.25 2.77
General Partner (0.38) 0.25 2.77
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
------------------------
2005 2004
----------- -----------
$ $
ASSETS
Equity in futures interests trading accounts:
Unrestricted cash 591,492,563 584,988,965
Restricted cash 127,922,335 160,985,939
----------- -----------
Total Cash 719,414,898 745,974,904
----------- -----------
Net unrealized gain on open contracts (MSIL) 24,718,032 4,707,076
Net unrealized gain (loss) on open contracts
(MS&Co.) (2,653,896) 22,634,674
----------- -----------
Total net unrealized gain on open contracts 22,064,136 27,341,750
----------- -----------
Total Trading Equity 741,479,034 773,316,654
Subscriptions receivable 8,317,319 17,135,652
Interest receivable (Morgan Stanley DW) 1,887,334 1,000,293
----------- -----------
Total Assets 751,683,687 791,452,599
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 22,863,255 6,466,684
Accrued brokerage fees (Morgan Stanley DW) 3,775,150 4,629,988
Accrued management fees 1,629,189 1,632,040
----------- -----------
Total Liabilities 28,267,594 12,728,712
----------- -----------
PARTNERS' CAPITAL
Limited Partners (32,000,561.834 and
32,613,627.616 Units, respectively) 715,669,731 770,511,257
General Partner (346,372.001 and
347,618.087 Units, respectively) 7,746,362 8,212,630
----------- -----------
Total Partners' Capital 723,416,093 778,723,887
----------- -----------
Total Liabilities and Partners' Capital 751,683,687 791,452,599
=========== ===========
NET ASSET VALUE PER UNIT 22.36 23.63
=========== ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2005 2004 2003
----------- ----------- -----------
$ $ $
INVESTMENT INCOME
Interest income (Morgan Stanley DW) 17,176,811 6,171,302 3,316,107
----------- ----------- -----------
EXPENSES
Brokerage fees (Morgan Stanley DW) 49,430,024 45,508,966 30,273,037
Management fees 19,268,955 16,226,640 10,835,994
Incentive fees 2,668,447 12,132,833 13,042,559
----------- ----------- -----------
Total Expenses 71,367,426 73,868,439 54,151,590
----------- ----------- -----------
NET INVESTMENT LOSS (54,190,615) (67,697,137) (50,835,483)
----------- ----------- -----------
TRADING RESULTS
Trading profit (loss):
Realized 19,045,879 122,928,230 116,446,374
Net change in unrealized (5,277,614) (19,092,460) 22,330,997
----------- ----------- -----------
13,768,265 103,835,770 138,777,371
Proceeds from Litigation Settlement 4,209 3,018 --
----------- ----------- -----------
Total Trading Results 13,772,474 103,838,788 138,777,371
----------- ----------- -----------
NET INCOME (LOSS) (40,418,141) 36,141,651 87,941,888
=========== =========== ===========
NET INCOME (LOSS) ALLOCATION:
Limited Partners (39,990,714) 35,747,190 86,960,795
General Partner (427,427) 394,461 981,093
NET INCOME (LOSS) PER UNIT:
Limited Partners (1.27) 0.99 4.23
General Partner (1.27) 0.99 4.23
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM CURRENCY L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
-------------- ----------- ---------- -----------
$ $ $
Partners' Capital,
December 31, 2002 6,902,618.107 93,891,619 2,267,833 96,159,452
Offering of Units 6,157,215.998 89,883,376 790,000 90,673,376
Net income -- 16,514,538 282,271 16,796,809
Redemptions (920,425.880) (12,246,860) (1,326,857) (13,573,717)
-------------- ----------- ---------- -----------
Partners' Capital,
December 31, 2003 12,139,408.225 188,042,673 2,013,247 190,055,920
Offering of Units 8,372,327.316 114,539,377 990,000 115,529,377
Net loss -- (11,774,885) (133,822) (11,908,707)
Redemptions (1,557,346.356) (20,575,860) -- (20,575,860)
-------------- ----------- ---------- -----------
Partners' Capital,
December 31, 2004 18,954,389.185 270,231,305 2,869,425 273,100,730
Offering of Units 3,336,357.445 40,295,529 170,000 40,465,529
Net loss -- (49,177,845) (526,014) (49,703,859)
Redemptions (4,587,517.773) (55,149,719) (225,924) (55,375,643)
-------------- ----------- ---------- -----------
Partners' Capital,
December 31, 2005 17,703,228.857 206,199,270 2,287,487 208,486,757
============== =========== ========== ===========
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
------------- ----------- ------- -----------
$ $ $
Partners' Capital,
December 31, 2002 3,460,180.682 49,814,229 591,203 50,405,432
Offering of Units 690,016.887 10,491,897 -- 10,491,897
Net income -- 3,043,649 33,859 3,077,508
Redemptions (748,285.123) (11,285,344) (50,000) (11,335,344)
------------- ----------- ------- -----------
Partners' Capital,
December 31, 2003 3,401,912.446 52,064,431 575,062 52,639,493
Offering of Units 778,018.263 11,587,284 -- 11,587,284
Net loss -- (2,985,362) (32,266) (3,017,628)
Redemptions (783,103.571) (11,597,531) -- (11,597,531)
------------- ----------- ------- -----------
Partners' Capital,
December 31, 2004 3,396,827.138 49,068,822 542,796 49,611,618
Offering of Units 345,735.053 4,999,666 -- 4,999,666
Net income -- 1,769,412 23,278 1,792,690
Redemptions (831,135.711) (11,967,738) (84,410) (12,052,148)
------------- ----------- ------- -----------
Partners' Capital,
December 31, 2005 2,911,426.480 43,870,162 481,664 44,351,826
============= =========== ======= ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
-------------- ------------ --------- ------------
$ $ $
Partners' Capital,
December 31, 2002 10,681,668.047 292,226,000 3,151,799 295,377,799
Offering of Units 4,942,610.490 141,160,704 1,340,000 142,500,704
Net income -- 33,822,853 364,052 34,186,905
Redemptions (1,058,775.458) (30,542,924) -- (30,542,924)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2003 14,565,503.079 436,666,633 4,855,851 441,522,484
Offering of Units 7,215,873.382 208,687,672 1,540,000 210,227,672
Net loss -- (23,067,010) (244,890) (23,311,900)
Redemptions (1,517,552.868) (43,132,131) -- (43,132,131)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2004 20,263,823.593 579,155,164 6,150,961 585,306,125
Offering of Units 3,482,044.148 91,946,015 380,000 92,326,015
Net loss -- (28,920,794) (293,719) (29,214,513)
Redemptions (4,325,067.114) (114,981,595) (433,690) (115,415,285)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2005 19,420,800.627 527,198,790 5,803,552 533,002,342
============== ============ ========= ============
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
-------------- ----------- --------- -----------
$ $ $
Partners' Capital,
December 31, 2002 6,530,775.305 74,487,934 881,138 75,369,072
Offering of Units 2,823,095.529 36,375,972 180,000 36,555,972
Net income -- 20,281,103 232,309 20,513,412
Redemptions (877,978.963) (11,168,017) -- (11,168,017)
-------------- ----------- --------- -----------
Partners' Capital,
December 31, 2003 8,475,891.871 119,976,992 1,293,447 121,270,439
Offering of Units 5,057,597.578 73,841,018 720,000 74,561,018
Net income -- 1,239,931 8,883 1,248,814
Redemptions (948,261.723) (13,839,146) -- (13,839,146)
-------------- ----------- --------- -----------
Partners' Capital,
December 31, 2004 12,585,227.726 181,218,795 2,022,330 183,241,125
Offering of Units 2,346,340.284 31,611,503 -- 31,611,503
Net loss -- (5,489,130) (56,837) (5,545,967)
Redemptions (2,966,679.287) (39,566,716) (114,207) (39,680,923)
-------------- ----------- --------- -----------
Partners' Capital,
December 31, 2005 11,964,888.723 167,774,452 1,851,286 169,625,738
============== =========== ========= ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
-------------- ------------ --------- ------------
$ $ $
Partners' Capital,
December 31, 2002 18,239,525.857 332,124,550 3,697,076 335,821,626
Offering of Units 7,617,427.705 156,115,402 1,240,000 157,355,402
Net income -- 86,960,795 981,093 87,941,888
Redemptions (2,082,749.238) (42,934,638) -- (42,934,638)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2003 23,774,204.324 532,266,109 5,918,169 538,184,278
Offering of Units 11,745,240.279 259,052,698 1,900,000 260,952,698
Net income -- 35,747,190 394,461 36,141,651
Redemptions (2,558,198.900) (56,554,740) -- (56,554,740)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2004 32,961,245.703 770,511,257 8,212,630 778,723,887
Offering of Units 6,431,314.024 139,226,034 480,000 139,706,034
Net loss -- (39,990,714) (427,427) (40,418,141)
Redemptions (7,045,625.892) (154,076,846) (518,841) (154,595,687)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2005 32,346,933.835 715,669,731 7,746,362 723,416,093
============== ============ ========= ============
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM CURRENCY L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2005 2004 2003
----------- ----------- -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) (49,703,859) (11,908,707) 16,796,809
Noncash item included in net
income (loss):
Net change in unrealized 10,445,759 (11,769,313) 772,909
(Increase) decrease in operating
assets:
Restricted cash 169,680 (169,680) --
Interest receivable
(Morgan Stanley DW) (244,444) (213,650) (31,679)
Increase (decrease) in operating
liabilities:
Accrued brokerage fees
(Morgan Stanley DW) (145,868) 346,433 345,106
Accrued management fees (63,421) 150,624 150,046
Accrued incentive fees -- (399,035) 159,553
----------- ----------- -----------
Net cash provided by (used for)
operating activities (39,542,153) (23,963,328) 18,192,744
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Cash received from offering of Units 45,800,729 117,548,841 86,142,266
Cash paid from redemptions of
Units (51,528,518) (19,137,190) (14,039,569)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (5,727,789) 98,411,651 72,102,697
----------- ----------- -----------
Net increase (decrease) in
unrestricted cash (45,269,942) 74,448,323 90,295,441
Unrestricted cash at beginning of
period 253,222,567 178,774,244 88,478,803
----------- ----------- -----------
Unrestricted cash at end of period 207,952,625 253,222,567 178,774,244
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
------------ ----------- -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) 1,792,690 (3,017,628) 3,077,508
Noncash item included in net
income (loss):
Net change in unrealized 214,685 1,729,717 (1,801,107)
(Increase) decrease in operating assets:
Restricted cash 1,501,795 (116,681) (685,089)
Interest receivable
(Morgan Stanley DW) (65,068) (43,862) 13,348
Net option premiums -- (39,600) 752,173
Decrease in operating liabilities:
Accrued brokerage fees
(Morgan Stanley DW) (16,460) (6,455) (7,218)
Accrued management fees (4,473) (1,754) (1,962)
------------ ----------- -----------
Net cash provided by (used for)
operating activities 3,423,169 (1,496,263) 1,347,653
------------ ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Cash received from offering of Units 5,343,828 11,983,540 10,172,272
Cash paid from redemptions of Units (11,783,215) (12,047,859) (11,199,079)
------------ ----------- -----------
Net cash used for financing activities (6,439,387) (64,319) (1,026,807)
------------ ----------- -----------
Net increase (decrease) in unrestricted
cash (3,016,218) (1,560,582) 320,846
Unrestricted cash at beginning of
period 44,914,117 46,474,699 46,153,853
------------ ----------- -----------
Unrestricted cash at end of period 41,897,899 44,914,117 46,474,699
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
------------ ----------- -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) (29,214,513) (23,311,900) 34,186,905
Noncash item included in net
income (loss):
Net change in unrealized (3,059,181) 21,655,342 (18,883,947)
(Increase) decrease in operating
assets:
Restricted cash 24,246,115 (15,987,079) (25,458,104)
Net option premiums 3,366,493 (2,134,005) (1,232,488)
Interest receivable
(Morgan Stanley DW) (659,466) (507,361) (15,337)
Increase (decrease) in operating
liabilities:
Accrued brokerage fees
(Morgan Stanley DW) (738,682) 1,067,674 738,759
Accrued management fees (60,615) 362,561 305,694
Accrued incentive fees -- (2,227,005) 2,227,005
------------ ----------- -----------
Net cash used for operating
activities (6,119,849) (21,081,773) (8,131,513)
------------ ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Cash received from offering of
Units 100,607,663 210,179,028 136,503,231
Cash paid from redemptions of
Units (107,667,647) (39,845,039) (30,014,204)
------------ ----------- -----------
Net cash provided by (used for)
financing activities (7,059,984) 170,333,989 106,489,027
------------ ----------- -----------
Net increase (decrease) in
unrestricted cash (13,179,833) 149,252,216 98,357,514
Unrestricted cash at beginning of
period 488,346,785 339,094,569 240,737,055
------------ ----------- -----------
Unrestricted cash at end of period 475,166,952 488,346,785 339,094,569
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2005 2004 2003
----------- ----------- -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) (5,545,967) 1,248,814 20,513,412
Noncash item included in net
income (loss):
Net change in unrealized (10,826,414) 5,262,416 (990,641)
(Increase) decrease in operating
assets:
Restricted cash (2,785,615) (3,161,765) (1,920,957)
Net option premiums 263,856 414,992 (455,512)
Interest receivable
(Morgan Stanley DW) (207,268) (172,065) (4,813)
Increase (decrease) in operating
liabilities:
Accrued incentive fees 1,515,612 (622,506) 811,250
Accrued brokerage fees
(Morgan Stanley DW) (243,247) 430,756 218,453
Accrued management fees (28,870) 140,911 90,394
----------- ----------- -----------
Net cash provided by (used for)
operating activities (17,857,913) 3,541,553 18,261,586
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Cash received from offering of Units 35,344,084 74,620,070 33,067,265
Cash paid from redemptions of
Units (36,891,247) (12,769,688) (11,627,695)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (1,547,163) 61,850,382 21,439,570
----------- ----------- -----------
Net increase (decrease) in
unrestricted cash (19,405,076) 65,391,935 39,701,156
Unrestricted cash at beginning of
period 161,592,256 96,200,321 56,499,165
----------- ----------- -----------
Unrestricted cash at end of period 142,187,180 161,592,256 96,200,321
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
------------ ----------- -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) (40,418,141) 36,141,651 87,941,888
Noncash item included in net
income (loss):
Net change in unrealized 5,277,614 19,092,460 (22,330,997)
(Increase) decrease in operating
assets:
Restricted cash 33,063,604 (71,797,043) (50,136,502)
Interest receivable
(Morgan Stanley DW) (887,041) (708,483) (22,974)
Net option premiums -- 3,973,725 (3,973,725)
Increase (decrease) in operating
liabilities:
Accrued brokerage fees
(Morgan Stanley DW) (854,838) 1,682,213 1,041,470
Accrued management fees (2,851) 547,516 411,562
Accrued incentive fees -- (4,924,640) 4,924,640
------------ ----------- -----------
Net cash provided by (used for)
operating activities (3,821,653) (15,992,601) 17,855,362
------------ ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Cash received from offering of
Units 148,524,367 259,672,165 148,609,073
Cash paid from redemptions of
Units (138,199,116) (53,013,759) (43,204,854)
------------ ----------- -----------
Net cash provided by financing
activities 10,325,251 206,658,406 105,404,219
------------ ----------- -----------
Net increase in unrestricted cash 6,503,598 190,665,805 123,259,581
Unrestricted cash at beginning of
period 584,988,965 394,323,160 271,063,579
------------ ----------- -----------
Unrestricted cash at end of period 591,492,563 584,988,965 394,323,160
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM CURRENCY L.P.
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2005 AND 2004
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS
- ------------------------------ --------------- ------------- ---------------- -------------
2005 PARTNERSHIP NET ASSETS: $208,486,757 $ % $ %
Foreign currency (1,081,795) (0.52) 7,283,989 3.49
---------- ----- --------- ----
Grand Total: (1,081,795) (0.52) 7,283,989 3.49
========== ===== ========= ====
Unrealized Currency Gain/(Loss)
Total Net Unrealized Gain per Statement of Financial Condition
2004 PARTNERSHIP NET ASSETS: $273,100,730
Foreign currency 16,600,066 6.08* 47,887 0.02
---------- ----- --------- ----
Grand Total: 16,600,066 6.08 47,887 0.02
========== ===== ========= ====
Unrealized Currency Gain/(Loss)
Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS)
- ------------------------------ --------------
2005 PARTNERSHIP NET ASSETS: $208,486,757 $
Foreign currency 6,202,194
----------
Grand Total: 6,202,194
Unrealized Currency Gain/(Loss) --
----------
Total Net Unrealized Gain per Statement of Financial Condition 6,202,194
==========
2004 PARTNERSHIP NET ASSETS: $273,100,730
Foreign currency 16,647,953
----------
Grand Total: 16,647,953
Unrealized Currency Gain/(Loss) --
----------
Total Net Unrealized Gain per Statement of Financial Condition 16,647,953
==========
* No single contract's value exceeds 5% of Net Assets.
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2005 AND 2004
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS
- ------------------------------ --------------- ------------- ---------------- -------------
2005 PARTNERSHIP NET ASSETS: $44,351,826 $ % $ %
Commodity 74,261 0.17 (9,113) (0.02)
Equity 431,246 0.97 -- --
Foreign currency 25,515 0.06 (31,429) (0.07)
Interest rate 37,273 0.08 186,788 0.42
-------- ----- ------- -----
Grand Total: 568,295 1.28 146,246 0.33
======== ===== ======= =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
2004 PARTNERSHIP NET ASSETS: $49,611,618
Commodity (174,817) (0.35) 88,890 0.18
Equity 416,781 0.84 -- --
Foreign currency 233,829 0.47 15,689 0.03
Interest rate 25,587 0.05 181,418 0.37
-------- ----- ------- -----
Grand Total: 501,380 1.01 285,997 0.58
======== ===== ======= =====
Unrealized Currency Gain
Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS)
- ------------------------------ -----------
2005 PARTNERSHIP NET ASSETS: $44,351,826 $
Commodity 65,148
Equity 431,246
Foreign currency (5,914)
Interest rate 224,061
--------
Grand Total: 714,541
Unrealized Currency Loss (111,903)
--------
Total Net Unrealized Gain per Statement of Financial Condition 602,638
========
2004 PARTNERSHIP NET ASSETS: $49,611,618
Commodity (85,927)
Equity 416,781
Foreign currency 249,518
Interest rate 207,005
--------
Grand Total: 787,377
Unrealized Currency Gain 29,946
--------
Total Net Unrealized Gain per Statement of Financial Condition 817,323
========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P.
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2005 AND 2004
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS
- ------------------------------ --------------- ------------- ---------------- -------------
2005 PARTNERSHIP NET ASSETS: $533,002,342 $ % $ %
Commodity 15,589,813 2.92 (730,681) (0.14)
Equity 1,882,850 0.35 12,500 --
Foreign currency (2,386,026) (0.44) 4,136,927 0.78
Interest rate 684,290 0.13 1,798,925 0.34
---------- ----- ---------- -----
Grand Total: 15,770,927 2.96 5,217,671 0.98
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
2004 PARTNERSHIP NET ASSETS: $585,306,125
Commodity 5,488,782 0.94 642,817 0.11
Equity 7,810,435 1.33 -- --
Foreign currency 3,951,731 0.68 (2,735,991) (0.47)
Interest rate 1,815,260 0.31 828,324 0.14
---------- ----- ---------- -----
Grand Total: 19,066,208 3.26 (1,264,850) (0.22)
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS)
- ------------------------------ --------------
2005 PARTNERSHIP NET ASSETS: $533,002,342 $
Commodity 14,859,132
Equity 1,895,350
Foreign currency 1,750,901
Interest rate 2,483,215
----------
Grand Total: 20,988,598
Unrealized Currency Loss (2,802,794)
----------
Total Net Unrealized Gain per Statement of Financial Condition 18,185,804
==========
2004 PARTNERSHIP NET ASSETS: $585,306,125
Commodity 6,131,599
Equity 7,810,435
Foreign currency 1,215,740
Interest rate 2,643,584
----------
Grand Total: 17,801,358
Unrealized Currency Loss (2,674,735)
----------
Total Net Unrealized Gain per Statement of Financial Condition 15,126,623
==========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2005 AND 2004
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS
- ------------------------------ --------------- ------------- ---------------- -------------
2005 PARTNERSHIP NET ASSETS: $169,625,738 $ % $ %
Commodity 16,718,531 9.86* (28,242) (0.01)
Equity (96,027) (0.06) -- --
Foreign currency (1,327,499) (0.78) (2,048,373) (1.21)
Interest rate -- -- 582,959 0.34
---------- ----- ---------- -----
Grand Total: 15,295,005 9.02 (1,493,656) (0.88)
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
2004 PARTNERSHIP NET ASSETS: $183,241,125
Commodity 2,260,763 1.23 811,061 0.44
Equity 746,712 0.41 -- --
Foreign currency 1,083,470 0.59 (1,174,936) (0.64)
Interest rate (999,978) (0.54) (59,493) (0.03)
---------- ----- ---------- -----
Grand Total: 3,090,967 1.69 (423,368) (0.23)
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS)
- ------------------------------ -----------
2005 PARTNERSHIP NET ASSETS: $169,625,738 $
Commodity 16,690,289
Equity (96,027)
Foreign currency (3,375,872)
Interest rate 582,959
----------
Grand Total: 13,801,349
Unrealized Currency Loss (315,566)
----------
Total Net Unrealized Gain per Statement of Financial Condition 13,485,783
==========
2004 PARTNERSHIP NET ASSETS: $183,241,125
Commodity 3,071,824
Equity 746,712
Foreign currency (91,466)
Interest rate (1,059,471)
----------
Grand Total: 2,667,599
Unrealized Currency Loss (8,230)
----------
Total Net Unrealized Gain per Statement of Financial Condition 2,659,369
==========
* No single contract's value exceeds 5% of Net Assets.
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2005 AND 2004
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS
- ------------------------------ --------------- ------------- ---------------- -------------
2005 PARTNERSHIP NET ASSETS: $723,416,093 $ % $ %
Commodity 33,767,846 4.66 (1,474,466) (0.20)
Equity (1,753,796) (0.24) -- --
Foreign currency (4,881,736) (0.67) (2,151,613) (0.30)
Interest rate 1,726,772 0.24 2,349,450 0.32
---------- ----- ---------- -----
Grand Total: 28,859,086 3.99 (1,276,629) (0.18)
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
2004 PARTNERSHIP NET ASSETS: $778,723,887
Commodity 4,959,331 0.63 1,798,641 0.23
Equity 7,857,895 1.01 (817,447) (0.10)
Foreign currency 13,746,446 1.77 (2,924,743) (0.38)
Interest rate 3,829,920 0.49 (382,283) (0.05)
---------- ----- ---------- -----
Grand Total: 30,393,592 3.90 (2,325,832) (0.30)
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS)
- ------------------------------ -----------
2005 PARTNERSHIP NET ASSETS: $723,416,093 $
Commodity 32,293,380
Equity (1,753,796)
Foreign currency (7,033,349)
Interest rate 4,076,222
----------
Grand Total: 27,582,457
Unrealized Currency Loss (5,518,321)
----------
Total Net Unrealized Gain per Statement of Financial Condition 22,064,136
==========
2004 PARTNERSHIP NET ASSETS: $778,723,887
Commodity 6,757,972
Equity 7,040,448
Foreign currency 10,821,703
Interest rate 3,447,637
----------
Grand Total: 28,067,760
Unrealized Currency Loss (726,010)
----------
Total Net Unrealized Gain per Statement of Financial Condition 27,341,750
==========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Morgan Stanley Spectrum Currency L.P. ("Spectrum Currency"),
Morgan Stanley Spectrum Global Balanced L.P. ("Spectrum Global Balanced"),
Morgan Stanley Spectrum Select L.P. ("Spectrum Select"), Morgan Stanley
Spectrum Strategic L.P. ("Spectrum Strategic"), and Morgan Stanley Spectrum
Technical L.P. ("Spectrum Technical") (individually, a "Partnership", or
collectively, the "Partnerships"), are limited partnerships organized to engage
in the speculative trading of futures contracts, options on futures and forward
contracts, and forward contracts on physical commodities and other commodity
interests, including, but not limited to, foreign currencies, financial
instruments, metals, energy, and agricultural products (collectively, "Futures
Interests").
The general partner for each Partnership is Demeter Management Corporation
("Demeter"). The non-clearing commodity broker is Morgan Stanley DW Inc.
("Morgan Stanley DW"). The clearing commodity brokers for Spectrum Global
Balanced, Spectrum Select, Spectrum Strategic, and Spectrum Technical are
Morgan Stanley & Co. Incorporated ("MS&Co.") and Morgan Stanley & Co.
International Limited ("MSIL"). Spectrum Currency's clearing commodity broker
is MS&Co. For Spectrum Strategic, Morgan Stanley Capital Group Inc. ("MSCG")
acts as the counterparty on all of the options on foreign currency forward
contracts. Effective January 2006, for Spectrum Technical, MSCG acts as the
counterparty on all the options on foreign currency forward contracts. Demeter,
Morgan Stanley DW, MS&Co., MSIL, and MSCG are wholly-owned subsidiaries of
Morgan Stanley.
Demeter is required to maintain a 1% minimum interest in the equity of each
Partnership and income (losses) are shared by Demeter and the limited partners
based upon their proportional ownership interests.
USE OF ESTIMATES. The financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require management to make estimates and assumptions that affect the reported
amounts in the financial statements and related disclosures. Management
believes that the estimates utilized in the preparation of the financial
statements are prudent and reasonable. Actual results could differ from those
estimates.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
REVENUE RECOGNITION. Futures Interests are open commitments until settlement
date, at which time they are realized. They are valued at market on a daily
basis and the resulting net change in unrealized gains and losses is reflected
in the change in unrealized trading profit (loss) on open contracts from one
period to the next on the Statements of Operations. Monthly, Morgan Stanley DW
pays each Partnership interest income equal to 80% of the month's average daily
"Net Assets" (as defined in the Limited Partnership Agreements) in the case of
Spectrum Currency, Spectrum Select, Spectrum Strategic, and Spectrum Technical,
and on 100% in the case of Spectrum Global Balanced. The interest rate is equal
to a prevailing rate on U.S. Treasury bills. For purposes of such interest
payments, Net Assets do not include monies owed to the Partnerships on Futures
Interests.
The Partnerships' functional currency is the U.S. dollar; however, they
transact business in currencies other than the U.S. dollar. Assets and
liabilities denominated in currencies other than the U.S. dollar are translated
into U.S. dollars at the rates in effect at the date of the Statements of
Financial Condition. Income and expense items denominated in currencies other
than the U.S. dollar are translated into U.S. dollars at the rates in effect
during the period. Gains and losses resulting from the translation to U.S.
dollars are reported in income currently.
NET INCOME (LOSS) PER UNIT. Net income (loss) per unit of limited partnership
interest ("Unit(s)") is computed using the weighted average number of Units
outstanding during the period.
CONDENSED SCHEDULES OF INVESTMENTS. In December 2003, the American Institute
of Certified Public Accountants' Accounting Standards Executive Committee
issued Statement of Position 03-4 ("SOP 03-4") "Reporting Financial Highlights
and Schedule of Investments by Nonregistered Investment Partnerships: An
Amendment to the Audit and Accounting Guide Audits Of Investment Companies and
AICPA Statement of Position 95-2, Financial Reporting By Nonpublic Investment
Partnerships". SOP 03-4 requires commodity pools to disclose the number of
contracts, the contracts' expiration dates, and the
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
cumulative unrealized gains/(losses) on open futures contracts, when the
cumulative unrealized gains/(losses) on an open futures contract exceeds 5% of
Net Assets, taking long and short positions into account separately. SOP 03-4
also requires ratios for net investment income/(losses), expenses before and
after incentive fees, and net income/(losses) based on average net assets, and
ratios for total return before and after incentive fees based on average units
outstanding to be disclosed in Financial Highlights. SOP 03-4 was effective for
fiscal years ending after December 15, 2003.
EQUITY IN FUTURES INTERESTS TRADING ACCOUNTS. The Partnerships' asset "Equity
in futures interests trading accounts," reflected on the Statements of
Financial Condition, consists of (A) cash on deposit with Morgan Stanley DW,
MS&Co, and MSIL for Spectrum Global Balanced, Spectrum Select, Spectrum
Strategic, and Spectrum Technical, and Morgan Stanley DW and MS&Co. for
Spectrum Currency, to be used as margin for trading; (B) net unrealized gains
or losses on open contracts, which are valued at market and calculated as the
difference between original contract value and market value; and (C) net option
premiums, which represent the net of all monies paid and/or received for such
option premiums.
The Partnerships, in their normal course of business, enter into various
contracts with MS&Co. and MSIL acting as their commodity brokers. Pursuant to
brokerage agreements with MS&Co. and MSIL to the extent that such trading
results in unrealized gains or losses, these amounts are offset and reported on
a net basis on the Partnerships' Statements of Financial Condition.
The Partnerships have offset the fair value amounts recognized for forward
and options on forward contracts executed with the same counterparty as
allowable under the terms of their master netting agreements with MS&Co., the
sole counterparty on such contracts. The Partnerships have consistently applied
their right to offset.
BROKERAGE AND RELATED TRANSACTION FEES AND COSTS. The brokerage fees for
Spectrum Currency and Spectrum Global Balanced are accrued at a flat monthly
rate of 1/12 of 4.6% (a 4.6% annual rate) of Net Assets as of the first day of
each month.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
Brokerage fees for Spectrum Select, Spectrum Strategic, and Spectrum
Technical are currently accrued at a flat monthly rate of 1/12 of 6.00% (a
6.00% annual rate) of Net Assets as of the first day of each month.
Effective July 1, 2005, brokerage fees for Spectrum Select, Spectrum
Strategic, and Spectrum Technical were reduced from 1/12 of 7.25% (a 7.25%
annual rate) to 1/12 of 6.00% (a 6.00% annual rate) of Net Assets as of the
first day of each month.
Such brokerage fees currently cover all brokerage fees, transaction fees and
costs, and ordinary administrative and continuing offering expenses.
OPERATING EXPENSES. The Partnerships incur monthly management fees and may
incur incentive fees. All common administrative and continuing offering
expenses including legal, auditing, accounting, filing fees, and other related
expenses are borne by Morgan Stanley DW through the brokerage fees paid by the
Partnerships.
CONTINUING OFFERING. Units of each Partnership are offered at a price equal to
100% of the Net Asset Value per Unit as of the close of business on the last
day of each month. No selling commissions or charges related to the continuing
offering of Units are paid by the limited partners or the Partnerships. Morgan
Stanley DW pays all such costs.
REDEMPTIONS. Limited partners may redeem some or all of their Units at 100% of
the Net Asset Value per Unit as of the end of the last day of any month that is
at least six months after the closing at which a person first becomes a limited
partner. The Request for Redemption must be delivered to a limited partner's
local Morgan Stanley Branch Office in time for it to be forwarded and received
by Demeter no later than 3:00 p.m., New York City time, on the last day of the
month in which the redemption is to be effective. Redemptions must be made in
whole Units, in a minimum amount of 50 Units required for each redemption,
unless a limited partner is redeeming his entire interest in a Partnership.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
Units redeemed on or prior to the last day of the twelfth month from the date
of purchase will be subject to a redemption charge equal to 2% of the Net Asset
Value of a Unit on the Redemption Date. Units redeemed after the last day of
the twelfth month and on or prior to the last day of the twenty-fourth month
from the date of purchase will be subject to a redemption charge equal to 1% of
the Net Asset Value of a Unit on Redemption Date. Units redeemed after the last
day of the twenty-fourth month from the date of purchase will not be subject to
a redemption charge. The foregoing redemption charges are paid to Morgan
Stanley DW.
EXCHANGES. On the last day of the first month which occurs more than six
months after a person first becomes a limited partner in any of the
Partnerships, and at the end of each month thereafter, limited partners may
exchange their investment among the Partnerships (subject to certain
restrictions outlined in the Limited Partnership Agreements) without paying
additional charges.
DISTRIBUTIONS. Distributions, other than redemptions of Units, are made on a
pro-rata basis at the sole discretion of Demeter. No distributions have been
made to date. Demeter does not intend to make any distributions of the
Partnerships' profits.
INCOME TAXES. No provision for income taxes has been made in the accompanying
financial statements, as partners are individually responsible for reporting
income or loss based upon their respective share of each Partnership's revenues
and expenses for income tax purposes.
DISSOLUTION OF THE PARTNERSHIPS. Spectrum Currency, Spectrum Global Balanced,
Spectrum Strategic, and Spectrum Technical will terminate on December 31, 2035
and Spectrum Select will terminate on December 31, 2025, regardless of
financial condition at such time, or at an earlier date if certain conditions
occur as defined in each Partnership's Limited Partnership Agreement.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
LITIGATION SETTLEMENT. On February 27, 2002, Spectrum Global Balanced,
Spectrum Select, Spectrum Strategic, and Spectrum Technical received
notification of a preliminary entitlement to payment from the Sumitomo Copper
Litigation Settlement Administrator, and the Partnerships received settlement
award payments in the amounts of $233,074, $4,636,156, $17,556, and $306,400,
respectively, during August 2002, $0, $45,665, $173, and 3,018, respectively,
during July 2004 and $2,230, $85,000, $454, and $4,209, respectively, during
November 2005. Spectrum Global Balanced received a settlement award payment in
the amount of $2,296 during October 2004. Any amounts received are accounted
for in the period received, for the benefit of the limited partners at the date
of receipt.
RECLASSIFICATIONS. Certain prior year amounts relating to cash balances were
reclassified on the Statements of Financial Condition and the related
Statements of Cash Flows to conform to 2005 presentation. Such
reclassifications have no impact to the Partnerships' reported net income
(loss).
- --------------------------------------------------------------------------------
2. RELATED PARTY TRANSACTIONS
The Partnerships pay brokerage fees to Morgan Stanley DW as described in Note
1. Spectrum Global Balanced, Spectrum Select, Spectrum Strategic, and Spectrum
Technical's cash is on deposit with Morgan Stanley DW, MS&Co., and MSIL, and
Spectrum Currency's cash is on deposit with Morgan Stanley DW and MS&Co., in
futures interests trading accounts to meet margin requirements as needed.
Morgan Stanley DW pays interest on these funds as described in Note 1.
- --------------------------------------------------------------------------------
3. TRADING ADVISORS
Demeter, on behalf of each Partnership, retains certain commodity trading
advisors to make all trading decisions for the Partnerships. The trading
advisors for each Partnership at December 31, 2005 were as follows:
Morgan Stanley Spectrum Currency L.P.
John W. Henry & Company, Inc.
Sunrise Capital Partners, LLC
Morgan Stanley Spectrum Global Balanced L.P.
SSARIS Advisors, LLC
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
Morgan Stanley Spectrum Select L.P.
EMC Capital Management, Inc. ("EMC")
Northfield Trading L.P. ("Northfield")
Rabar Market Research, Inc. ("Rabar")
Sunrise Capital Management, Inc. ("Sunrise")
Graham Capital Management, L.P. ("Graham"),
effective January 1, 2004
Morgan Stanley Spectrum Strategic L.P.
Blenheim Capital Management, L.L.C. ("Blenheim")
Eclipse Capital Management, Inc. ("Eclipse")
FX Concepts (Trading Advisor), Inc. ("FX Concepts"),
effective November 1, 2004
Effective April 30, 2004, Allied Irish Capital Management Ltd. was terminated
as a trading advisor for Spectrum Strategic.
Morgan Stanley Spectrum Technical L.P.
Campbell & Company, Inc. ("Campbell")
Chesapeake Capital Corporation ("Chesapeake")
John W. Henry & Company, Inc. ("JWH")
Winton Capital Management Limited ("Winton"),
effective January 1, 2004
Compensation to the trading advisors by the Partnerships consists of a
management fee and an incentive fee as follows:
MANAGEMENT FEE. The management fee for Spectrum Currency is accrued at a rate
of 1/12 of 2% per month of Net Assets allocated to each trading advisor on the
first day of each month (a 2% annual rate).
The management fee for Spectrum Global Balanced is accrued at a rate of 5/48
of 1% per month of Net Assets allocated to its sole trading advisor on the
first day of each month (a 1.25% annual rate).
The management fee for Spectrum Select is accrued at a rate of 1/4 of 1% per
month of Net Assets allocated to EMC, Northfield, Rabar, and Sunrise on the
first day of each month (a 3% annual rate) and 1/12 of 2% per month of Net
Assets allocated to Graham on the first day of each month (a 2% annual rate).
The management fee for Spectrum Strategic is accrued at a rate of 1/12 of 3%
per month of Net Assets allocated to Blenheim and Eclipse on the first day of
each month (a 3% annual rate) and 1/12 of 2% per month of Net Assets allocated
to FX Concepts on the first day of each month (a 2% annual rate).
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
The management fee for Spectrum Technical is accrued at the rate of 1/12 of
2% per month of Net Assets allocated to JWH and Winton on the first day of each
month (a 2% annual rate) and 1/12 of 3% per month of Net Assets allocated to
Campbell and Chesapeake on the first day of each month (a 3% annual rate).
INCENTIVE FEE. Spectrum Currency pays a monthly incentive fee equal to 20% of
the trading profits experienced with respect to each trading advisor's
allocated Net Assets as of the end of each calendar month.
Spectrum Global Balanced pays a monthly incentive fee equal to 15% of the
trading profits experienced with respect to the sole trading advisor's
allocated Net Assets as of the end of each calendar month.
Spectrum Select pays a monthly incentive fee equal to 15% of the trading
profits experienced with respect to the Net Assets allocated to each of EMC,
Northfield, Rabar, and Sunrise as of the end of each calendar month and 20% of
the trading profits experienced with respect to the Net Assets allocated to
Graham as of the end of each calendar month.
Spectrum Strategic pays a monthly incentive fee equal to 15% of the trading
profits experienced with respect to the Net Assets allocated to each of
Blenheim and Eclipse as of the end of each calendar month and 20% of the
trading profits experienced with respect to the Net Assets allocated to FX
Concepts as of the end of each calendar month.
Spectrum Technical pays a monthly incentive fee equal to 20% of the trading
profits experienced with respect to the Net Assets allocated to each of
Campbell, JWH, and Winton as of the end of each calendar month and 19% of the
trading profits experienced with respect to the Net Assets allocated to
Chesapeake as of the end of each calendar month.
Trading profits represent the amount by which profits from futures, forwards,
and options trading exceed losses after brokerage and management fees are
deducted.
For all Partnerships with trading losses, no incentive fee is paid in
subsequent months until all such losses are recovered. Cumulative trading
losses are adjusted on a pro-rata basis for the net amount of each month's
subscriptions and redemptions.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
- --------------------------------------------------------------------------------
4. FINANCIAL INSTRUMENTS
The Partnerships trade Future Interests. Futures and forwards represent
contracts for delayed delivery of an instrument at a specified date and price.
Risk arises from changes in the value of these contracts and the potential
inability of counterparties to perform under the terms of the contracts. There
are numerous factors which may significantly influence the market value of
these contracts, including interest rate volatility.
The market value of exchange-traded contracts is based on the settlement
price quoted by the exchange on the day with respect to which market value is
being determined. If an exchange-traded contract could not have been liquidated
on such day due to the operation of daily limits or other rules of the
exchange, the settlement price shall be the settlement price on the first
subsequent day on which the contract could be liquidated. The market value of
off-exchange-traded contracts is based on the fair market value quoted by the
counterparty.
The Partnerships' contracts are accounted for on a trade-date basis and
marked to market on a daily basis. The Partnerships account for their
derivative investments in accordance with the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 defines a derivative as
a financial instrument or other contract that has all three of the following
characteristics:
(1) One or more underlying notional amounts or payment provisions;
(2) Requires no initial net investment or a smaller initial net investment than
would be required relative to changes in market factors;
(3) Terms require or permit net settlement.
Generally, derivatives include futures, forward, swaps or options contracts,
and other financial instruments with similar characteristics such as caps,
floors, and collars.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
The net unrealized gains (losses) on open contracts at December 31, reported
as a component of "Equity in futures interests trading accounts" on the
Statements of Financial Condition, and their longest contract maturities were
as follows:
SPECTRUM CURRENCY
NET UNREALIZED GAINS
ON OPEN CONTRACTS LONGEST MATURITIES
------------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- --------- ---------- ---------- --------- ---------
$ $ $
2005 -- 6,202,194 6,202,194 -- Mar. 2006
2004 -- 16,647,953 16,647,953 -- Mar. 2005
SPECTRUM GLOBAL BALANCED
NET UNREALIZED GAINS
ON OPEN CONTRACTS LONGEST MATURITIES
--------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- --------- --------- ------- --------- ---------
$ $ $
2005 581,983 20,655 602,638 Mar. 2006 Mar. 2006
2004 746,251 71,072 817,323 Mar. 2005 Mar. 2005
SPECTRUM SELECT
NET UNREALIZED GAINS
ON OPEN CONTRACTS LONGEST MATURITIES
------------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- ---------- --------- ---------- --------- ---------
$ $ $
2005 16,351,481 1,834,323 18,185,804 Jun. 2007 Mar. 2006
2004 13,504,844 1,621,779 15,126,623 Jun. 2006 Mar. 2005
SPECTRUM STRATEGIC
NET UNREALIZED GAINS/(LOSSES)
ON OPEN CONTRACTS LONGEST MATURITIES
--------------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- ---------- ---------- ---------- --------- ---------
$ $ $
2005 16,488,302 (3,002,519) 13,485,783 Jun. 2010 Jul. 2006
2004 3,084,000 (424,631) 2,659,369 Mar. 2006 Mar. 2005
SPECTRUM TECHNICAL
NET UNREALIZED GAINS/(LOSSES)
ON OPEN CONTRACTS LONGEST MATURITIES
--------------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- ---------- ---------- ---------- --------- ---------
$ $ $
2005 26,727,989 (4,663,853) 22,064,136 Jun. 2007 Mar. 2006
2004 15,108,739 12,233,011 27,341,750 Jun. 2006 Mar. 2005
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
The Partnerships have credit risk associated with counterparty
nonperformance. As of the date of the financial statements, the credit risk
associated with the instruments in which the Partnerships trade is limited to
the amounts reflected in the Partnerships' Statements of Financial Condition.
The Partnerships also have credit risk because Morgan Stanley DW, MS&Co.,
MSIL, and/or MSCG act as the futures commission merchants or the
counterparties, with respect to most of the Partnerships' assets.
Exchange-traded futures, forward, options on forward, and futures-styled
options contracts are marked to market on a daily basis, with variations in
value settled on a daily basis. Morgan Stanley DW, MS&Co., and MSIL, each as a
futures commission merchant for each Partnership's exchange-traded futures,
forward, options on forward, and futures-styled options contracts, are
required, pursuant to regulations of the Commodity Futures Trading Commission,
to segregate from their own assets, and for the sole benefit of their commodity
customers, all funds held by them with respect to exchange-traded futures,
forward, options on forward, and futures-styled options contracts, including an
amount equal to the net unrealized gains (losses) on all open futures, forward,
options on forward, and futures-styled options contracts, which funds, in the
aggregate, totaled at December 31, 2005 and 2004 respectively, $44,956,486 and
$49,638,767 for Spectrum Global Balanced, $542,760,780 and $577,340,091 for
Spectrum Select, $178,269,302 and $181,484,461 for Spectrum Strategic, and
$746,142,887 and $761,083,643 for Spectrum Technical. With respect to each
Partnership's off-exchange-traded forward currency contracts, there are no
daily exchange-required settlements of variation in value, nor is there any
requirement that an amount equal to the net unrealized gains (losses) on open
forward contracts be segregated. However, each Partnership is required to meet
margin requirements equal to the net unrealized loss on open contracts in the
Partnership accounts with the counterparty, which is accomplished by daily
maintenance of the cash balance in a custody account held at Morgan Stanley DW
for the benefit of MS&Co. With respect to those off-exchange-traded forward
currency contracts, the Partnerships are at risk to the ability of MS&Co., the
sole counterparty on all such contracts, to perform. Each Partnership has a
netting agreement with MS&Co. These agreements, which seek to reduce both the
Partnerships' and MS&Co.'s exposure on off-exchange-traded forward currency
contracts, should materially decrease the Partnerships' credit risk in the
event of MS&Co.'s bankruptcy or insolvency.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
- --------------------------------------------------------------------------------
5. FINANCIAL HIGHLIGHTS
SPECTRUM CURRENCY
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1, 2005: $ 14.41
--------
NET OPERATING RESULTS:
Interest Income 0.28
Expenses (0.82)
Realized Loss (1.54)
Unrealized Loss (0.55)
--------
Net Loss (2.63)
--------
NET ASSET VALUE, DECEMBER 31, 2005: $ 11.78
========
FOR THE 2005 CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
Net Investment Loss (4.4)%
Expenses before Incentive Fees 6.8 %
Expenses after Incentive Fees 6.8 %
Net Loss (21.4)%
TOTAL RETURN BEFORE INCENTIVE FEES (18.3)%
TOTAL RETURN AFTER INCENTIVE FEES (18.3)%
INCEPTION-TO-DATE RETURN 17.8 %
COMPOUND ANNUALIZED RETURN 3.0 %
SPECTRUM GLOBAL BALANCED
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1, 2005: $ 14.61
-------
NET OPERATING RESULTS:
Interest Income 0.43
Expenses (0.85)
Realized Profit 1.11
Unrealized Loss (0.07)
Proceeds from Litigation Settlement 0.00
-------
Net Income 0.62
-------
NET ASSET VALUE, DECEMBER 31, 2005: $ 15.23
=======
FOR THE 2005 CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
Net Investment Loss (2.9)%
Expenses before Incentive Fees 5.9 %
Expenses after Incentive Fees 5.9 %
Net Income 3.9 %
TOTAL RETURN BEFORE INCENTIVE FEES 4.2 %
TOTAL RETURN AFTER INCENTIVE FEES 4.2 %
INCEPTION-TO-DATE RETURN 52.3 %
COMPOUND ANNUALIZED RETURN 3.8 %
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
SPECTRUM SELECT
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1, 2005: $ 28.88
--------
NET OPERATING RESULTS:
Interest Income 0.63
Expenses (2.54)
Realized Profit 0.33
Unrealized Profit 0.15
Proceeds from Litigation Settlement 0.00
--------
Net Loss (1.43)
--------
NET ASSET VALUE, DECEMBER 31, 2005: $ 27.45
========
FOR THE 2005 CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
Net Investment Loss (7.2)%
Expenses before Incentive Fees 9.5 %
Expenses after Incentive Fees 9.5 %
Net Loss (5.3)%
TOTAL RETURN BEFORE INCENTIVE FEES (5.0)%
TOTAL RETURN AFTER INCENTIVE FEES (5.0)%
INCEPTION-TO-DATE RETURN 174.5 %
COMPOUND ANNUALIZED RETURN 7.3 %
SPECTRUM STRATEGIC
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1, 2005: $ 14.56
-------
NET OPERATING RESULTS:
Interest Income 0.31
Expenses (1.44)
Realized Loss (0.10)
Unrealized Profit 0.85
Proceeds from Litigation Settlement 0.00
-------
Net Loss (0.38)
-------
NET ASSET VALUE, DECEMBER 31, 2005: $ 14.18
=======
FOR THE 2005 CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
Net Investment Loss (8.4)%
Expenses before Incentive Fees 9.4 %
Expenses after Incentive Fees 10.8 %
Net Loss (3.3)%
TOTAL RETURN BEFORE INCENTIVE FEES (1.4)%
TOTAL RETURN AFTER INCENTIVE FEES (2.6)%
INCEPTION-TO-DATE RETURN 41.8 %
COMPOUND ANNUALIZED RETURN 3.2 %
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(concluded)
SPECTRUM TECHNICAL
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1, 2005: $ 23.63
--------
NET OPERATING RESULTS:
Interest Income 0.51
Expenses (2.10)
Realized Profit 0.48
Unrealized Loss (0.16)
Proceeds from Litigation Settlement 0.00
--------
Net Loss (1.27)
--------
NET ASSET VALUE, DECEMBER 31, 2005: $ 22.36
========
FOR THE 2005 CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
Net Investment Loss (7.3)%
Expenses before Incentive Fees 9.3 %
Expenses after Incentive Fees 9.6 %
Net Loss (5.4)%
TOTAL RETURN BEFORE INCENTIVE FEES (5.0)%
TOTAL RETURN AFTER INCENTIVE FEES (5.4)%
INCEPTION-TO-DATE RETURN 123.6 %
COMPOUND ANNUALIZED RETURN 7.5 %
Demeter Management Corporation
330 Madison Avenue, 8th Floor
New York, NY 10017
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