UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2006 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to__________________
Commission File Number 0-19511
MORGAN STANLEY SPECTRUM SELECT L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3619290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Demeter Management Corporation
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
(Former name, former address, and former fiscal year, if changed since
last report)
Indicate by check-mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No___________
Indicate by check-mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition
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 Exchange Act). Yes ___ No X
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2006
<caption>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<s> <c>
Statements of Financial Condition as of March 31, 2006
(Unaudited) and December 31, 2005 2
Statements of Operations for the Quarters
Ended March 31, 2006 and 2005 (Unaudited) 3
Statements of Changes in Partners? Capital for the
Quarters Ended March 31, 2006 and 2005 (Unaudited) 4
Statements of Cash Flows for the Quarters Ended
March 31, 2006 and 2005 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6-12
Item 2. Management?s Discussion and Analysis of
Financial Condition and Results of Operations 13-22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 23-36
Item 4. Controls and Procedures 37
PART II. OTHER INFORMATION
Item 1A.Risk Factors 38-40
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 41-42
Item 5. Other Information 42
Item 6. Exhibits 42-43
</table>
<page> <table> PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF FINANCIAL CONDITION
<caption>
March 31, December 31,
2006 2005
$ $
(Unaudited)
ASSETS
<s> <c> <c>
Equity in futures interests trading accounts:
Unrestricted cash 445,230,799 475,166,952
Restricted cash 75,518,212 51,242,347
Total cash 520,749,011 526,409,299
Net unrealized gain on open contracts (MS&Co.) 26,927,826 9,019,008
Net unrealized gain on open contracts (MSIL) 650,844 9,166,796
Total net unrealized gain on open contracts 27,578,670 18,185,804
Total Trading Equity 548,327,681 544,595,103
Subscriptions receivable 7,634,457 4,455,213
Interest receivable (Morgan Stanley DW) 1,616,762 1,417,447
Total Assets 557,578,900 550,467,763
LIABILITIES AND PARTNERS? CAPITAL
Liabilities
Redemptions payable 10,716,225 13,439,853
Accrued brokerage fees (Morgan Stanley DW) 2,637,061 2,730,072
Accrued management fees 1,254,213 1,295,496
Total Liabilities 14,607,499 17,465,421
Partners? Capital
Limited Partners (18,852,892.812 and
19,209,338.858 Units, respectively) 536,948,763 527,198,790
General Partner (211,461.769 Units) 6,022,638 5,803,552
Total Partners? Capital 542,971,401 533,002,342
Total Liabilities and Partners? Capital 557,578,900 550,467,763
NET ASSET VALUE PER UNIT 28.48 27.45
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<caption>
For the Quarters Ended March 31,
2006 2005
$ $
<s> <c> <c>
INVESTMENT INCOME
Interest income (Morgan Stanley DW) 4,384,809 2,424,227
EXPENSES
Brokerage fees (Morgan Stanley DW) 8,016,810 10,285,170
Management fees 3,812,789 4,009,258
Total Expenses 11,829,599 14,294,428
NET INVESTMENT LOSS (7,444,790) (11,870,201)
TRADING RESULTS
Trading profit (loss):
Realized 18,024,678 (26,726,458)
Net change in unrealized 9,392,866 (11,003,115)
Total Trading Results 27,417,544 (37,729,573)
NET INCOME (LOSS) 19,972,754 (49,599,774)
NET INCOME (LOSS) ALLOCATION
Limited Partners 19,753,668
(49,076,602)
General Partner 219,086
(523,172)
NET INCOME (LOSS) PER UNIT
Limited Partners 1.03 (2.43)
General Partner 1.03 (2.43)
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF CHANGES IN PARTNERS? CAPITAL
For the Quarters Ended March 31, 2006 and 2005
(Unaudited)
<caption>
Units of
Partnership Limited General
Interest Partners Partner Total
$ $ $
<s> <c> <c> <c> <c>
Partners? Capital,
December 31, 2004 20,263,823.593 579,155,164 6,150,961 585,306,125
Offering of Units 1,446,709.087 38,334,882 380,000 38,714,882
Net Loss ? (49,076,602) (523,172) (49,599,774)
Redemptions (660,606.857) (17,673,211) ? (17,673,211)
Partners? Capital,
March 31, 2005 21,049,925.823 550,740,233 6,007,789 556,748,022
Partners? Capital,
December 31, 2005 19,420,800.627 527,198,790 5,803,552 533,002,342
Offering of Units 689,035.900 19,337,299 ? 19,337,299
Net Income ? 19,753,668 219,086 19,972,754
Redemptions (1,045,481.946) (29,340,994) ? (29,340,994)
Partners? Capital,
March 31, 2006 19,064,354.581 536,948,763 6,022,638 542,971,401
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<caption>
For the Quarters Ended March 31,
2006 2005
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<s> <c> <c>
Net income (loss) 19,972,754 (49,599,774)
Noncash item included in net income (loss):
Net change in unrealized (9,392,866) 11,003,115
(Increase) decrease in operating assets:
Restricted cash (24,275,865) 89,418
Interest receivable (Morgan Stanley DW) (199,315) (215,577)
Net option premiums ? 3,366,493
Decrease in operating liabilities:
Accrued brokerage fees (Morgan Stanley DW) (93,011) (57,245)
Accrued management fees (41,283) (24,546)
Net cash used for operating activities (14,029,586) (35,438,116)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from offering of Units 16,158,055 38,319,817
Cash paid for redemptions of Units (32,064,622) (16,018,293)
Net cash provided by (used for) financing activities (15,906,567) 22,301,524
Net decrease in unrestricted cash (29,936,153) (13,136,592)
Unrestricted cash at beginning of period 475,166,952 488,346,785
Unrestricted cash at end of period 445,230,799 475,210,193
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
The unaudited financial statements contained herein include, in the
opinion of management, all adjustments necessary for a fair
presentation of the results of operations and financial condition
of Morgan Stanley Spectrum Select L.P. (the ?Partnership?). The
financial statements and condensed notes herein should be read in
conjunction with the Partnership?s December 31, 2005 Annual Report
on Form 10-K. Certain prior year amounts relating to cash balances
were reclassified on the Statemetns of Financial Condition and the
related Statements of Cash Flows to conform to 2006 presentation.
Such reclassifications have no impact on the Partnership?s reported
net income (loss).
1. Organization
Morgan Stanley Spectrum Select L.P. is a Delaware limited
partnership organized in 1991 to engage primarily in the
speculative trading of futures contracts, options on futures
contracts, and forward contracts on physical commodities and
other commodity interests, including, but not limited to, foreign
currencies, financial instruments, metals, energy, and
agricultural products. The Partnership is one of the Morgan
Stanley Spectrum Series of funds, comprised of the Partnership,
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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
L.P. (?Northfield?), Rabar Market Research, Inc., Sunrise
Capital Management, Inc., and Graham Capital Management, L.P.
(?Graham?) (individually, a ?Trading Advisor?, or
collectively, the ?Trading Advisors?).
2. Related Party Transactions
The Partnership?s cash is on deposit with Morgan Stanley DW, MS &
Co., and MSIL in futures, forwards, and options trading accounts to
meet margin requirements as needed. Monthly, Morgan Stanley DW
pays the Partnership interest income equal to 80% of the month?s
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
average daily Net Assets at a rate equal to a prevailing rate on
U.S. Treasury bills. The Partnership pays brokerage fees to Morgan
Stanley DW.
3. Financial Instruments
The Partnership trades futures contracts, options on futures
contracts, and forward contracts on physical commodities and other
commodity interests, including, but not limited to, foreign
currencies, financial instruments, metals, energy, and agricultural
products. Futures and forwards represent contracts for delayed
delivery of an instrument at a specified date and price. Risk
arises from changes in the value of these contracts and the
potential inability of counterparties to perform under the terms of
the contracts. There are numerous factors which may significantly
influence the market value of these contracts, including interest
rate volatility.
The 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
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Partnership?s contracts are accounted for on a trade-date
basis and marked to market on a daily basis. The Partnership
accounts for its derivative investments in accordance with the
provisions of Statement of Financial Accounting Standards 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.
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The net unrealized gains (losses) on open contracts, reported as a
component of ?Equity in futures interests trading accounts? on
the Statements of Financial Condition, and their longest contract
maturities were as follows:
Net Unrealized Gains/(Losses)
on Open Contracts Longest Maturities
Exchange- Off-Exchange- Exchange- Off-Exchange-
Date Traded Traded Total Traded Traded
$ $ $
Mar. 31, 2006 32,205,116 (4,626,446) 27,578,670 Sep. 2007 Jun. 2006
Dec. 31, 2005 16,351,481 1,834,323 18,185,804 Jun. 2007 Mar. 2006
The Partnership has credit risk associated with counterparty non-
performance. As of the date of the financial statements, the
credit risk associated with the instruments in which the
Partnership trades is limited to the amounts reflected in the
Partnership?s Statements of Financial Condition.
The Partnership also has credit risk because Morgan Stanley DW, MS
& Co., and MSIL act as the futures commission merchants or the
counterparties, with respect to most of the Partnership?s assets.
Exchange-traded futures, 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 the
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Partnership?s exchange-traded futures, forward, and futures-styled
options contracts, are required, pursuant to regulations of the
Commodity Futures Trading Commission (?CFTC?), to segregate from
their own assets, and for the sole benefit of their commodity
customers, all funds held by them with respect to exchange-traded
futures, forward, and futures-styled options contracts, including
an amount equal to the net unrealized gains (losses) on all open
futures, forward, and futures-styled options contracts, which
funds, in the aggregate, totaled $552,954,127 and $542,760,780
at March 31, 2006 and December 31, 2005, respectively. With
respect to the 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, 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. With respect to those off-exchange-traded forward
currency contracts, the Partnership is at risk to the ability of MS
& Co., the sole counterparty on all such contracts, to perform. The
Partnership has a netting agreement with MS & Co. This
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
agreement, which seeks to reduce both the Partnership?s and MS &
Co.?s exposure on off-exchange-traded forward currency contracts,
should materially decrease the Partnership?s credit risk in the
event of MS & Co.?s bankruptcy or insolvency.
<page> Item 2. MANAGEMENT?S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership deposits its assets with Morgan Stanley
DW as non-clearing broker, and MS & Co. and MSIL as clearing
brokers in separate futures, forwards, and options trading accounts
established for each Trading Advisor. Such assets are used as
margin to engage in trading and may be used as margin solely for
the Partnership?s trading. The assets are held in either non-
interest bearing bank accounts or in securities and instruments
permitted by the CFTC for investment of customer segregated or
secured funds. Since the Partnership?s sole purpose is to trade in
futures, forwards, and options, it is expected that the Partnership
will continue to own such liquid assets for margin purposes.
The Partnership?s investment in futures, forwards, and options may,
from time to time, be illiquid. Most U.S. futures exchanges limit
fluctuations in prices during a single day by regulations referred
to as ?daily price fluctuations limits? or ?daily limits?.
Trades may not be executed at prices beyond the daily limit. If
the price for a particular futures or options contract has
increased or decreased by an amount equal to the daily limit,
positions in that futures or options contract can neither be taken
nor liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the daily
limit for several consecutive days with little or no <page>
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 of limited partnership interest (?Unit(s)?) in the future
will affect the amount of funds available for investments in
futures, forwards, and options in subsequent periods. It is not
<page> 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 the three month periods ended
March 31, 2006 and 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 or will be profitable in the future. Consequently, the
results of operations of the Partnership are difficult to discuss
<page> other than in the context of the Trading Advisors? trading
activities on behalf of the Partnership during the period in
question. Past performance is no guarantee of future results.
The Partnership?s results of operations set forth in the
financial statements on pages 2 through 12 of this report are
prepared in accordance with accounting principles generally
accepted in the United States of America, which require the use
of certain accounting policies that affect the amounts reported
in these financial statements, including the following: The
contracts the Partnership trades are accounted for on a trade-
date basis and marked to market on a daily basis. The difference
between their 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 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.
For the Quarter Ended March 31, 2006
The Partnership recorded total trading results including interest
income totaling $31,802,353 and expenses totaling $11,829,599,
resulting in net income of $19,972,754 for the quarter ended
March 31, 2006. The Partnership?s net asset value per Unit
increased from $27.45 at December 31, 2005 to $28.48 at March 31,
2006.
The most significant trading gains of approximately 3.2% were
recorded in the global interest rate futures markets, primarily
during March, from short positions in U.S., European, and
Japanese interest rate futures as global bond prices trended
lower amid strength in regional equity markets and investor
sentiment that interest rates in the United States, the European
Union, and Japan will rise. Additional gains of approximately
2.8% were experienced in the metals markets during January and
March from long futures positions in copper, zinc, and aluminum
as prices strengthened amid news of weak supplies, forecasts for
continued buying by China, and acceleration in demand from Japan,
Europe, and the U.S. Elsewhere in the metals markets, gains were
<page> recorded from long futures positions in silver and gold as
precious metals prices moved higher on persistent demand from
foreign central banks. Silver prices were also pressured higher
after news that a silver-backed Exchange Traded Fund would soon
launch and create greater investment interest in the metal.
Within the global stock index futures markets, gains of
approximatly 2.3% were experienced from long positions in
European and Australian stock index futures as global equity
markets trended higher during the quarter on strong corporate
earnings and solid economic data. A portion of the Partnership?s
overall gains for the quarter was offset by losses of
approximatly 2.8% in the currency sector from long U.S. dollar
positions versus the Swiss franc, euro, and Japanese yen as the
value of the U.S. dollar moved lower during January on
expectations that a string of increases in interest rates by the
U.S. Federal Reserve could possible come to an end. Also pushing
the value of the U.S. dollar lower against its rivals was
speculation that China might move to diversify some of its U.S.
dollar based assets into other currencies. Further losses were
experienced during February from short positions in the Japanese
yen relative to the U.S. dollar as the value of the yen increased
on the release of better-than-expected Japanese machinery orders
data and speculation that the Bank of Japan may move to tighten
monetary policy in Japan. Additional losses during February were
recorded from short positions in the Swiss franc versus the U.S.
<page> dollar as the value of the U.S. dollar weakened amid
investor concern regarding the massive U.S. trade deficit.
Currency losses were also incurred during March from long
positions in the British pound relative to the U.S. dollar as the
value of the pound finished lower after news that Gross Domestic
Product in the United Kingdom for 2005 was weaker-than-expected.
Smaller losses were experienced during March from short
positions in the euro and the Swiss franc relative to the U.S.
dollar as the value of these European currencies moved higher
after the release of generally positive economic data from the
euro-zone reinforced expectations that European interest rates
would continue to rise. Losses of approximatly 0.6% were
experienced in the energy markets during February from long
futures positions in crude oil and its related products as prices
declined after Chinese government authorities announced that
China would place an emphasis on prospecting alternative energy
sources in the future, reports of larger-than-expected supplies
from the International Energy Agency, and mild weather in the
U.S. Northeast. Further losses in the energy markets were
recorded during March from short positions in the aforementioned
markets as prices strengthened early in the month on supply fears
fueled by news of geopolitical tensions in Nigeria and Iran.
<page> For the Quarter Ended March 31, 2005
The Partnership recorded total trading results including interest
income totaling $(35,305,346) and expenses totaling $14,294,428,
resulting in a net loss of $49,599,774 for the quarter ended March
31, 2005. The Partnership?s net asset value per Unit decreased from
$28.88 at December 31, 2004 to $26.45 at March 31, 2005.
The most significant trading losses of approximately 6.8% resulted
in the currency sector throughout the quarter from positions in
foreign currencies versus the U.S. dollar. During January, long
positions in Swiss franc and 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 Swiss franc
and 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 the month 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
<page> losses during March after the value of the U.S. dollar
reversed sharply higher benefiting from higher U.S. interest rates
and consumer prices. Additional Partnership losses of
approximately 1.5% were recorded in the global stock index sector,
primarily during January and March, from long positions in U.S. and
Pacific Rim stock index futures. During January, long U.S. index
positions experienced losses after prices declined amid weak
consumer confidence data, concerns about higher U.S. interest
rates, and the potential for slower corporate profit growth.
Additional losses were incurred from long positions in Japanese
equity index futures as prices declined in the wake of lower U.S.
equity markets and weaker-than-expected earnings in the Japanese
technology sector. During March, long positions in U.S. and
Pacific Rim stock index futures incurred losses after equity prices
moved lower amid concerns for the growing U.S. trade deficit,
weakness in the U.S. dollar early in the month, inflation fears,
and a surge in crude oil prices. Prices continued to weaken
throughout the month on higher U.S. interest rates and fears that
consistently rising energy prices would negatively impact economic
growth in the U.S. and Pacific Rim region. Smaller Partnership
losses of approximately 0.1% resulted in the metals markets from
long futures positions in gold as prices declined during January
amid strength in the U.S. dollar. A portion of the Partnership?s
overall losses for the quarter was offset by gains of approximately
1.1% recorded in the agricultural markets during February from long
futures positions in coffee as <page> prices increased amid news of
strong demand and expectations for smaller world crops. Long
positions in the soybeans complex were also profitable after prices
trended higher on news of extremely cold weather in U.S. growing
regions and rumors of a reduction on world output during 2005.
Additional Partnership gains of approximately 0.8% were achieved in
the energy markets, primarily during March, from long futures
positions in crude oil and its related products as rising energy
prices advanced after OPEC oil ministers announced that there were
no plans to raise output and the U.S. Energy Information
Administration reported that U.S. inventories of gasoline and
heating oil measured significantly lower-than-expected. The weaker
U.S. dollar value also triggered crude oil demand early in the
month from countries such as Japan and China. Finally, prices
soared at the end of the month after Goldman Sachs analysts warned
oil prices could reach $105 a barrel in the future. Smaller
Partnership gains of approximately 0.1% were achieved in the global
interest rate sector during January and March from positions in
U.S. interest rate futures. During January, long positions
benefited after prices trended higher due to uncertainty in the
equity markets and the release of conflicting international
economic data. During March, short positions benefited as prices
moved lower amid an increase in U.S. interest rates and speculation
for further increases in the future.
<page>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures, forwards, and options. The market-
sensitive instruments held by the Partnership are acquired for
speculative trading purposes only and, as a result, all or
substantially all of the Partnership?s assets are at risk of
trading loss. Unlike an operating company, the risk of market-
sensitive instruments is inherent to the primary business activity
of the Partnership.
The futures, forwards, and options traded by the Partnership
involve varying degrees of related market risk. Market risk is
often dependent upon changes in the level or volatility of
interest rates, exchange rates, and prices of financial
instruments and commodities, factors that result in frequent
changes in the fair value of the Partnership?s open positions,
and consequently in its earnings, whether realized or unrealized,
and cash flow. Gains and losses on open positions of exchange-
traded futures, 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 Partnership accounts with the counterparty, which is
<page> accomplished by daily maintenance of the cash balance in a
custody account held at Morgan Stanley DW for the benefit of MS &
Co.
The Partnership?s total market risk may increase or decrease as
it is influenced by a wide variety of factors, including, but not
limited to, the diversification among the Partnership?s open
positions, the volatility present within the markets, and the
liquidity of the markets.
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership 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 experience to date
under the ?Partnership?s Value at Risk in Different Market
Sectors? <page> section and significantly exceed the Value at
Risk (?VaR?) tables disclosed.
Limited partners will not be liable for losses exceeding the
current net asset value of their investment.
Quantifying the Partnership?s Trading Value at Risk
The following quantitative disclosures regarding the Partnership?s
market risk exposures contain ?forward-looking statements? within
the meaning of the safe harbor from civil liability provided for
such statements by the Private Securities Litigation Reform Act of
1995 (set forth in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934). All
quantitative disclosures in this section are deemed to be forward-
looking statements for purposes of the safe harbor, except for
statements of historical fact.
The Partnership accounts for open positions on the basis of mark to
market accounting principles. Any loss in the market value of the
Partnership?s open positions is directly reflected in the
Partnership?s earnings and cash flow.
The Partnership?s risk exposure in the market sectors traded by
the Trading Advisors is estimated below in terms of VaR. The
Partnership estimates VaR using a model based upon historical
simulation (with a confidence level of 99%) which involves
<page> constructing a distribution of hypothetical daily changes
in the value of a trading portfolio. The VaR model takes into
account linear exposures to risk including equity and commodity
prices, interest rates, foreign exchange rates, and correlation
among these variables. The hypothetical changes in portfolio
value are based on daily percentage changes observed in key
market indices or other market factors (?market risk factors?) to
which the portfolio is sensitive. The one-day 99% confidence
level of the Partnership?s VaR corresponds to the negative change
in portfolio value that, based on observed market risk factors,
would have been exceeded once in 100 trading days, or one day in
100. VaR typically does not represent the worst case outcome.
Demeter uses approximately four years of daily market data (1,000
observations) and re-values its portfolio (using delta-gamma
approximations) for each of the historical market moves that
occurred over the 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
<page> dealer-based instruments. They are also not based on
exchange and/or dealer-based maintenance margin requirements.
VaR models, including the Partnership?s, are continually evolving
as trading portfolios become more diverse and modeling techniques
and systems capabilities improve. Please note that the VaR model
is used to numerically quantify market risk for historic
reporting purposes only and is not utilized by either Demeter or
the Trading Advisors in their daily risk management activities.
Please further note that VaR as described above may not be
comparable to similarly-titled measures used by other entities.
The Partnership?s Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership?s open positions as a percentage of total Net Assets
by primary market risk category at March 31, 2006 and 2005. At
March 31, 2006 and 2005, the Partnership?s total capitalization
was approximately $543 million and $557 million, respectively.
Primary Market March 31, 2006 March 31, 2005
Risk Category Value at Risk Value at Risk
Interest Rate (1.67)% (0.98)%
Equity (1.60) (1.45)
Currency (0.63) (0.69)
Commodity (0.57) (1.21)
Aggregate Value at Risk (2.96)% (2.65)%
<page> The VaR for a market category represents the one-day
downside risk for the aggregate exposures associated with this
market category. The Aggregate Value at Risk listed above
represents the VaR of the Partnership?s open positions across all
the market categories, and is less than the sum of the VaRs for all
such market categories due to the diversification benefit across
asset classes.
Because the business of the Partnership is the speculative
trading of futures, forwards, and options, the composition of its
trading portfolio can change significantly over any given time
period, or even within a single trading day, which could
positively or negatively materially impact market risk as
measured by VaR.
The table below supplements the quarter-end VaR set forth above
by presenting the Partnership?s high, low, and average VaR, as a
percentage of total Net Assets for the four quarter-end reporting
periods from April 1, 2005 through March 31, 2006.
Primary Market Risk Category High Low Average
Interest Rate (2.49)% (0.31)% (1.23)%
Equity (2.51) (1.60) (2.07)
Currency (1.94) (0.63) (1.11)
Commodity (1.04) (0.57) (0.80)
Aggregate Value at Risk (3.18)% (2.86)% (2.98)%
<page>
Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio?s aggregate market risk
exposure, incorporating a range of varied market risks; reflect
risk reduction due to portfolio diversification or hedging
activities; and can cover a wide range of portfolio assets.
However, VaR risk measures should be viewed in light of the
methodology?s limitations, which include, but may not be limited to
the following:
* past changes in market risk factors will not always result in
accurate predictions of the distributions and correlations of
future market movements;
* changes in portfolio value caused by market movements may differ
from those of the VaR model;
* VaR results reflect past market fluctuations applied to current
trading positions while future risk depends on future positions;
* VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
* the historical market risk factor data used for VaR estimation
may provide only limited insight into losses that could be
incurred under certain unusual market movements.
<page> 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 March 31, 2005, and for the four quarter-end
reporting periods from April 1, 2005 through March 31, 2006. VaR
is not necessarily representative of the Partnership?s historic
risk, nor should it be used to predict the Partnership?s future
financial performance or its ability to manage or monitor risk.
There can be no assurance that the Partnership?s actual losses on a
particular day will not exceed the VaR amounts indicated above or
that such losses will not occur more than once in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances. These balances and any market risk they may represent
are immaterial.
The Partnership also maintains a substantial portion of its
available assets in cash at Morgan Stanely DW; as of March 31,
2006, such amount is equal to approximately 88% of the
Partnership?s net asset value. A decline in short-term interest
rates would result in a decline in the Partnership?s cash
<page> management income. This cash flow risk is not considered
to be material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality, and multiplier features of the Partnership?s market-
sensitive instruments, in relation to the Partnership?s Net
Assets.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership?s
market risk exposures - except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures - constitute
forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act. The
Partnership?s primary market risk exposures, as well as the
strategies used and to be used by Demeter and the Trading Advisors
for managing such exposures, are subject to numerous uncertainties,
contingencies and risks, any one of which could cause the actual
results of the Partnership?s risk controls to differ materially
from the objectives of such strategies. Government interventions,
defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in
historical price relationships, an influx of new market
participants, increased regulation, and many other <page> factors
could result in material losses, as well as in material changes to
the risk exposures and the risk management strategies of the
Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the
Partnership at March 31, 2006, by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.
Interest Rate. The largest market exposure of the Partnership at
March 31, 2006, was to the global interest rate sector. Exposure
was primarily spread across the European, U.S., Japanese,
Australian, and Canadian interest rate sectors. Interest rate
movements directly affect the price of the sovereign bond futures
positions held by the Partnership and indirectly affect the value
of its stock index and currency positions. Interest rate
movements in one country, as well as relative interest rate
movements between countries, materially impact the Partnership?s
profitability. The Partnership?s interest rate exposure is
generally to interest rate fluctuations in the U.S. and the other
G-7 countries interest rates. The G-7 countries consist of
France, the U.S., Britain, Germany, Japan, Italy, and Canada.
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
<page> interest rates will remain the primary interest rate
exposure of the Partnership for the foreseeable future. The
speculative futures positions held by the Partnership may range
from short to long-term instruments. Consequently, changes in
short, medium, or long-term interest rates may have an effect on
the Partnership.
Equity. The second largest market exposure of the Partnership at
March 31, 2006 was to the global stock index sector, primarily to
equity price risk in the G-7 countries. The stock index futures
traded by the Partnership are by law limited to futures on
broadly-based indices. The Partnership?s primary market
exposures were to the S&P 500 (U.S.), DAX (Germany), Hang Seng
(China), FTSE 100 (United Kingdom), Euro Stoxx 50 (Europe),
NASDAQ 100 (U.S.), CAC 40 (France), S&P/MIB (Italy), NIKKEI 225
(Japan), Dow Jones (U.S.), IBEX 35 (Spain), ASX-AOI (Australia),
TAIWAN (Taiwan), Canadian S&P 60 (Canada), TOPIX (Japan), and
RUSSELL 2000 (U.S.) stock indices. The Partnership is typically
exposed to the risk of adverse price trends or static markets in
the European, U.S., Chinese, and Japanese 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 third largest market exposure of the Partnership
at March 31, 2006 was to the currency sector. The Partnership?s
<page> currency market exposure was to exchange rate
fluctuations, primarily fluctuations which disrupt the historical
pricing relationships between different currencies and currency
pairs. Interest rate changes, as well as political and general
economic conditions influence these fluctuations. The
Partnership trades a large number of currencies, including cross-
rates ? i.e., positions between two currencies other than the
U.S. dollar. At March 31, 2006, the Partnership?s major
exposures were to euros, Japanese yen, British pounds, 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.
Commodity.
Metals. At March 31, 2006, the Partnership had market
exposure in the metals sector. The Partnership's metals
exposure was to fluctuations in the price of base metals,
such as copper, nickel, aluminum, zinc, and lead, and
precious metals, such as silver, gold, and platinum.
Economic forces, supply and demand inequalities,
geopolitical factors, and market expectations influence
price movements in these markets. The Trading Advisors
utilize the trading system(s) to take positions when market
<page> opportunities develop, and Demeter anticipates that
the Partnership will continue to do so.
Soft Commodities and Agriculturals. At March 31, 2006, the
Partnership had market exposure to the markets that comprise
these sectors. Most of the exposure was to the cotton, live
cattle, sugar, soybean oil, feeder cattle, lean hogs, orange
juice, rubber, soybeans, corn, and coffee markets. Supply
and demand inequalities, severe weather disruptions and
market expectations affect price movements in these markets.
Energy. At March 31, 2006, 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.
<page>
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at March 31, 2006:
Foreign Currency Balances. The Partnership?s primary foreign
currency balances at March 31, 2006 were in euros, Hong Kong
dollars, Japanese yen, Australian dollars, British pounds,
Swiss francs, Canadian dollars, and Norwegian krone. The
Partnership controls the non-trading risk of foreign
currency balances by regularly converting them back into
U.S. dollars upon liquidation of their respective positions.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to
manage the risk of the Partnership?s open positions in essentially
the same manner in all market categories traded. Demeter attempts
to manage market exposure by diversifying the Partnership?s assets
among different Trading Advisors 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.
<page> Demeter monitors and controls the risk of the Partnership?s
non-trading instrument, cash. Cash is the only Partnership
investment directed by Demeter, rather than the Trading Advisors.
Item 4. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this quarterly
report, the President and Chief Financial Officer of
Demeter, the general partner of the Partnership, have
evaluated the effectiveness of the Partnership?s
disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act), and have
judged such controls and procedures to be effective.
(b) There have been no material changes during the period
covered by this quarterly report in the Partnership?s
internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) or in
other factors that could significantly affect these
controls subsequent to the date of their evaluation.
<page> PART II. OTHER INFORMATION
Item 1A. RISK FACTORS
The Partnership?s trading is highly leveraged. As an example of
the leverage employed by the Partnership, the average of the
underlying value of the Partnership?s month-end positions for the
period March 2005 through February 2006 compared to the average
month-end Net Assets of the Partnership during such period was 11.6
times Net Assets.
Option trading can be more volatile than futures trading. The
Partnership?s average month-end margin level for its options
positions as a percent of its total average month-end margin
requirements for the period March 2005 through February 2006 was
0.4%.
Trading on foreign exchanges presents greater risks to the
Partnership than trading on U.S. exchanges. The average percentage
of month-end margin requirements for the period March 2005 through
February 2006 that relates to futures and options contracts on
foreign exchanges as compared to the Partnership?s total average
month-end margin requirements was 42.1%.
The unregulated nature of the forwards markets creates counterparty
risks that does not exist in futures trading on exchanges. The
average percentage of month-end total margin requirements for the
period March 2005 through February 2006 that <page> relates to
forward contracts as compared to the Partnership?s total average
month-end margin requirements was 15.7%.
The Partnership incurs substantial charges. Demeter estimates the
percentage of Partnership Net Assets that must be earned each year
in order for the Partnership to break even without accounting for a
redemption charge to be 6.05%.
The Partnership could lose assets and have its trading disrupted if
a commodity broker, any of the Trading Advisors, or others become
bankrupt or if any of the Partnership?s Trading Advisors commits a
trading error. The Partnership?s assets could be lost or impounded
and trading suspended if a commodity broker, any of the
Partnership?s Trading Advisors, an exchange or a clearinghouse
becomes insolvent or involved in lengthy bankruptcy proceedings, or
if any of the Partnership?s Trading Advisors commits a trading
error executed on behalf of the Partnership.
Increasing the assets managed by the Trading Advisors may adversely
affect performance. The assets under management for Graham have
increased from approximately $3 billion on February 29, 2004 to
approximately $5.1 billion on February 28, 2006.
Northfield?s use of an increased rate of leverage could affect
future performance. Demeter and Northfield have agreed that <page>
Northfield will leverage the funds of the Partnership allocated to
Northfield at 150% the leverage Northfield normally applies to its
Diversified Program. This increased leverage could, depending on
Northfield?s performance, results in increased gain or loss and
trading volatility as compared to other accounts employing
Northfield?s Diversified Program at standard leverage.
<page>
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND 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 25,235,442.904
Units unsold through 3/31/06 16,764,557.096
Total Units sold
through 3/31/06 39,849,410.004
(pre and post conversion)
The managing underwriter for the Partnership is Morgan Stanley
DW.
<page> 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 March 31, 2006 was
$874,739,098.
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 included as part of the
above referenced Registration Statements.
Item 5. OTHER INFORMATION
Management. In connection with the election of new directors to
the Board of Directors of Demeter, the following information
updates the disclosures in the Partnership?s Form 8-K filed on
March 27, 2006 and Form 8-K filed on April 5, 2006:
On April 11, 2006, the National Futures Association approved Mr.
Richard Gueren as a director of Demeter.
Item 6. EXHIBITS
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.
<page>
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.
<page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Morgan Stanley Spectrum Select L.P.
(Registrant)
By: Demeter Management Corporation
(General Partner)
May 15, 2006 By:/s/ Kevin Perry
Kevin Perry
Chief Financial Officer
The General Partner which signed the above is the only party
authorized to act for the Regisrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.