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, 2009 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 has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (?232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes 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
March 31, 2009
<caption>
PART I. FINANCIAL INFORMATION
<s> <c>
Item 1. Financial Statements (Unaudited)
Statements of Financial Condition as of March 31, 2009
and December 31, 2008 (Unaudited) ..2
Statements of Operations for the Quarters Ended
March 31, 2009 and 2008 (Unaudited) 3
Statements of Changes in Partners? Capital for the
Quarters Ended March 31, 2009 and 2008 (Unaudited) 4
Statements of Cash Flows for the Quarters Ended
March 31, 2009 and 2008 (Unaudited) 5
Condensed Schedules of Investments as of March 31, 2009
and December 31, 2008 (Unaudited)............................6
Notes to Financial Statements (Unaudited) 7-24
Item 2. Management?s Discussion and Analysis of
Financial Condition and Results of Operations 25-33
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 33-47
Item 4. Controls and Procedures 47
Item 4T. Controls and Procedures 47
PART II. OTHER INFORMATION
Item 1A.Risk Factors 48
Item 6. Exhibits 48
</table>
<page> <table> PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<caption>
March 31, December 31,
2009 2008
$ $
ASSETS
<s> <c> <c>
Trading Equity:
Unrestricted cash 505,518,880 601,638,653
Restricted cash 29,922,359 8,756,170
Total cash 535,441,239 610,394,823
Net unrealized gain on open contracts (MS&Co.) 4,429,683 19,905,581
Net unrealized gain (loss) on open contracts (MSIP) (1,066,625) 6,140,183
Total net unrealized gain on open contracts 3,363,058 26,045,764
Total Trading Equity 538,804,297 636,440,587
Interest receivable (MS&Co.) 44,889 4,300
Total Assets 538,849,186 636,444,887
LIABILITIES AND PARTNERS? CAPITAL
Liabilities
Redemptions payable 18,106,911 23,861,804
Accrued brokerage fees (MS&Co.) 2,776,199 3,093,914
Accrued management fees 1,059,069 1,175,736
Accrued incentive fee ? 2,429,055
Total Liabilities 21,942,179 30,560,509
Partners? Capital
Limited Partners (13,327,299.967 and
14,700,689.307 Units, respectively) 511,708,304 599,790,920
General Partner (135,398.769 and
149,348.769 Units, respectively) 5,198,703 6,093,458
Total Partners? Capital 516,907,007 605,884,378
Total Liabilities and Partners? Capital 538,849,186 636,444,887
NET ASSET VALUE PER UNIT 38.40 40.80
<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,
2009 2008
$ $
<s> <c> <c>
INVESTMENT INCOME
Interest income (MS&Co.) 150,166 2,397,952
EXPENSES
Brokerage fees (MS&Co.) 8,701,452 8,197,976
Management fees 3,320,196 3,275,658
Incentive fee 391,898 5,716,243
Total Expenses 12,413,546 17,189,877
NET INVESTMENT LOSS (12,263,380) (14,791,925)
TRADING RESULTS
Trading profit (loss):
Realized 648,139 81,581,893
Net change in unrealized (22,682,706) 937,842
Total Trading Results (22,034,567) 82,519,735
NET INCOME (LOSS) (34,297,947) 67,727,810
NET INCOME (LOSS) ALLOCATION
Limited Partners (33,953,012) 66,986,460
General Partner (344,935) 741,350
NET INCOME (LOSS) PER UNIT
Limited Partners (2.42) 4.08
General Partner (2.42) 4.08
Units Units
WEIGHTED AVERAGE NUMBER
OF UNITS OUTSTANDING 14,177,157.583 16,465,308.371
<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, 2009 and 2008
(Unaudited)
<caption>
Units of
Partnership Limited General
Interest Partners Partner Total
$ $ $
<s> <c> <c> <c> <c>.
Partners? Capital,
December 31, 2007 16,744,490.009 517,496,723 5,681,832 523,178,555
Offering of Units 234,627.264 8,106,900 ? 8,106,900
Net Income ? 66,986,460 741,350 67,727,810
Redemptions (777,556.806) (26,450,837) (296,829) (26,747,666)
Partners? Capital,
March 31, 2008 16,201,560.467 566,139,246 6,126,353 572,265,599
Partners? Capital,
December 31, 2008 14,850,038.076 599,790,920 6,093,458 605,884,378
Net Loss ? (33,953,012) (344,935) (34,297,947)
Redemptions (1,387,339.340) (54,129,604) (549,820) (54,679,424)
Partners? Capital,
March 31, 2009 13,462,698.736 511,708,304 5,198,703 516,907,007
<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,
2009 2008
$ $
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (34,297,947) 67,727,810
Noncash item included in net income (loss):
Net change in unrealized 22,682,706 (937,842)
(Increase) decrease in operating assets:
Restricted cash (21,166,189) 22,023,805
Interest receivable (MS&Co.) (40,589) 472,289
Net premiums paid for options purchased ? (1,518,435)
Increase (decrease) in operating liabilities:
Accrued brokerage fees (MS&Co.) (317,715) 300,199
Accrued management fees (116,667) 122,441
Accured incentive fees (2,429,055) 47,147
Net cash provided by (used for) operating activities (35,685,456) 88,237,414
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from offering of Units ? 8,004,646
Cash paid for redemptions of Units (60,434,317) (24,920,048)
Net cash used for financing activities (60,434,317) (16,915,402)
Net increase (decrease) in unrestricted cash (96,119,773) 71,322,012
Unrestricted cash at beginning of period 601,638,653 475,137,768
Unrestricted cash at end of period 505,518,880 546,459,780
<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
March 31, 2009 and December 31, 2008 (Unaudited)
<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)
$
%
$
%
$
March 31, 2009, Partnership Net Assets: $516,907,007
<s>
<c>
<c>
<c>
<c>
<c>
Commodity
353,228
0.07
(974,697)
(0.18)
(621,469)
Equity
(92,861)
(0.02)
(1,189,704)
(0.23)
(1,282,565)
Foreign currency
(452,827)
(0.09)
(1,179,524)
(0.23)
(1,632,351)
Interest rate
8,593,524
1.66
(31,416)
(0.01)
8,562,108
Grand Total:
8,401,064
1.62
(3,375,341)
(0.65)
5,025,723
Unrealized Currency Loss
(0.32)
(1,662,665)
Total Net Unrealized Gain on Open Contracts
3,363,058
9,609,050
December 31, 2008, Partnership Net Assets: $605,884,378
Commodity
838,755
0.14
11,613,498
1.92
12,452,253
Equity
145,512
0.02
(39,608)
(0.01)
105,904
Foreign currency
(318,118)
(0.05)
453,250
0.07
135,132
Interest rate
14,885,639
2.46
2,078
?
14,887,717
Grand Total:
15,551,788
2.57
12,029,218
1.98
27,581,006
Unrealized Currency Loss
(0.25)
(1,535,242)
Total Net Unrealized Gain on Open Contracts
26,045,764
<fn>
The accompanying notes are an integral part
of these financial statements.
- - 6 - </table>
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2009
(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, 2008, 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?) (refer
to Note 4.). 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
- - 7 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stanley Spectrum Technical L.P. (collectively, the ?Spectrum
Series?).
The Partnership may buy or write put and call options through
listed exchanges and the over-the-counter market. The buyer of an
option 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
Futures Interest or 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/premiums paid from writing/purchasing options
are recorded as liabilities/assets on the Statements of Financial
Condition and are subsequently adjusted to fair values. The
difference between the fair value of the option and the premiums
received/premiums 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.
- 8 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
International plc (?MSIP?). MS&Co. also acts as the counterparty
on all trading of foreign currency forward contracts. Morgan
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 (?LME?). 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 (each individually, a ?Trading Advisor?, or
collectively, the ?Trading Advisors?).
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.
Financial Accounting Standards Board (?the FASB?) Interpretation
No. 48, ?Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109? (?FIN 48?), clarifies
the accounting for uncertainty in income taxes recognized in a
Partnership's financial statements, and prescribes a recognition
threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected
to be taken. The adoption of FIN 48 does not have a material
impact on the Partnership's financial statements. The 2005
through 2008 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
- 10 ?
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to perform under the terms of the contracts. There are numerous
factors which may significantly influence the fair value of these
contracts, including interest rate volatility.
The fair value of exchange-traded contracts is based on the
settlement price quoted by the exchange on the day with respect
to which fair value is being determined. If an exchange-traded
contract could not have been liquidated on such day due to the
operation of daily limits or other rules of the exchange, the
settlement price shall be the settlement price on the first
subsequent day on which the contract could be liquidated. The
fair value of off-exchange-traded contracts is based on the fair
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
(?SFAS?) 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:
- - 11 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 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:
Net Unrealized Gains/(Losses)
on Open Contracts Longest Maturities
Exchange- Off-Exchange- Exchange- Off-Exchange-
Date Traded Traded Total Traded Traded
$ $ $
Mar. 31, 2009 5,416,938 (2,053,880) 3,363,058 Mar. 2011 Jun. 2009
Dec. 31, 2008 27,202,139 (1,156,375) 26,045,764 Jun. 2010 Mar. 2009
The Partnership has credit risk associated with counterparty non-
performance. As of the date of the financial statements, the
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-
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 $540,858,177 and $637,596,962 at March 31,
2009 and December 31, 2008, respectively. With respect to the
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
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.
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 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.
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, ?Disclosures about
Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133? (?SFAS No. 161?). SFAS 161 is intended to
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
improve financial reporting about derivative 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 No. 161 is effective for
financial statements issued for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years.
The Partnership?s objective is to profit from speculative trading
in Futures Interests. Therefore, the Trading Advisors for the
Partnership will take speculative positions in Futures Interests
where they feel the best profit opportunities exist for their
trading strategy. As such, the absolute quantity (the total of
the open long and open short positions) which has been presented,
as position direction is not an indicative factor in such volume
disclosures. In regards to foreign currency forward trades, each
notional quantity amount has been converted to an equivalent
contract based upon an industry convention.
The following table summarizes the valuation of the Partnership?s
investments by the above SFAS No. 161 disclosure as of March 31,
2009 and reflects the information outstanding at such time.
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<table> <caption>
The Effect of Trading Activities on the Statements of Financial Condition for the Three Months Ended March 31, 2009:
Futures and Forward Contracts
Long
Unrealized
Gain
Long
L Unrealized
Loss
Short
Unrealized
Gain
Short
Unrealized
Loss
Net
Unrealized
Gain/(Loss)
Total number
of outstanding
contracts
$
$
$
$
$
March 31, 2009
<s>
<c>
<c>
<c>
<c>
<c>
<c>
Tr Commodity
1,792,350
(1,439,122)
2,057,320
(3,032,017)
(621,469)
4,899
K Equity
4,790
(97,651)
26,022
(1,215,726)
(1,282,565)
817
K Foreign currency
978,198
(1,431,025)
614,673
(1,794,197)
(1,632,351)
5,124
K Interest rate
8,916,166
(322,642)
?_ _
(31,416)
8,562,108
13,948
K Total
11,691,504
(3,290,440)
2,698,015
(6,073,356)
5,025,723
K Unrealized currency loss
(1,662,665)
K Total net unrealized gain
on open contracts
3,363,058
</table>
Based upon the Trading Advisors? historical trading, it can
generally be expected that the Partnership will trade
approximately 2,010 round turn contracts per million under
management over the course of a year or approximately 505
contracts in a quarter. Such quarterly amount is based upon such
contracts being evenly traded throughout the year, but may be
higher or lower for any individual quarter. The Trading
Advisors? volume will vary over time based upon a multitude of
factors, including but not limited to, individual market price
movement, individual market volatility and individual market
liquidity.
The following table summarizes the net trading results of the
Partnership during the quarter as required by SFAS No. 161.
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<caption>
The Effect of Trading Activities on the Statements of Operations for the Three Months Ended March 31, 2009 included in Total
Trading Results:
_
Type of Instrument
$
<s>
<c>
Tr Commodity
(10,004,917)
K Equity
(896,657)
K Foreign currency
(8,659,862)
K Interest rate
(2,345,708)
K Unrealized currency loss
(127,423)
K Total
(22,034,567)
Line Item on the Statements of Operations for the Three Months Ended March 31, 2009:
<s>
_<c>
Trading Results
$
Tr Realized
648,139
K Net change in unrealized
(22,682,706)
K Total Trading Results
(22,034,567)
</table>
As discussed in Note 1, the Partnership?s objective for investing
in these derivatives is for speculative trading.
5. Fair Value Measurements
Management has continued to evaluate the application of SFAS No.
157 (?SFAS No. 157?), ?Fair Value Measurements? to the
Partnership, and has determined that SFAS No. 157 does not have a
material impact on the financial statements. Fair value is the
amount that would be recovered when an asset is sold or an amount
paid to transfer a liability, in an ordinary transaction between
market participants at the measurement date (exit price). Market
price observability is impacted by a number of factors, including
the types of investments, the characteristics specific to the
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
investment, and the state of the market (including the existence
and the transparency of transactions between market
participants). Investments with readily available actively
quoted prices in an ordinary market will generally have a higher
degree of market price observability and a lesser degree of
judgment used in measuring fair value.
SFAS No. 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 ? unadjusted quoted market
prices in active markets for identical assets and liabilities;
Level 2 - inputs other than unadjusted quoted market prices that
are observable for the asset or 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).
In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In such cases,
an investment?s level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value
measurement. The Partnership?s assessment of the significance of
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the
investment.
The following tables summarize the valuation of the Partnership?s
investments by the above SFAS No. 157 fair value hierarchy as of
March 31, 2009 and December 31, 2008:
<table> <caption>
March 31, 2009
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>
Net unrealized gain (loss) on open
contracts
$5,416,938
$(2,053,880)
n/a
$3,363,058
</table>
<table> <caption>
December 31, 2008
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>
Net unrealized gain (loss) on open
contracts
$27,202,139
$(1,156,375)
n/a
$26,045,764
</table>
6. New Accounting Developments
In April 2009, the FASB issued FASB Staff Position (?FSP?) FAS
No. 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly (?FSP FAS No.
157-4?). FSP FAS No. 157-4 provides additional guidance for
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
determining fair value and requires new disclosures regarding the
categories of fair value instruments, as well as the inputs and
valuation techniques utilized to determine fair value and any
changes to the inputs and valuation techniques during the period.
FSP FAS No. 157-4 is effective for interim and annual periods
ending after June 15, 2009. The Partnership is currently
evaluating the impact of the adoption of FSP FAS No. 157-4.
In April 2009, the FASB issued FSP FAS No. 107-1 and Accounting
Principals Board (?APB?) No. 28-1, Interim Disclosures About Fair
Value of Financial Instruments (?FSP FAS No. 107-1? and ?APB No.
28-1?). The staff position requires fair value disclosures of
financial instruments on a quarterly basis, as well as new
disclosures regarding the methodology and significant assumptions
underlying the fair value measures and any changes to the
methodology and assumptions during the reporting period. FSP FAS
No. 107-1 and APB No. 28-1 are effective for interim and annual
periods ending after June 15, 2009. The Partnership is currently
evaluating the impact of the adoption of FSP FAS No. 107-1 and
APB No. 28-1.
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. 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 LME positions. All of these amounts
are maintained separately. Cash that is not classified as
restricted cash is therefore classified as unrestricted cash.
8. Subsequent Event.
On January 13, 2009, Morgan Stanley and Citigroup announced that
they had agreed to combine the Global Wealth Management Group of
Morgan Stanley and the Smith Barney division of Citigroup Global
Markets Inc. into a new joint venture (the ?Transaction?). The
joint venture will own Morgan Stanley Smith Barney LLC, a newly
formed investment advisor and broker dealer that will be
registered with the U.S. Securities and Exchange Commission and
as a non-clearing futures commission merchant with the
Commodities Futures Trading Commission. Upon the closing of the
Transaction, subsidiaries of Morgan Stanley collectively will
have a 51 percent ownership interest in the joint venture and
Citigroup Inc. (?Citi?) will have a 49 percent ownership interest
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
in the joint venture. The Transaction is expected to close by
the end of the third quarter of 2009.
As part of the Transaction, the Board of Directors of Demeter
resolved that Demeter should be converted from a Delaware
corporation to a Delaware limited liability company (the
?Conversion?). The Conversion became effective on April 30, 2009
and Demeter?s name changed to Demeter Management LLC.
In addition, in the near future Morgan Stanley, the sole member
of Demeter, intends to contribute all of the membership interests
in Demeter (along with other Morgan Stanley subsidiaries being
contributed to the joint venture as part of the Transaction) to
Morgan Stanley Commercial Financial Services, Inc. It is
anticipated that on or about the time of the consummation of the
Transaction, Morgan Stanley Commercial Financial Services, Inc.
will contribute to Morgan Stanley JV Holdings LLC all of its in-
scope assets and liabilities (including all of the membership
interests of Demeter) (collectively, the ?Contribution?). Upon
the completion of both the Conversion and the Contribution,
Demeter will be a Delaware limited liability company that is a
wholly owned subsidiary of Morgan Stanley Smith Barney Holdings
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
LLC, which in turn will be owned 51 percent by Morgan Stanley and
49 percent by Citi.
At all times Demeter shall remain the General Partner of the
Partnership and at no time will it cease to exist. In addition,
neither the Conversion nor the Contribution will materially impact
the daily trading activities of the Partnership?s respective
commodity Trading Advisors. The Board of Directors of Demeter
believes that the Conversion and the Contribution shall not have a
material impact on the Partnership?s Limited Partners.
<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
- - 25 -
<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 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 possible to
- - 26 -
<page> estimate the amount, and therefore the impact, of future
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 month periods ended
March 31, 2009 and 2008, and a general discussion of its trading
activities during each period. It is important to note, however,
that the Trading Advisors trade in various markets at different
times and that prior activity in a particular market does not
mean that such market will be actively traded by the Trading
Advisors or will be profitable in the future. Consequently, the
results of operations of the Partnership are difficult to discuss
other than in the context of the Trading Advisors? trading <page>
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 24 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 original contract value 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 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.
Demeter believes that, based on the nature of the operations of
the Partnership, no assumptions relating to the application of
<page> critical accounting policies other than those presently
used could reasonably affect reported amounts.
For the Quarter Ended March 31, 2009
The Partnership recorded total trading results including interest
income totaling $(21,884,401) and expenses totaling $12,413,546,
resulting in a net loss of $34,297,947 for the quarter ended
March 31, 2009. The Partnership?s net asset value per Unit
decreased from $40.80 at December 31, 2008, to $38.40 at March
31, 2009.
The most significant trading losses of approximately 1.5% were
recorded in the currency markets, primarily during March, from
short positions in the euro and Swiss franc versus the U.S.
dollar as the value of the U.S. dollar decreased relative to most
of its rivals following the U.S. Federal Reserve?s surprise plans
to begin a more aggressive phase of quantitative easing and
economic stimulus spending. Elsewhere, losses were recorded
during January and February from long positions in the Japanese
yen versus the U.S. dollar as the value of the Japanese yen
reversed lower against most of its rivals amid speculation that
the Bank of Japan might intervene to weaken the currency, as well
as on news that Japan?s trade deficit substantially increased.
Additional losses of approximately 1.3% were incurred within the
agricultural sector primarily during March from short futures
positions in the soybean complex, corn, and coffee as prices rose
<page> on speculation that government bailouts might help revive
the world economy and boost demand for these commodities. Within
the metals sector, losses of approximately 0.7% were experienced
during late February and March from long positions in gold
futures as prices fell amid a rebound in the global equity
markets. Meanwhile, short futures positions in zinc, copper, and
lead resulted in further losses as prices reversed higher during
February and March on speculation that economic stimulus plans in
the U.S. and China would help boost demand for base metals.
Smaller losses of approximately 0.3% were recorded in the global
interest rate sector primarily during January from long positions
in U.S. and Japanese fixed-income futures as prices dropped
following news that debt sales might increase as governments
around the world boosted spending in an effort to ease the
deepening economic slump. Further losses were recorded during
March from long positions in Japanese fixed-income futures as
prices continued to slide on optimism that government efforts
might revive financial markets. Within the global equity index
markets, losses of approximately 0.3% were incurred during March
from short positions in U.S. and Japanese stock index futures as
prices reversed higher after G-20 officials indicated that
participating governments and central banks would ?take whatever
further actions are necessary to stabilize the financial system.?
A portion of the Partnership?s losses for the quarter was offset
by gains of approximately 0.1% achieved in the energy sector
throughout the quarter from short futures positions in natural
<page> gas as prices moved lower amid speculation that the
ongoing global economic recession might continue to erode energy
demand.
For the Quarter Ended March 31, 2008
The Partnership recorded total trading results including interest
income totaling $84,917,687 and expenses totaling $17,189,877,
resulting in net income of $67,727,810 for the quarter ended
March 31, 2008. The Partnership?s net asset value per Unit
increased from $31.24 at December 31, 2007, to $35.32 at March,
31, 2008.
The most significant trading gains of approximately 5.1% were
recorded in the agricultural markets 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. Meanwhile, long futures positions in corn
and the soybean complex resulted in gains as prices increased
during January following news that global production might drop,
while rising energy prices might boost demand for alternative
biofuels. Prices continued to move higher throughout February
amid speculation that demand from China would climb after severe
winter storms damaged some of the nation?s major crops. Lastly,
gains were experienced from long positions in cocoa futures as
prices strengthened during January and February on worries
regarding future supply from the Ivory Coast, the world?s largest
producer. Additional gains of approximately 3.3% were recorded
<page> in the currency sector during February and March from
short positions in the U.S. dollar versus the Swiss franc, euro,
Colombian peso, and Brazilian real as the value of the U.S.
dollar weakened against most of its major rivals after weaker-
than-expected manufacturing data from the Federal Reserve Bank of
Philadelphia reignited fears of an economic slowdown in the U.S.
The value of the U.S. dollar continued to decline after U.S.
government reports showed a rise in unemployment and slower-than-
expected fourth quarter 2007 Gross Domestic Product growth.
Furthermore, the U.S. dollar weakened against its major rivals in
March following news of weaker-than-expected U.S. retail sales
and U.S. consumer confidence at a 16-year low. Finally, the
value of the U.S. dollar was negatively affected by several
interest rate cuts by the U.S. Federal Reserve as well as
indications that interest rates might continue to decline.
During March, short positions in the Korean won versus the U.S.
dollar resulted in gains as the value of the Korean won decreased
relative to the U.S. dollar at the beginning of the month amid
news of a widening Current-Account deficit out of Korea. Within
the global interest rate sector, gains of approximately 3.0% were
recorded during January and February from long positions in U.S.
and Japanese fixed-income futures as prices moved higher amid a
sharp decline in global equity markets, the aforementioned fears
of a recession in the United States, and speculation that global
interest rates would move lower. Smaller gains of approximately
1.9% were recorded in the metals markets during January and
February from long positions in gold, silver, and platinum <page>
futures as prices moved higher amid continued uncertainty in the
direction of the U.S. dollar and further ?safe haven? buying
because of weakness in global equity markets. Further gains of
approximately 1.7% were recorded in the global stock index sector
throughout the quarter from short positions in European,
Japanese, and U.S. equity index futures as prices decreased on
concerns that mounting losses linked to U.S. sub-prime mortgage
investments might continue to erode corporate earnings and curb
global economic growth for the foreseeable future. Lastly, gains
of approximately 0.7% were experienced in the energy markets
during February and March from long futures positions in crude
oil and its related products as prices moved higher amid
increasing global supply concerns and a weakening U.S. dollar.
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
<page> 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, 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
<page> the Partnership typically to be many times the total
capitalization of the Partnership.
The Partnership?s past performance is no guarantee of its future
results. Any attempt to numerically quantify the Partnership?s
market risk is limited by the uncertainty of its speculative
trading. The Partnership?s speculative trading and use of
leverage may cause future losses and volatility (i.e., ?risk of
ruin?) that far exceed the Partnership?s experiences to date
under the ?Partnership?s Value at Risk in Different Market
Sectors? section and significantly exceed the Value at Risk
(?VaR?) tables disclosed.
Limited partners will not be liable for losses exceeding the
current net asset value of their investment.
Quantifying the Partnership?s Trading Value at Risk
The following quantitative disclosures regarding the 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.
<page> The Partnership accounts for open positions on the basis
of mark to market accounting principles. Any loss in the market
value of the Partnership?s open positions is directly reflected
in the Partnership?s earnings and cash flow.
The Partnership?s risk exposure in the market sectors traded by
the Trading Advisors is estimated below in terms of VaR. The
Partnership estimates VaR using a model based upon historical
simulation (with a confidence level of 99%) which involves
constructing a distribution of hypothetical daily changes in the
value of a trading portfolio. The VaR model takes into account
linear exposures to 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
<page> example, the 99% one-day VaR would represent the 10th
worst outcome from Demeter?s simulated profit and loss series.
The Partnership?s VaR computations are based on the risk
representation of the underlying benchmark for each instrument or
contract and do not distinguish between exchange and non-exchange
dealer-based instruments. They are also not based on exchange
and/or dealer-based maintenance margin requirements.
VaR models, including the Partnership?s, are 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, 2009 and 2008. At
March 31, 2009 and 2008, the Partnership?s total capitalization
was approximately $517 million and $572 million, respectively.
<page>
Primary Market March 31, 2009 March 31, 2008
Risk Category Value at Risk Value at Risk
Interest Rate (0.71)% (0.31)%
Equity (0.23) (0.30)
Currency (0.21) (0.65)
Commodity (0.27) (0.95)
Aggregate Value at Risk (0.78)% (1.34)%
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 April 1, 2008 through March 31, 2009.
<page>
Primary Market Risk Category High Low Average
Interest Rate (0.71)% (0.21)% (0.43)%
Equity (0.59) (0.03) (0.28)
Currency (0.76) (0.10) (0.30)
Commodity (1.69) (0.27) (0.70)
Aggregate Value at Risk (1.94)% (0.57)% (1.03)%
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 March 31, 2009 and 2008, and for the four
quarter-end reporting periods from April 1, 2008 through March 31,
2009. 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 March 31, 2009, such
amount was equal to approximately 97% 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 March 31, 2009, 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, 2009, was to the global interest rate sector. Exposure
was primarily spread across the European, U.S., Australian,
Japanese, 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.
<page> However, the Partnership also takes futures positions in
the government debt of smaller countries ? e.g., Australia.
Demeter anticipates that the G-7 countries? interest rates and
Australian interest 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.
Equity. At March 31, 2009, the Partnership had market exposure
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
DAX (Germany), CAC 40 (France), IBEX 35 (Spain), Euro Stox 50
(Europe), Hang Seng (Hong Kong), S&P 500 E-MINI (U.S.), TOPIX
(Japan), Canadian S&P 60 (Canada), NASDAQ 100 (U.S.), SPI 200
(Australia), AEX (The Netherlands), FTSE 100 (United Kingdom),
Dow Jones (U.S.), S&P/MIB (Italy), All Share (South Africa),
TAIWAN (Taiwan), and S&P Midcap (U.S.) stock indices. The
Partnership is typically exposed to 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.
<page>
Currency. At March 31, 2009, 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 March 31,
2009, the Partnership?s major exposures were to the euro,
Japanese yen, Australian dollar, British pound, Swiss franc,
Canadian dollar, 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 second largest
market exposure of the Partnership at March 31, 2009, was to
the markets that comprise these sectors. Most of the
exposure was to the wheat, sugar, cocoa, cotton, soybean
meal, corn, coffee, lean hogs, live cattle, soybean oil,
soybeans, fluid milk, lumber, orange juice, rubber, feeder
cattle, and rapeseed markets. Supply and demand <page>
inequalities, severe weather disruptions, and market
expectations affect price movements in these markets.
Energy. The third largest market exposure of the Partner-
ship at March 31, 2009, was to the energy sector. The
Partnership?s energy exposure was shared primarily by
futures contracts in crude oil and its related products, as
well as in 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.
Metals. At March 31, 2009, the Partnership had market
exposure to the metals sector. The Partnership's metals
exposure was to fluctuations in the price of precious
metals, such as gold, platinum, silver, and palladium, and
base metals, such as copper, nickel, tin, and lead. 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 opportunities <page>
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 March 31, 2009:
Foreign Currency Balances. The Partnership?s primary foreign
currency balances at March 31, 2009, were in euros, Japanese
yen, Australian dollars, British pounds, South African
rands, Hong Kong dollars, Canadian dollars, Swiss francs,
Swedish kronor, Czech koruny, New Zealand dollars, Hungarian
forint, Norwegian kroner, and Singapore dollars. 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
diversification guidelines, often set in terms of the maximum
<page> 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, 2008.
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.
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<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 LLC
(General Partner)
May 15, 2009 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.
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