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 September 30, 2008 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
522 Fifth Avenue, 13th Floor
New York, NY 10036
(Address of principal executive offices) (Zip Code)
Registrant?s telephone number, including area code (212) 296-1999
(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, a non-accelerated filer, or a smaller
reporting company. See the definitions of ?large accelerated filer?,
?accelerated filer? and ?smaller reporting company? in Rule 12b-2 of the
Exchange Act.
Large accelerated filer_______ Accelerated filer_______
Non-accelerated filer X Smaller reporting company_______
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
September 30, 2008
<caption>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<s> <c>
Statements of Financial Condition as of September 30, 2008
(Unaudited) and December 31, 2007 ..2
Statements of Operations for the Three and Nine Months
Ended September 30, 2008 and 2007 (Unaudited) 3
Statements of Changes in Partners? Capital for the
Nine Months Ended September 30, 2008 and 2007 (Unaudited) 4
Statements of Cash Flows for the Nine Months Ended
September 30, 2008 and 2007 (Unaudited) 5
Condensed Schedules of Investments as of September 30, 2008
(Unaudited) and December 31, 2007............................6
Notes to Financial Statements (Unaudited) 7-17
Item 2. Management?s Discussion and Analysis of
Financial Condition and Results of Operations 18-32
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 32-46
Item 4. Controls and Procedures 46
Item 4T. Controls and Procedures 46
PART II. OTHER INFORMATION
Item 1A.Risk Factors 47
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 47-48
Item 5. Other Information 48
Item 6. Exhibits 49
</table>
<page> <table> PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF FINANCIAL CONDITION
<caption>
September 30, December 31,
2008 2007
$ $
(Unaudited)
ASSETS
<s> <c> <c>
Trading Equity:
Unrestricted cash 515,082,980 475,137,768
Restricted cash 30,684,301 44,662,254
Total cash 545,767,281 519,800,022
Net unrealized gain on open contracts (MS&Co.) 2,598,355 8,888,890
Net unrealized gain on open contracts (MSIP) 1,178,343 773,528
Total net unrealized gain on open contracts 3,776,698 9,662,418
Options purchased (proceeds paid $0 and
$378,156, respectively) ? 324,788
Total Trading Equity 549,543,979 529,787,228
Subscriptions receivable 7,084,208 3,061,382
Interest receivable (MS&Co.) 342,138 1,063,195
Total Assets 556,970,325 533,911,805
LIABILITIES AND PARTNERS? CAPITAL
Liabilities
Redemptions payable 6,733,518 7,030,875
Accrued brokerage fees (MS&Co.) 2,696,713 2,636,618
Accrued management fees 1,046,715 1,049,154
Accrued incentive fee ? 16,603
Total Liabilities 10,476,946 10,733,250
Partners? Capital
Limited Partners (15,406,394.191 and
16,562,641.240 Units, respectively) 540,409,464 517,496,723
General Partner (173,444.769 and
181,848.769 Units, respectively) 6,083,915 5,681,832
Total Partners? Capital 546,493,379 523,178,555
Total Liabilities and Partners? Capital 556,970,325 533,911,805
NET ASSET VALUE PER UNIT 35.08 31.24
<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 Three Months For the Nine Months
Ended September 30, Ended September 30,
2008 2007 2008 2007
$ $ $ $
<s> <c> <c> <c> <c>
INVESTMENT INCOME
Interest income (MS&Co.) 1,689,047 4,817,933 5,908,454 15,050,688
EXPENSES
Brokerage fees (MS&Co.) 8,468,944 7,810,074 25,192,631 23,635,367
Management fees 3,313,248 3,420,998 10,009,187 10,385,929
Incentive fees 282,117 497,617 10,823,949 497,617
Total Expenses 12,064,309 11,728,689 46,025,767 34,518,913
NET INVESTMENT LOSS (10,375,262) (6,910,756) (40,117,313) (19,468,225)
TRADING RESULTS
Trading profit (loss):
Realized (13,157,761) (29,965,493) 110,794,298 5,348,358
Net change in unrealized (31,746,625) 15,497,488 (5,832,352) 22,821,311
Total Trading Results (44,904,386) (14,468,005) 104,961,946 28,169,669
NET INCOME (LOSS) (55,279,648) (21,378,761) 64,844,633 8,701,444
NET INCOME (LOSS) ALLOCATION
Limited Partners (54,662,655) (21,141,608) 64,145,721 8,602,350
General Partner (616,993) (237,153) 698,912 99,094
NET INCOME (LOSS) PER UNIT
Limited Partners (3.55) (1.16) 3.84 0.51
General Partner (3.55) (1.16) 3.84 0.51
Units Units Units Units
WEIGHTED AVERAGE NUMBER
OF UNITS OUTSTANDING 15,551,875.104 17,744,142.966 15,984,286.313 18,209,734.053
<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 Nine Months Ended September 30, 2008 and 2007
(Unaudited)
<caption>
Units of
Partnership Limited General
Interest Partners Partner Total
$ $ $
<s> <c> <c> <c> <c>
Partners? Capital,
December 31, 2006 18,702,848.006 537,667,844 5,854,641 543,522,485
Offering of Units 1,285,666.373 36,860,346 ? 36,860,346
Net Income ? 8,602,350 99,094 8,701,444
Redemptions (2,601,817.187) (74,630,915) (298,891) (74,929,806)
Partners? Capital,
September 30, 2007 17,386,697.192 508,499,625 5,654,844 514,154,469
Partners? Capital,
December 31, 2007 16,744,490.009 517,496,723 5,681,832 523,178,555
Offering of Units 1,395,138.653 49,580,029 ? 49,580,029
Net Income ? 64,145,721 698,912 64,844,633
Redemptions (2,559,789.702) (90,813,009) (296,829) (91,109,838)
Partners? Capital,
September 30, 2008 15,579,838.960 540,409,464 6,083,915 546,493,379
<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 Nine Months Ended September 30,
2008 2007
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<s> <c> <c>
Net income 64,844,633 8,701,444
Noncash item included in net income:
Net change in unrealized 5,832,352 (22,821,311)
Decrease in operating assets:
Restricted cash 13,977,953 17,701,048
Proceeds paid for options purchased 378,156 ?
Interest receivable (MS&Co.) 721,057 550,938
Increase (decrease) in operating liabilities:
Accrued brokerage fees (MS&Co.) 60,095 (299,902)
Accrued management fees (2,439) (135,947)
Accrued incentive fees (16,603) 445,293
Net cash provided by operating activities 85,795,204 4,141,563
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from offering of Units 45,557,203 39,589,539
Cash paid for redemptions of Units (91,407,195) (72,453,060)
Net cash used for financing activities (45,849,992) (32,863,521)
Net increase (decrease) in unrestricted cash 39,945,212 (28,721,958)
Unrestricted cash at beginning of period 475,137,768 472,088,633
Unrestricted cash at end of period 515,082,980 443,366,675
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
CONDENSED SCHEDULES OF INVESTMENTS
September 30, 2008 (Unaudited) and December 31, 2007
<caption>
Futures and Forward Contracts
Long
Unrealized
Gain/(Loss)
Percentage of
Net Assets
Short
Unrealized
Gain/(Loss)
Percentage of
Net Assets
Net Unrealized
Gain/(Loss)
$
%
$
%
$
September 30, 2008, Partnership Net Assets: $546,493,379
<s>
<c>
<c>
<c>
<c>
<c>
Commodity
(3,945,958)
(0.72)
14,426,134
2.64
10,480,176
Equity
220,825
0.04
4,437,986
0.81
4,658,811
Foreign currency
(3,288,972)
(0.60)
(7,095,941)
(1.30)
(10,384,913)
Interest rate
262,390
0.05
(404,051)
(0.07)
(141,661)
Grand Total:
(6,751,715)
(1.23)
11,364,128
2.08
4,612,413
Unrealized Currency Loss
(835,715)
Total Net Unrealized Gain
3,776,698
December 31, 2007, Partnership Net Assets: $523,178,555
Commodity
7,709,875
1.47
(680,641)
(0.13)
7,029,234
Equity
217,470
0.04
753,313
0.14
970,783
Foreign currency
(2,792,089)
(0.53)
1,293,820
0.25
(1,498,269)
Interest rate
3,108,440
0.59
137,198
0.03
3,245,638
Grand Total:
8,243,696
1.57
1,503,690
0.29
9,747,386
Unrealized Currency Loss
(84,968)
Total Net Unrealized Gain
9,662,418
Fair Value
$
Percentage of
Net Assets
%
Options purchased on Futures Contracts
?
?
Options purchased on Forward Contracts
324,788
0.06
Options written on Futures Contracts
?
?
Options written on Forward Contracts
?
?
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
- - 6 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
The unaudited financial statements contained herein include, in
the opinion of management, all adjustments necessary for a fair
presentation of the financial condition and results of operations
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, 2007, Annual
Report on Form 10-K.
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 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
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").
- - 7 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership may buy or write put and call options through
listed exchanges and the over-the-counter market. The buyer has
the right to purchase (in the case of a call option) or sell (in
the case of a put option) a specified quantity of a specific
Futures Interest or underlying asset at a specified price prior to
or on a specified expiration date. The writer of an option is
exposed to the risk of loss if the market price of the underlying
asset declines (in the case of a put option) or increases (in the
case of a call option). The writer of an option can never profit
by more than the premium paid by the buyer but can lose an
unlimited amount.
Premiums received/proceeds paid from writing/purchasing options
are recorded as liabilities/assets on the Statements of Financial
Condition and are subsequently adjusted to current values. The
difference between the current value of the options and the
premiums received/proceeds paid is treated as an unrealized gain
or loss.
The Partnership?s general partner is Demeter Management
Corporation ("Demeter"). The commodity brokers are Morgan Stanley
& Co. Incorporated ("MS&Co.") and Morgan Stanley & Co.
International plc ("MSIP"). MS&Co. also acts as the counterparty
on all trading of foreign currency forward contracts. Morgan
- 8 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stanley Capital Group Inc. ("MSCG") acts as the counterparty on
all trading of options on foreign currency forward contracts.
MSIP serves as the commodity broker for trades on the London Metal
Exchange. Demeter, MS&Co., MSIP, and MSCG are wholly-owned
subsidiaries of Morgan Stanley. The trading advisors to the
Partnership are EMC Capital Management, Inc., Northfield Trading
L.P., Rabar Market Research, Inc., Sunrise Capital Management,
Inc., Graham Capital Management, L.P., and Altis Partners
(Jersey) Limited ("Altis") (each individually, a "Trading
Advisor", or collectively, the "Trading Advisors").
Effective August 1, 2008, the management fee paid by the
Partnership to Altis was reduced from a 1.75% annual rate to a
1.25% annual rate.
2. Related Party Transactions
The Partnership?s cash is on deposit with MS&Co. and MSIP in
futures, forward, and options trading accounts to meet margin
requirements as needed. MS&Co. pays the Partnership at each month
end interest income on 80% of the funds on deposit with the
commodity brokers at a rate equal to the monthly average of the
4-week U.S. Treasury bill discount rate during such month. The
Partnership pays brokerage fees to MS&Co.
- - 9 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. 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
the Partnership?s revenues or expenses for income tax purposes.
The Partnership files U.S. federal and state tax returns. The
2004 through 2007 tax years generally remain subject to
examination by U.S. federal and most state tax authorities.
4. Financial Instruments
The Partnership trades Futures Interests. Futures and forwards
represent contracts for delayed delivery of an instrument at a
specified date and price. Risk arises from changes in the value
of these contracts and the potential inability of counterparties
to perform under the terms of the contracts. There are numerous
factors which may significantly influence the market value of
these contracts, including interest rate volatility.
The market value of exchange-traded contracts is based on the
settlement price quoted by the exchange on the day with respect
to which market value is being determined. If an exchange-traded
contract could not have been liquidated on such day due to the
- - 10 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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.
- - 11 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Generally, derivatives include futures, forward, swap or options
contracts, and other financial instruments with similar
characteristics such as caps, floors, and collars.
The net unrealized gains (losses) on open contracts, reported as a
component of "Trading Equity" on the Statements of Financial
Condition, and their longest contract maturities were as follows:
<table>
Net Unrealized Gains/(Losses)
on Open Contracts Longest Maturities
Exchange- Off-Exchange- Exchange- Off-Exchange-
Date Traded Traded Total Traded Traded
$ $ $
<s> <c> <c> <c> <c> <c>
Sep. 30, 2008 14,109,359 (10,332,661) 3,776,698 Mar. 2010 Dec. 2008
Dec. 31, 2007 10,327,936 (665,518) 9,662,418 Jun. 2009 Mar. 2008
</table>
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 MS&Co., MSIP, and/or
MSCG act as the futures commission merchants or the counter-
parties, with respect to most of the Partnership?s assets.
Exchange-traded futures, exchange-traded forward, and exchange-
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
traded futures-styled options contracts are marked to market on a
daily basis, with variations in value settled on a daily basis.
MS&Co. and MSIP, each acting as a commodity broker for the
Partnership?s exchange-traded futures, exchange-traded forward,
and exchange-traded futures-styled options contracts, are
required, pursuant to regulations of the Commodity Futures Trading
Commission ("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, exchange-traded
forward, and exchange-traded futures-styled options contracts,
including an amount equal to the net unrealized gains (losses) on
all open exchange-traded futures, exchange-traded forward, and
exchange-traded futures-styled options contracts, which funds, in
the aggregate, totaled $559,876,640 and $530,127,958 at September
30, 2008, and December 31, 2007, respectively. With respect to
the Partnership?s off-exchange-traded forward currency contracts
and forward currency options contracts, there are no daily
settlements of variation in value, nor is there any requirement
that an amount equal to the net unrealized gains (losses) on such
contracts be segregated. However, the Partnership is required to
meet margin requirements equal to the net unrealized loss on open
forward currency contracts in the Partnership accounts with the
counterparty, which is accomplished by daily maintenance of the
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
cash balance in a custody account held at 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. With respect to
those off-exchange-traded forward currency options contracts, the
Partnership is at risk to the ability of MSCG, the sole
counterparty on all such contracts, to perform. The Partnership
has a netting agreement with each counterparty. These agreements,
which seek to reduce both the Partnership?s and the
counterparties? exposure on off-exchange-traded forward currency
contracts, including options on such contracts, should materially
decrease the Partnership?s credit risk in the event of MS&Co.?s or
MSCG?s bankruptcy or insolvency.
5. New Accounting Developments
In September 2006, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
157 ("SFAS 157"), "Fair Value Measurements". SFAS 157 requires
use of a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three
levels: Level 1 - quoted market prices in active markets for
identical assets and liabilities; Level 2 - inputs other than
quoted market prices that are observable for the asset or
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
liability, either directly or indirectly (including quoted prices
for similar investments, interest rates, credit risk); and Level 3
- - unobservable inputs for the asset or liability (including the
Partnership?s own assumptions used in determining the fair value of
investments).
Demeter evaluated the impact of adopting SFAS 157 on the
Partnership?s financial statements. The Partnership adopted SFAS
157 as of January 1, 2008. Based on its analysis, the effect of
applying SFAS 157 to the investments included in the financial
statements does not have a material impact on the Partnership?s
financial statements.
The following table summarizes the valuation of the Partnership?s
investments by the above SFAS 157 fair value hierarchy as of
September 30, 2008: <table> <caption>
Assets
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
<s>
<c>
<c>
<c>
<c>
Unrealized gain (loss) on open
contracts
$14,109,359
$(10,332,661)
n/a
$3,776,698
</table>
In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities ("SFAS 161"). SFAS
161 is intended to improve financial reporting about derivative
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand how those
instruments and activities are accounted for; how and why they are
used; and their effects on a Partnership?s financial position,
financial performance, and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years.
The Partnership is currently evaluating the impact that the
adoption of SFAS No. 161 will have on its financial statement
disclosures.
6. Restricted and Unrestricted Cash
As reflected on the Partnership?s Statements of Financial
Condition, restricted cash equals the cash portion of assets on
deposit to meet margin requirements plus the cash required to
offset unrealized losses on foreign currency forwards and options
and offset losses on offset London Metal Exchange positions. All
of these amounts are maintained separately. Cash that is not
classified as restricted cash is therefore classified as
unrestricted cash.
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
7. Reclassifications
Certain prior year amounts relating to Condensed Schedules of
Investments for December 31, 2007 were reclassified to conform to
2008 presentation. Such reclassifications have no impact on the
Partnership?s reported net income (loss).
<page> Item 2. MANAGEMENT?S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership deposits its assets with MS&Co. and
MSIP as commodity brokers in separate futures, forward, 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
- - 18 -
<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 does it
expect 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
- - 19 -
<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 to take advantage of price movements in the futures,
forward, and options markets. The following presents a summary
of the Partnership?s operations for the three and nine month
periods ended September 30, 2008, and 2007, and a general
discussion of its trading activities during each period. It is
important to note, however, that the Trading Advisors trade in
various markets at different times and that prior activity in a
particular market does not mean that such market will be actively
traded by the Trading Advisors or will be profitable in the
future. Consequently, the results of operations of the
Partnership are difficult to discuss other than in the context of
<page> 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 17 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 gain (loss)?
for open (unrealized) contracts, and recorded as ?Realized
trading gain (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 a foreign currency forward contract
is based on the spot rate as of the close of business. Interest
income, as well as management fees, incentive fees, and brokerage
fees expenses of the Partnership are recorded on an accrual
basis.
<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 Three and Nine Months Ended September 30, 2008
The Partnership recorded total trading results including interest
income totaling $(43,215,339) and expenses totaling $12,064,309,
resulting in a net loss of $55,279,648 for the three months ended
September 30, 2008. The Partnership?s net asset value per Unit
decreased from $38.63 at June 30, 2008, to $35.08 at September
30, 2008.
The most significant trading losses of approximately 3.3% were
incurred within the energy markets, primarily during July, from
long futures positions in crude oil and its related products as
prices reversed lower amid signs that the U.S. economic slump
might extend into 2009 and curb future energy demand. Meanwhile,
long positions in natural gas futures resulted in losses as
prices sharply decreased in July amid rising inventories and news
that the Atlantic hurricane season's first storm had avoided the
gas-producing fields in the Gulf of Mexico. Within the currency
sector, losses of approximately 3.2% were experienced during
August and September from long positions in the euro, Swiss
franc, South African rand, and Brazilian real versus the U.S.
dollar as the value of the U.S. dollar reversed higher against
most of its rivals in August after the U.S. Commerce Department
<page> reported a larger-than-previously-estimated increase in
Gross Domestic Product during the second quarter of 2008. The
U.S. dollar then moved sharply higher against these currencies
during September in tandem with surging U.S. Treasury prices amid
a worldwide "flight-to-quality". Additional losses of
approximately 1.8% were incurred within the agricultural sector
throughout the majority of the quarter from long futures
positions in the soybean complex and corn as prices declined on
news that favorable weather might improve crop conditions in the
U.S. Midwest. Prices also moved lower amid speculation that a
slowing U.S. economy would reduce demand for alternative
biofuels. Smaller losses were recorded in July from long
positions in cocoa futures as prices decreased following news of
a rise in exports from the Ivory Coast, the world?s largest cocoa
producer. Finally, losses were incurred, primarily during July,
from long positions in coffee futures as prices moved lower
following news that Brazil, the world?s largest grower, had
accelerated exports. Further losses of approximately 1.1% were
experienced within the global interest rate sector, primarily
during July and August, from short positions in European fixed-
income futures as prices increased amid a decline in the global
equity markets and growing speculation that the European Central
Bank would not raise interest rates due to weak economic growth.
Within the metals sector, losses of approximately 1.0% were
recorded during July from long positions in gold futures as
prices fell due to a rise in the value of the U.S. dollar. Newly
established short positions in gold futures incurred further
<page> losses as prices reversed sharply higher during September
on "safe haven" buying amid global credit-market turmoil and
uncertainty regarding the U.S. financial system. Elsewhere, long
positions in copper and aluminum futures experienced losses,
primarily during July and August, as prices declined amid
speculation that slowing economic growth would reduce demand for
the base metals. A portion of the Partnership?s losses during the
quarter was offset by gains of approximately 3.1% experienced in
the global stock index sector, primarily during September, from
short positions in U.S., European, and Pacific Rim equity index
futures as prices moved sharply lower amid unprecedented U.S.
financial market volatility and turmoil. Furthermore, global
equity prices plunged after the U.S. House of Representatives
rejected the Economic Stabilization Act of 2008, which would have
allowed the U.S. Treasury to purchase troubled mortgage-backed
securities from U.S. financial institutions.
The Partnership recorded total trading results including interest
income totaling $110,870,400 and expenses totaling $46,025,767,
resulting in net income of $64,844,633 for the nine months ended
September 30, 2008. The Partnership?s net asset value per Unit
increased from $31.24 at December 31, 2007, to $35.08 at
September 30, 2008.
The most significant trading gains of approximately 6.9% were
recorded in the energy sector throughout a majority of the first
half of the year from long futures positions in crude oil and its
<page> related products as prices moved higher amid increasing
global supply concerns and strong demand in Asia. Furthermore,
futures prices for crude oil and its related products were also
pressured higher due to continued weakness in the U.S. dollar.
Within the global equity markets, gains of approximately 5.7%
were achieved during January, February, March, and June from
short positions in European and Pacific Rim equity index futures
as prices decreased on concerns that mounting losses linked to
U.S. sub-prime mortgage investments would continue to erode
corporate earnings and curb global economic growth. Additional
gains were recorded during September from short positions in
U.S., European, and Pacific Rim equity index futures as prices
continued to move sharply lower amid unprecedented U.S. financial
market volatility and turmoil in light of the credit crisis.
Gains of approximately 3.7% were experienced within the
agricultural sector, primarily during January and February, from
long positions in wheat futures as prices increased to a record
high amid diminishing stockpiles and consistently rising global
demand. Further gains were achieved during January, February, and
June from long positions in corn futures as prices moved higher
on supply concerns and rising demand for alternative biofuels.
Meanwhile, long futures positions in the soybean complex resulted
in gains primarily during June as prices increased after a
government report showed a rise in demand for U.S. supplies.
Elsewhere, gains were experienced from long positions in cocoa
futures primarily during January, February, and June as prices
moved higher amid supply disruptions in the Ivory Coast. Within
<page> the global interest rate sector, gains of approximately
2.8% were recorded primarily during January and February from
long positions in U.S. fixed-income futures as prices moved
higher amid a sharp decline in global equity prices and fears of
a recession in the United States. During May and June,
additional gains were recorded from short positions in European
fixed-income futures as prices decreased after the European
Central Bank left its benchmark interest rate unchanged at 4% and
signaled it was considering raising borrowing costs in July in
order to combat accelerating inflation in the Euro-Zone. Smaller
gains of 0.9% were experienced within the metals sector,
primarily during January and February, from long positions in
platinum and silver futures as prices moved higher amid continued
uncertainty in the direction of the U.S. dollar and further "safe
haven" buying due to weakness in global equity markets.
Meanwhile, short positions in nickel futures resulted in gains
during May and September as prices fell amid rising inventories
and speculation that a slowing global economy would reduce demand
for the base metals. A portion of the Partnership?s gains in the
first nine months of the year was offset by losses of
approximately 0.2% incurred within the currency sector, primarily
during June, July, August, and September, from both short and
long positions in the Canadian dollar versus the U.S. dollar as
the value of the Canadian dollar moved without consistent
direction following conflicting economic data out of Canada.
Meanwhile, short positions in the New Zealand dollar versus the
U.S. dollar incurred losses, primarily during June, as the value
<page> of the New Zealand dollar moved higher against the U.S.
dollar amid rising commodity prices. Additional losses were
recorded during the latter half of September from short positions
in the New Zealand dollar versus the U.S. dollar as the value of
the U.S. dollar moved lower on concerns that a U.S. proposal to
buy troubled assets from financial institutions would widen the
U.S. budget deficit. Elsewhere, losses were incurred, primarily
during August, from long positions in the South African rand
versus the U.S. dollar as the value of the U.S. dollar reversed
higher against most of its rivals after the aforementioned weak
U.S. economic data, as well as in response to a worldwide
"flight-to-quality".
For the Three and Nine Months Ended September 30, 2007
The Partnership recorded total trading results including interest
income totaling $(9,650,072) and expenses totaling $11,728,689,
resulting in a net loss of $21,378,761 for the three months ended
September 30, 2007. The Partnership?s net asset value per Unit
decreased from $30.73 at June 30, 2007, to $29.57 at September
30, 2007.
The most significant trading losses of approximately 2.9% were
recorded in the global stock index sector primarily during July
and August from long positions in Japanese, European, and U.S.
equity index futures as prices fell sharply amid speculation that
a widening credit crunch, sparked by U.S. sub-prime mortgage
losses, would erode global economic growth and corporate <page>
earnings. Additional losses of approximately 1.3% were incurred
in the global interest rate sector, also during July and August,
from short positions in European, Australian, and U.S. fixed-
income futures as prices reversed sharply higher in a worldwide
"flight-to-quality" after the significant decline in the global
equity markets resulted in substantially higher demand for the
"safe haven" of government bonds. Smaller losses continued
during September from long positions in European interest rate
futures as prices reversed lower following a rebound in global
equities, which reduced demand for the relative safety of
government debt. A portion of the Partnership?s losses during
the quarter was offset by gains of approximately 1.2% experienced
in the agricultural markets during August and September from long
positions in wheat futures as prices increased to a record high
amid persistently strong international demand and news from the
U.S. Department of Agriculture that global stockpiles would fall
to the lowest level in 26 years. Further gains of approximately
0.4% were recorded in the metals markets primarily during
September from long positions in gold and platinum futures as
prices moved higher due to persistent weakness in the value of
the U.S. dollar. In addition, prices of gold futures rose on
speculation that a strike in Peru?s largest gold mine would
disrupt global supplies. Smaller gains of approximately 0.2%
were experienced in the energy markets primarily during July and
September from long futures positions in crude oil and its
related products as prices moved higher amid persistent concerns
regarding U.S. refinery capacity and after continuous hurricane
<page> activity in the Gulf of Mexico threatened production
facilities. Lastly, further gains of approximately 0.1% were
recorded in the currency sector primarily during September from
long positions in the euro, Canadian dollar, and Norwegian krone
versus the U.S. dollar, as well as outright short positions in
the U.S. Dollar Index, as the value of the U.S. dollar moved
lower relative to most of its major rivals leading up to and
after the U.S. Federal Reserve?s decision to cut interest rates
at its September 18, 2007, meeting. In addition, the value of
the U.S. dollar was pulled lower amid speculation that the U.S.
Federal Reserve would continue to reduce interest rates in the
near term. Conversely, the value of the Canadian dollar and
Norwegian krone moved higher in tandem with rising energy prices
on investor belief that surging oil prices and exports would
expand these respective economies.
The Partnership recorded total trading results including interest
income totaling $43,220,357 and expenses totaling $34,518,913,
resulting in net income of $8,701,444 for the nine months ended
September 30, 2007. The Partnership?s net asset value per Unit
increased from $29.06 at December 31, 2006, to $29.57 at
September 30, 2007.
The most significant trading gains of approximately 4.6% were
experienced in the currency sector during April, May, June, and
September from long positions in the euro, Canadian dollar,
Australian dollar, Turkish lira, and Brazilian real versus the
<page> U.S. dollar, as well as outright short positions in the
U.S. Dollar Index, as the value of these currencies strengthened
relative to the U.S. dollar amid the release of consistently
strong economic data out of their respective countries.
Furthermore, the value of the U.S. dollar weakened against most
of its major rivals leading up to and after the U.S. Federal
Reserve?s decision to cut interest rates at its September 18,
2007, meeting. Additional gains of approximately 3.9% were
recorded in the global interest rate sector during January, May,
and June from short positions in European interest rate futures
as prices initially fell after reports showed confidence in the
Euro-Zone economy stayed close to a six-year high in December and
unemployment dropped in the United Kingdom and Germany. In
addition, European fixed-income futures prices fell after reports
showed Italian retail sales were stronger-than-expected during
April and German investor confidence rose during May.
Furthermore, prices continued to move lower on news that housing
prices in the United Kingdom showed their biggest jump this year.
During August, long positions in Japanese government bond futures
resulted in smaller gains as prices increased in a continuation
of a worldwide "flight-to-quality" after volatility in the global
equity markets, spurred by losses in the U.S. sub-prime mortgage
sector, caused investors to seek the "safe haven" of government
bonds. Smaller gains of approximately 0.5% were recorded in the
agricultural markets during June, August, and September from long
positions in wheat futures as prices rose amid persistently
strong international demand and news from the U.S. Department of
<page> Agriculture that global stockpiles would fall to the
lowest level in 26 years. Elsewhere, long positions in soybean
oil and soybean meal futures resulted in gains primarily during
May and June as prices moved higher after a representative from
the European Union announced plans to increase alternative fuel
sources and U.S. government reports showed that soybean acreage
was down from a year earlier. A portion of the Partnership?s
gains in the first nine months of the year was offset by losses
of approximately 2.0% recorded in the metals markets throughout a
majority of the year from both short and long positions in
silver, gold, and aluminum futures as prices moved without
consistent direction due to conflicting data regarding supply and
demand, as well as uncertainty regarding the direction of the
U.S. dollar. Additional losses of approximately 1.3% were
incurred in the global stock index sector during February and
early March from long positions in Japanese and U.S. stock index
futures as prices reversed sharply lower after a massive sell-off
in the global equity markets that began on February 27, 2007,
following comments from former U.S. Federal Reserve Chairman Alan
Greenspan that the U.S. economy could be due for a recession. In
addition, concerns that tighter credit conditions in China and
Japan might dampen global growth first sent Chinese stock markets
plunging before the sell-off spread to other equity markets.
During July and August, long positions in U.S. equity index
futures resulted in further losses as prices fell sharply amid
speculation that a widening credit crunch, sparked by U.S. sub-
prime mortgage losses, would erode global economic growth and
<page> corporate earnings. Smaller losses of approximately 0.1%
were experienced within the energy markets during March from
short positions in natural gas futures as prices reversed higher
after the U.S. Department of Energy reported that supplies were
down 15% from a year earlier. Further losses were recorded from
both short and long positions in natural gas futures as prices
moved in a trendless pattern during May. During August, long
positions in gasoline futures resulted in losses as prices
declined amid concerns that a slowdown in the global economy
would negatively impact global energy demand.
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
<page> changes in the fair value of the Partnership?s open
positions, and consequently in its earnings, whether realized or
unrealized, and cash flow. Gains and losses on open positions of
exchange-traded futures, exchange-traded forward, and exchange-
traded futures-styled options contracts are settled daily through
variation margin. Gains and losses on off-exchange-traded
forward currency contracts are settled upon termination of the
contract. However, the Partnership is required to meet margin
requirements equal to the net unrealized loss on open forward
currency contracts in the Partnership accounts with the
counterparty, which is accomplished by daily maintenance of the
cash balance in a custody account held at MS&Co.
The Partnership?s total market risk may increase or decrease as
it is influenced by a wide variety of factors, including, but not
limited to, the diversification among the Partnership?s open
positions, the volatility present within the markets, and the
liquidity of the markets.
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership typically to be many times the total
capitalization of the Partnership.
<page> 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 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
<page> 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 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 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.
<page> The Partnership?s VaR computations are based on the risk
representation of the underlying benchmark for each instrument or
contract and do not distinguish between exchange and non-exchange
dealer-based instruments. They are also not based on exchange
and/or dealer-based maintenance margin requirements.
VaR models, including the Partnership?s, are continually evolving
as trading portfolios become more diverse and modeling techniques
and systems capabilities improve. Please note that the VaR model
is used to numerically quantify market risk for historic
reporting purposes only and is not utilized by either Demeter or
the Trading Advisors in their daily risk management activities.
Please further note that VaR as described above may not be
comparable to similarly-titled measures used by other entities.
The Partnership?s Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership?s open positions as a percentage of total Net Assets
by primary market risk category at September 30, 2008, and 2007.
At September 30, 2008, and 2007, the Partnership?s total
capitalization was approximately $546 million and $514 million,
respectively.
<page>
Primary Market September 30, 2008 September 30, 2007
Risk Category Value at Risk Value at Risk
Equity (0.28)% (0.35)%
Interest Rate (0.21) (0.44)
Currency (0.12) (1.37)
Commodity (0.54) (2.21)
Aggregate Value at Risk (0.81)% (2.96)%
The VaR for a market category represents the one-day downside
risk for the aggregate exposures associated with this market
category. The Aggregate Value at Risk listed above represents
the VaR of the Partnership?s open positions across all the market
categories, and is less than the sum of the VaRs for all such
market categories due to the diversification benefit across asset
classes.
Because the business of the Partnership is the speculative
trading of futures, forwards, and options, the composition of its
trading portfolio can change significantly over any given time
period, or even within a single trading day. Such changes could
positively or negatively materially impact market risk as
measured by VaR.
The table below supplements the 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 October 1, 2007, through September 30, 2008.
<page>
Primary Market Risk Category High Low Average
Equity (0.59)% (0.20)% (0.34)%
Interest Rate (0.39) (0.21) (0.30)
Currency (0.76) (0.12) (0.51)
Commodity (1.69) (0.54) (1.14)
Aggregate Value at Risk (1.94)% (0.81)% (1.38)%
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
<page>
* 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 September 30, 2008 and 2007, and for the four
quarter-end reporting periods from October 1, 2007, through
September 30, 2008. 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.
<page> The Partnership also maintains a substantial portion of its
available assets in cash at MS&Co.; as of September 30, 2008, such
amount was equal to approximately 94% of the Partnership?s net
asset value. A decline in short-term interest rates would result
in a decline in the Partnership?s cash management income. This
cash flow risk is not considered to be material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality, and multiplier features of the Partnership?s market-
sensitive instruments, in relation to the Partnership?s Net
Assets.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership?s
market risk exposures - except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures - constitute
forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act.
The Partnership?s primary market risk exposures, as well as the
strategies used and to be used by Demeter and the Trading Advisors
for managing such exposures, are subject to numerous
uncertainties, contingencies and risks, any one of which could
cause the actual results of the Partnership?s risk controls to
differ materially from the objectives of such strategies. <page>
Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx of
new market participants, increased regulation, and many other
factors could result in material losses, as well as in material
changes to the risk exposures and the risk management strategies
of the Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the
Partnership at September 30, 2008, by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.
Equity. At September 30, 2008, the Partnership had market
exposure to the global stock index sector, primarily to equity
price risk in the G-7 countries. The G-7 countries consist of
France, the U.S., the United Kingdom, Germany, Japan, Italy, and
Canada. 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 NIKKEI 225
(Japan), DAX (Germany), S&P 500 (U.S.), Hang Seng (Hong Kong),
NASDAQ 100 (U.S.), TOPIX (Japan), Euro Stox 50 (Europe), FTSE 100
(United Kingdom), CAC 40 (France), AEX (Netherlands), All Share
(South Africa), SPI-200 (Australia), TAIWAN (Taiwan), Canada S&P
60 (Canada), IBEX 35 (Spain), Dow Jones (U.S.), and RUSSELL 2000
(U.S.) stock indices. The Partnership is typically exposed to
<page> the risk of adverse price trends or static markets in the
European, U.S., Asian, South African, 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.
Interest Rate. At September 30, 2008, the Partnership had market
exposure to the global interest rate sector. Exposure was
primarily spread across the U.S., European, Australian, Japanese,
Canadian, and Hong Kong interest rate sectors. Interest rate
movements directly affect the price of the sovereign bond futures
positions held by the Partnership and indirectly affect the value
of its stock index and currency positions. Interest rate
movements in one country, as well as relative interest rate
movements between countries, materially impact the Partnership?s
profitability. The Partnership?s interest rate exposure is
generally to interest rate fluctuations in the U.S. and the other
G-7 countries? interest rates. However, the Partnership also
takes futures positions in the government debt of smaller
countries ? e.g., Australia and Hong Kong. Demeter anticipates
that the G-7 countries? interest rates and Australian interest
rate 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.
<page>
Currency. At September 30, 2008, the Partnership had market
exposure to the currency sector. The Partnership?s currency
market exposure was to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. Interest rate
changes as well as political and general economic conditions
influence these fluctuations. The Partnership trades a large
number of currencies, including cross-rates - i.e., positions
between two currencies other than the U.S. dollar. At September
30, 2008, the Partnership?s major exposures were to the British
pound, Swiss franc, Canadian dollar, euro, Japanese yen,
Australian dollar, Norwegian krone, and New Zealand dollar
currency crosses, as well as to outright U.S. dollar positions.
Outright positions consist of the U.S. dollar vs. other
currencies. These other currencies include major and minor
currencies. Demeter does not anticipate that the risk associated
with the Partnership?s currency trades will change significantly
in the future.
Commodity.
Soft Commodities and Agriculturals. The largest market
exposure of the Partnership at September 30, 2008, was to
the markets that comprise these sectors. Most of the
exposure was to the wheat, cotton, coffee, live cattle,
corn, lean hogs, feeder cattle, sugar, soybeans, cocoa,
lumber, soybean oil, soybean meal, orange juice, oats,
<page> rapeseed, raw beans, rough rice, pork bellies,
rubber, and fluid milk markets. Supply and demand
inequalities, severe weather disruptions, and market
expectations affect price movements in these markets.
Energy. The second largest market exposure of the
Partnership at September 30, 2008, was to the energy sector.
The Partnership?s energy exposure was shared primarily by
futures contracts in natural gas and crude oil and its
related products. Price movements in these markets result
from geopolitical developments, particularly in the Middle
East, as well as weather patterns and other economic
fundamentals. Significant profits and losses, which have
been experienced in the past, are expected to continue to be
experienced in the future. Natural gas has exhibited
volatility in prices resulting from weather patterns and
supply and demand factors and will likely continue in this
choppy pattern.
Metals. The third largest market exposure of the
Partnership at September 30, 2008, was to the metals sector.
The Partnership's metals exposure was to fluctuations in the
price of base metals, such as copper, aluminum, nickel,
zinc, lead, and tin, and precious metals, such as silver,
gold, platinum, and palladium. Economic forces, supply and
demand inequalities, geopolitical factors, and market
expectations influence price movements in these markets.
<page> The Trading Advisors utilize their trading systems to
take positions when market opportunities develop, and
Demeter anticipates that the Trading Advisors will continue
to do so.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at September 30, 2008:
Foreign Currency Balances. The Partnership?s primary foreign
currency balances at September 30, 2008, were in euros,
Japanese yen, Hong Kong dollars, Australian dollars,
Canadian dollars, Swiss francs, British pounds, South
African rand, Czech koruny, New Zealand dollars, Hungarian
forint, Norwegian kroner, and Swedish kronor. 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 market sectors and trading approaches through the
selection of Commodity Trading Advisors and by daily monitoring
their performance. In addition, the Trading Advisors establish
<page> diversification guidelines, often set in terms of the
maximum margin to be committed to positions in any one market
sector or market-sensitive instrument.
Demeter monitors and controls the risk of the Partnership?s non-
trading instrument, cash. Cash is the only Partnership investment
directed by Demeter, rather than the Trading Advisors.
Item 4. CONTROLS AND PROCEDURES
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.
Changes in Internal Control over Financial Reporting
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.
Item 4T. CONTROLS AND PROCEDURES
Not applicable.
<page> PART II. OTHER INFORMATION
Item 1A. RISK FACTORS
There have been no material changes from the risk factors
previously referenced in the Partnership?s Report on Form 10-K for
the fiscal year ended December 31, 2007 and the Partnership?s
Reports on Form 10-Q for the quarters ended March 31, 2008 and
June 30, 2008.
<table> <caption>
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
SEC
Registration Statement on Form S-1 Units Registered Effective Date File Number
<s> <c> <c> <c>
Initial Registration 60,000.000 May 17, 1991 33-39667
Supplemental Closing 10,000.000 August 23, 1991 33-42380
Additional Registration 75,000.000 August 31, 1993 33-65072
Additional Registration 60,000.000 October 27, 1997 333-01918
Pre-conversion 205,000.000
Units sold through 10/17/97 146,139.671
Units unsold through 10/17/97 58,860.329
(Ultimately de-registered)
Commencing with the April 30, 1998 monthly closing 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 30,296,396.073
Units unsold through 9/30/08 11,703,603.927
Total Units sold
through 9/30/08 44,910,363.173
(pre and post conversion) </table>
- - 47 -
<page> The managing underwriter for the Partnership is MS&Co.
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 September 30, 2008,
was $1,031,439,055.
Since no expenses are chargeable against proceeds, 100% of the
proceeds of the offering have been applied to the working capital
of the Partnership for use in accordance with the "Use of
Proceeds" section of the prospectus and the supplement included
as part of the above referenced Registration Statements.
Item 5. OTHER INFORMATION
After the month end close for November 30, 2008, Demeter will no
longer offer Units via subscriptions or exchanges into the
Partnership. If there are not sufficient Units of the
Partnership available for sale through November 30, 2008, to
satisfy all subscription and exchange requests, subscription and
exchange requests for the Partnership will be handled in the
order in which they are received, with Demeter reserving the
right to handle special situations in its sole discretion.
- - 48 -
<page>
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.
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.
- - 49 -
<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)
November 13, 2008 By:/s/ Christian Angstadt
Christian Angstadt
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.