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 June 30, 2007 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, or a non-accelerated filer. See definition
of ?accelerated filer and large accelerated filer? in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer___Accelerated filer____Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2007
<caption>
PART I. FINANCIAL INFORMATION
<s> <c>
Item 1. Financial Statements
Statements of Financial Condition as of June 30, 2007
(Unaudited) and December 31, 2006 2
Statements of Operations for the Three and Six Months
Ended June 30, 2007 and 2006 (Unaudited) 3
Statements of Changes in Partners? Capital for the
Six Months Ended June 30, 2007 and 2006 (Unaudited) 4
Statements of Cash Flows for the Six Months Ended
June 30, 2007 and 2006 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6-12
Item 2. Management?s Discussion and Analysis of
Financial Condition and Results of Operations 13-28
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 29-42
Item 4. Controls and Procedures 42
Item 4T. Controls and Procedures 43
PART II. OTHER INFORMATION
Item 1A.Risk Factors 44
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 44-45
Item 6. Exhibits 45-46
</table>
<page> <table> PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF FINANCIAL CONDITION
<caption>
June 30, December 31,
2007 2006
$ $
(Unaudited)
ASSETS
<s> <c> <c>
Equity in futures interests trading accounts:
Unrestricted cash 480,220,331 472,088,633
Restricted cash 62,271,838 64,801,445
Total cash 542,492,169 536,890,078
Net unrealized gain on open contracts (MS&Co.) 22,777,650 11,039,855
Net unrealized gain (loss) on open contracts (MSIL) (3,492,216) 921,756
Total net unrealized gain on open contracts 19,285,434 11,961,611
Total Trading Equity 561,777,603 548,851,689
Subscriptions receivable 3,435,869 4,725,710
Interest receivable (MS&Co.) 1,654,882 1,858,406
Total Assets 566,868,354 555,435,805
LIABILITIES AND PARTNERS? CAPITAL
Liabilities
Redemptions payable 7,992,624 7,988,976
Accrued brokerage fees (MS&Co.) 2,716,107 2,727,852
Accrued management fees 1,193,620 1,196,492
Total Liabilities 11,902,351 11,913,320
Partners? Capital
Limited Partners (17,857,965.072 and
18,501,387.237 Units, respectively) 548,775,115 537,667,844
General Partner (201,460.769 Units) 6,190,888 5,854,641
Total Partners? Capital 554,966,003 543,522,485
Total Liabilities and Partners? Capital 566,868,354 555,435,805
NET ASSET VALUE PER UNIT 30.73 29.06
<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 Six Months
Ended June 30, Ended June 30,
2007 2006 2007 2006
$ $ $ $
<s> <c> <c> <c> <c>
INVESTMENT INCOME
Interest income (MS&Co.) 4,968,472 5,360,860 10,232,755 9,745,669
EXPENSES
Brokerage fees (MS&Co.) 7,746,785 8,540,432 15,825,293 16,557,242
Management fees 3,406,750 4,068,156 6,964,931 7,880,945
Total Expenses 11,153,535 12,608,588 22,790,224 24,438,187
NET INVESTMENT LOSS (6,185,063) (7,247,728) (12,557,469) (14,692,518)
TRADING RESULTS
Trading profit (loss):
Realized 78,365,702 46,301,251 35,313,851 64,325,929
Net change in unrealized 5,934,879 (14,908,905) 7,323,823 (5,516,039)
Total Trading Results 84,300,581 31,392,346 42,637,674 58,809,890
NET INCOME 78,115,518 24,144,618 30,080,205 44,117,372
NET INCOME ALLOCATION
Limited Partners 77,260,201 23,878,300 29,743,958 43,631,968
General Partner 855,317 266,318 336,247 485,404
NET INCOME PER UNIT
Limited Partners 4.25 1.26 1.67 2.29
General Partner 4.25 1.26 1.67 2.29
<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 Six Months Ended June 30, 2007 and 2006
(Unaudited)
<caption>
Units of
Partnership Limited General
Interest Partners Partner Total
$ $ $
<s> <c> <c> <c> <c>
Partners? Capital,
December 31, 2005 19,420,800.627 527,198,790 5,803,552 533,002,342
Offering of Units 1,381,439.762 40,353,096 ? 40,353,096
Net Income ? 43,631,968 485,404 44,117,372
Redemptions (1,809,804.780) (52,630,340) ? (52,630,340)
Partners? Capital,
June 30, 2006 18,992,435.609 558,553,514 6,288,956 564,842,470
Partners? Capital,
December 31, 2006 18,702,848.006 537,667,844 5,854,641 543,522,485
Offering of Units 980,507.447 28,096,074 ? 28,096,074
Net Income ? 29,743,958 336,247 30,080,205
Redemptions (1,623,929.612) (46,732,761) ? (46,732,761)
Partners? Capital,
June 30, 2007 18,059,425.841 548,775,115 6,190,888 554,966,003
<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 Six Months Ended June 30,
2007 2006
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<s> <c> <c>
Net income 30,080,205 44,117,372
Noncash item included in net income:
Net change in unrealized (7,323,823) 5,516,039
(Increase) decrease in operating assets:
Restricted cash 2,529,607 4,467,651
Interest receivable (MS&Co.) 203,524 (341,650)
Increase (decrease) in operating liabilities:
Accrued brokerage fees (MS&Co.) (11,745) 171,434
Accrued management fees (2,872) 88,340
Net cash provided by operating activities 25,474,896 54,019,186
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from offering of Units 29,385,915 37,013,847
Cash paid for redemptions of Units (46,729,113) (59,763,548)
Net cash used for financing activities (17,343,198) (22,749,701)
Net increase in unrestricted cash 8,131,698 31,269,485
Unrestricted cash at beginning of period 472,088,633 475,166,952
Unrestricted cash at end of period 480,220,331 506,436,437
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
The unaudited financial statements contained herein include, in
the opinion of management, all adjustments necessary for a fair
presentation of the results of operations and financial condition
of Morgan Stanley Spectrum Select L.P. (the ?Partnership?). The
financial statements and condensed notes herein should be read in
conjunction with the Partnership?s December 31, 2006, 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
contracts, and forward contracts on physical commodities and
other commodity interests, including, but not limited to, foreign
currencies, financial instruments, metals, energy, and
agricultural products. The Partnership is one of the Morgan
Stanley Spectrum Series of funds, comprised of the Partnership,
Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum
Global Balanced L.P., Morgan Stanley Spectrum Strategic L.P., and
Morgan Stanley Spectrum Technical L.P.
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership?s general partner is Demeter Management
Corporation (?Demeter?). Morgan Stanley & Co. Incorporated
(?MS&Co.?) is the Partnership?s principal commodity broker-dealer
and also acts as the counterparty on all trading of foreign
currency forward contracts. In addition, Morgan Stanley & Co.
International plc (?MSIL?) serves as the commodity broker for
trades on the London Metal Exchange. Effective April 13, 2007,
Morgan Stanley & Co. International Limited changed its name to
Morgan Stanley & Co. International plc. Demeter, MS&Co., and
MSIL are wholly-owned subsidiaries of Morgan Stanley. The trading
advisors to the Partnership are EMC Capital Management, Inc.,
Northfield Trading L.P., Rabar Market Research, Inc., Sunrise
Capital Management, Inc., and Graham Capital Management, L.P.
(individually, a ?Trading Advisor?, or collectively, the ?Trading
Advisors?).
2. Related Party Transactions
The Partnership?s cash is on deposit with MS&Co. and MSIL 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
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4-week U.S. Treasury bills discount rate during such month. The
Partnership pays brokerage fees to MS&Co.
3. Financial Instruments
The Partnership trades futures contracts, options on futures
contracts, and forward contracts on physical commodities and
other commodity interests, including, but not limited to, foreign
currencies, financial instruments, metals, energy, and
agricultural products. Futures and forwards represent contracts
for delayed delivery of an instrument at a specified date and
price. Risk arises from changes in the value of these contracts
and the potential inability of counterparties to perform under
the terms of the contracts. There are numerous factors which may
significantly influence the market value of these contracts,
including interest rate volatility.
The market value of exchange-traded contracts is based on the
settlement price quoted by the exchange on the day with respect
to which market value is being determined. If an exchange-traded
contract could not have been liquidated on such day due to the
operation of daily limits or other rules of the exchange, the
settlement price shall be the settlement price on the first
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
subsequent day on which the contract could be liquidated. The
market value of off-exchange-traded contracts is based on the
fair market value quoted by the counterparty.
The Partnership?s contracts are accounted for on a trade-date
basis and marked to market on a daily basis. The Partnership
accounts for its derivative investments in accordance with the
provisions of Statement of Financial Accounting Standards No.
133, ?Accounting for Derivative Instruments and Hedging
Activities? (?SFAS No. 133?). SFAS No. 133 defines a derivative
as a financial instrument or other contract that has all three of
the following characteristics:
1) One or more underlying notional amounts or payment
provisions;
2) Requires no initial net investment or a smaller initial net
investment than would be required relative to changes in
market factors;
3) Terms require or permit net settlement.
Generally, derivatives include futures, forward, swap or options
contracts, and other financial instruments with similar
characteristics such as caps, floors, and collars.
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The net unrealized gains on open contracts, reported as a
component of ?Equity in futures interests trading accounts? on the
Statements of Financial Condition, and their longest contract
maturities were as follows:
Net Unrealized Gains
on Open Contracts Longest Maturities
Exchange- Off-Exchange- Exchange- Off-Exchange-
Date Traded Traded Total Traded Traded
$ $ $
Jun. 30, 2007 14,655,622 4,629,812 19,285,434 Dec. 2008 Sep. 2007
Dec. 31, 2006 10,738,293 1,223,318 11,961,611 Jun. 2008 Mar. 2007
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. and MSIL act
as the futures commission merchants or the counterparties, 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
MSIL, each as a futures commission merchant for the Partnership?s
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 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
$557,147,791 and $547,628,371 at June 30, 2007, and December 31,
2006, respectively. With respect to the Partnership?s off-
exchange-traded forward currency 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. The Partnership
has a netting agreement with MS&Co. This agreement, which seeks
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
to reduce both the Partnership?s and MS&Co.?s exposure on off-
exchange-traded forward currency contracts, should materially
decrease the Partnership?s credit risk in the event of MS&Co.?s
bankruptcy or insolvency.
4. New Accounting Developments
In July 2006, the Financial Accounting Standards Board (?FASB?)
issued interpretation No. 48, ?Accounting for Uncertainty in
Income Taxes ? an interpretation of FASB Statement 109? (?FIN
48?). FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position must
meet before being recognized in the financial statements. FIN 48
was effective for the Partnership as of January 1, 2007. Based
on its analysis, management believes that the adoption of FIN 48
has no impact on the Partnership?s Financial Statements.
In September 2006, the FASB issued SFAS No. 157, ?Fair Value
Measurements? (?SFAS No. 157?). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS No. 157 is
effective for the Partnership as of January 1, 2008. The impact
to the Partnership?s Financial Statements, if any, is currently
being assessed.
<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
MSIL 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
<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
<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 six month
periods ended June 30, 2007, and 2006, and a general discussion
of its trading activities during each period. It is important to
note, however, that the Trading Advisors trade in various markets
at different times and that prior activity in a particular market
does not mean that such market will be actively traded by the
Trading Advisors or will be profitable in the future.
Consequently, the results of operations of the Partnership are
difficult to discuss other than in the context of the Trading
Advisors? trading activities on behalf of the Partnership during
<page> the period in question. Past performance is no guarantee
of future results.
The Partnership?s results of operations set forth in the
financial statements on pages 2 through 12 of this report are
prepared in accordance with accounting principles generally
accepted in the United States of America, which require the use
of certain accounting policies that affect the amounts reported
in these financial statements, including the following: The
contracts the Partnership trades are accounted for on a trade-
date basis and marked to market on a daily basis. The difference
between their cost and market value is recorded on the Statements
of Operations as ?Net change in unrealized trading profit (loss)?
for open (unrealized) contracts, and recorded as ?Realized
trading profit (loss)? when open positions are closed out. The
sum of these amounts constitutes the Partnership?s trading
results. The market value of a futures contract is the
settlement price on the exchange on which that futures contract
is traded on a particular day. The value of 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 Three and Six Months Ended June 30, 2007
The Partnership recorded total trading results including interest
income totaling $89,269,053 and expenses totaling $11,153,535,
resulting in net income of $78,115,518 for the three months
ended June 30, 2007. The Partnership?s net asset value per Unit
increased from $26.48 at March 31, 2007, to $30.73 at June 30,
2007.
The most significant trading gains of approximately 6.6% were
recorded in the currency sector throughout the quarter from short
positions in the Japanese yen versus the U.S. dollar, euro,
British pound, and Australian dollar as the value of the Japanese
yen weakened relative to most of its major rivals in a
continuation of the carry-trade after news that the Tankan survey
was weaker than expected and a decline in Japanese industrial
production increased speculation that Japanese economic growth
was not sufficient to warrant an increase in interest rates by
the Bank of Japan. Additional gains were experienced throughout
the quarter from long positions in the British pound, Canadian
dollar, New Zealand dollar, Brazilian real, and Australian dollar
versus the U.S. dollar as the value of these currencies
strengthened relative to the U.S. dollar amid the release of
consistently strong economic data out of these countries.
<page> Furthermore, the U.S. dollar weakened against its major
rivals after the U.S. Federal Reserve?s decision to leave
interest rates steady at 5.25%. Within the global interest rate
sector, gains of approximately 6.4% were experienced primarily
during May and June from short positions in European, U.S.,
Canadian, and Australian fixed-income futures as prices moved
lower due to the aforementioned reasons regarding strong economic
data and rising interest rates that affected the currency
markets. Additional gains of approximately 4.4% were recorded in
the global stock index sector primarily during April and May from
long positions in European and U.S. equity index futures as
prices moved higher on continued strong corporate earnings and
increased merger and acquisition activity. In addition, prices
were pressured higher amid strong U.S. retail sales data and on
optimism that global trade imbalances would be reduced in the
long term. Further gains in the global equity index sector were
experienced from long positions in Pacific Rim stock index
futures as prices moved higher during May on optimism that strong
economic growth in the Euro-Zone and the U.S. would result in
higher exports from Asia. Smaller gains of approximately 0.2%
were recorded in the agricultural markets primarily during May
and June from long futures positions in soybean oil, soybeans,
and soybean meal after a representative from the European Union
announced plans to increase alternative fuel sources in order to
reduce the Euro-Zone?s dependence on crude oil and U.S.
government reports showed that soybean acreage was down from a
<page> year earlier. Elsewhere, long positions in wheat futures
resulted in gains during June as prices moved higher amid news of
increased global demand. A portion of the Partnership?s gains in
the second quarter was offset by losses of approximately 1.0%
experienced in the metals markets during May from long positions
in aluminum, copper, nickel, and zinc futures as prices moved
lower after the Chinese government announced that it would raise
export taxes for base metals, as well as amid speculation that
rising production and inventories might create a global surplus.
Elsewhere, long positions in gold futures experienced smaller
losses as prices declined due to temporary strength in the value
of the U.S. dollar. Lastly, losses of approximately 0.2% were
incurred in the energy markets primarily during May from both
short and long futures positions in crude oil and its related
products as prices moved without consistent direction amid
conflicting news regarding supply and demand.
The Partnership recorded total trading results including interest
income totaling $52,870,429 and expenses totaling $22,790,224,
resulting in net income of $30,080,205 for the six months ended
June 30, 2007. The Partnership?s net asset value per Unit
increased from $29.06 at December 31, 2006, to $30.73 at June 30,
2007.
The most significant trading gains of approximately 5.2% were
experienced in the global interest rate sector primarily during
<page> 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 German investor confidence rose
during May and Italian retail sales were stronger than expected
during April. Furthermore, prices continued to move lower on
news that housing prices in the United Kingdom showed their
biggest jump of 2007. Within the currency sector, gains of
approximately 4.6% were recorded in the currency sector primarily
during the second quarter from short positions in the Japanese
yen versus the U.S. dollar, euro, British pound, and Australian
dollar as the value of the Japanese yen weakened relative to most
of its major rivals in a continuation of the carry-trade after
news that the Tankan survey was weaker than expected and a
decline in Japanese industrial production increased speculation
that Japanese economic growth was not sufficient to warrant an
increase in interest rates by the Bank of Japan. Additional
gains were experienced from long positions in the Australian
dollar, Brazilian real, and Canadian dollar versus the U.S.
dollar throughout the second quarter as the value of these
currencies strengthened relative to the U.S. dollar amid the
release of consistently strong economic data. Furthermore, the
U.S. dollar weakened against most of its major rivals leading up
to and after the U.S. Federal Reserve?s decision to leave
<page> interest rates steady at 5.25%. Smaller gains of
approximately 1.7% were experienced in the global stock index
sector primarily during January, April, and May from long
positions in German and Pacific Rim stock index futures as prices
climbed higher on continued strong corporate earnings and
increased merger and acquisition activity in those regions.
Additionally, Pacific Rim stock index futures prices moved higher
amid optimism that strong economic growth in the Euro-Zone and
U.S. would result in higher exports from Asia. A portion of the
Partnership?s gains in the first six months of the year was
offset by losses of approximately 2.4% recorded in the metals
sector throughout the year from both short and long positions in
aluminum futures as prices moved without consistent direction due
to conflicting data regarding supply and demand. Elsewhere, long
positions in silver and gold futures resulted in losses during
March, May, and June as prices moved lower on speculative
selling. Within the agricultural sector, losses of approximately
0.6% were incurred primarily during January from long positions
in coffee futures as prices fell on speculation that retail price
increases imposed by large food companies during the last quarter
of 2006 would curb demand in the United States. Elsewhere,
losses from long positions in lean hog futures were experienced
primarily during April as prices fell amid technically-based
selling. Lastly, long positions in corn futures resulted in
losses during January and March as prices fell after the U.S.
announced plans to seek additional sources for alternative fuels
<page> and the U.S. Department of Agriculture?s Prospective
Plantings report showed corn acreage might be up in 2007 to its
highest level since 1944. Smaller losses of approximately 0.3%
were experienced within the energy sector from short positions in
natural gas futures as prices moved higher during March after the
U.S. Department of Energy reported that natural gas supplies were
down 15% from a year ago. Additional losses were recorded from
both short and long positions in natural gas futures as prices
moved without consistent direction during May. Elsewhere, short
positions in crude oil futures and its related products incurred
losses during February and March as prices moved higher on
increased concerns that unexpected refinery shutdowns might curb
fuel stockpiles in the future. In addition, prices moved higher
amid geopolitical uncertainty in Iraq and concerns regarding
future production in Venezuela and Iran.
For the Three and Six Months Ended June 30, 2006
The Partnership recorded total trading results including interest
income totaling $36,753,206 and expenses totaling $12,608,588,
resulting in net income of $24,144,618 for the three months ended
June 30, 2006. The Partnership?s net asset value per Unit
increased from $28.48 at March 31, 2006, to $29.74 at June 30,
2006.
The most significant trading gains of approximately 5.4% were
recorded in the global interest rate futures markets from short
positions in U.S., European, Japanese, and Australian interest
<page> rate futures as global bond prices trended lower during
April. In the U.S., interest rate futures prices declined
following the release of stronger than expected economic data.
Similarly in Europe, rising equity prices and strong economic
growth pressured European fixed-income futures prices lower. U.S
fixed-income futures prices continued to move lower into May amid
higher than forecasted manufacturing and construction data and
the sixteenth consecutive interest rate hike by the U.S. Federal
Reserve, while Australian fixed-income futures prices also
declined on an optimistic outlook for the Australian economy as
commodity prices climbed higher. Finally, additional gains were
achieved in the global interest rate sector during June as prices
for U.S. and European fixed-income futures continued to move
lower on strong economic data out of the U.S. and Europe. In the
metals sector, gains of approximately 3.4% were experienced
during April and May from long futures positions in copper,
nickel, and aluminum as prices rallied sharply on strong global
industrial demand, particularly from the U.S., China, and India,
and reports of decreasing inventories. Additional gains were
experienced from long positions in gold and silver futures as
prices reached 25-year highs, benefiting from strong demand and
lagging supply. In addition, demand for precious metals increased
given continued geopolitical concerns regarding Iran?s nuclear
program and inflation concerns due to high energy prices. A
portion of the Partnership?s gains in the second quarter was
offset by losses of approximately 1.7% in the global equity index
market from long positions in U.S., European, and Japanese stock
index futures as prices reversed lower during May and June. The
<page> weakness in the equity markets was attributed to inflation
fears and uncertainty regarding global interest rate policy.
Within the Asian equity index markets, long positions incurred
losses as prices suffered a heavy sell-off as investors expressed
concern that a global economic slowdown would negatively affect
Japan?s export-driven economy. Losses of approximately 0.8% were
incurred in the agricultural complex from long positions in wheat
futures as prices fell in April and June on forecasts for
favorable weather in U.S. wheat-growing regions. Elsewhere in
the agricultural complex, short futures positions in soybeans
recorded losses as prices moved higher in April on speculative
buying and increased demand. Smaller losses were recorded during
June from newly established long positions as prices moved lower
on forecasts for rain in the drought-suffering regions of the
U.S. Additional losses of approximately 0.4% were incurred in the
energy sector from short positions in natural gas futures as
prices moved higher on fears of a possible supply shortage. In
May, losses were also incurred from long futures positions in
crude oil and its related products as prices fell during the
month after supply data showed an increase in domestic gasoline
and crude oil inventories. Further losses in the energy markets
were recorded during June from newly established long positions
in natural gas futures as prices reversed higher on reports of a
supply surplus and fears of a slowing global economy. Smaller
losses of approximately 0.2% were incurred in the currency
markets from short positions in the Japanese yen, Australian
dollar, and Swiss franc relative to the U.S. dollar as the value
of the U.S. dollar weakened on news that foreign central banks,
<page> including Russia, Sweden, and several Middle Eastern
central banks were diversifying their currency reserves away from
the U.S. dollar. Also pressuring the value of the U.S. dollar
lower were concerns over the steep U.S. trade deficit and
speculation that the U.S. Federal Reserve might be near the end
of its interest rate tightening campaign. In addition to the U.S.
dollar weakening, the Japanese yen strengthened on speculation of
a possible Bank of Japan interest rate hike, while the Swiss
franc moved higher on the political tensions in the Middle East,
which increased the demand for the safe-haven currency. The
Australian dollar also moved higher on an unexpected interest
rate hike by the Reserve Bank of Australia in May.
The Partnership recorded total trading results including interest
income totaling $68,555,559 and expenses totaling $24,438,187,
resulting in net income of $44,117,372 for the six months ended
June 30, 2006. The Partnership?s net asset value per Unit
increased from $27.45 at December 31, 2005 to $29.74 at June 30,
2006.
The most significant trading gains of approximately 8.8% were
experienced in the global interest rate sector from short
positions in U.S., European, and Japanese interest rate futures as
global bond prices trended lower throughout a majority of the
first quarter amid strength in regional equity markets and
investor sentiment that interest rates in the United States, the
European Union, and Japan would rise. U.S. fixed-income futures
<page> continued to move lower into the second quarter following
the release of stronger than expected U.S. economic data.
Similarly in Germany, rising equity prices, strong economic
growth, and concerns about rising oil prices pressured German
fixed-income futures prices even lower in the second quarter.
Additional gains of approximately 6.3% were recorded in the metals
markets from long futures positions in copper, nickel, zinc, and
aluminum as base metals prices rallied throughout the second
quarter on strong global demand and reports of falling
inventories. As a result, copper and nickel prices hit new-record
highs during the month of May. Further gains in the metals markets
were experienced from long positions in gold and silver futures as
prices reached 25-year highs, benefiting from strong demand and
lagging supply. Demand for gold increased given continued
geopolitical concerns regarding Iran?s nuclear program and
inflation concerns due to high energy prices. Smaller gains,
approximately 0.6%, were experienced in the global stock index
sector from long positions in European and Australian stock index
futures as global equity prices trended higher during the first
quarter on strong corporate earnings and solid economic data. Long
positions in Hong Kong equity index futures also recorded gains as
prices moved higher during April on positive performance in the
technology sector and speculation that the end was near for the
U.S. Federal Reserve?s interest rate tightening campaign. A
portion of the Partnership?s gains in the first six months of the
year was offset by losses of approximately 3.0% incurred in the
currency market from short positions in the Japanese yen, Swiss
franc, and Australian dollar. Throughout a majority of the first
<page> half of the year, the U.S. dollar moved lower on news that
foreign central banks were beginning to diversify their currency
reserves away from U.S. dollar-denominated assets, as well as
uncertainty regarding the future of the U.S. Federal Reserve?s
interest rate tightening campaign. The Japanese yen and Swiss
franc moved higher against the U.S. dollar during January and
February as strong economic data out of the two regions increased
speculation that the Bank of Japan and European Central Bank might
raise interest rates. During April, the Japanese yen strengthened
on speculation of a possible Bank of Japan interest rate hike in
the near future, while the Swiss franc moved higher on the
political tensions in the Middle East, which increased the demand
for the safe-haven currency. The Australian dollar also moved
higher on an unexpected interest rate hike by the Reserve Bank of
Australia in May. Losses of approximately 1.0% were experienced in
the energy markets from positions in crude oil, heating oil, and
natural gas futures. During February, long futures positions in
crude oil and its related products recorded losses as prices
declined after an announcement by Chinese government authorities
that China would place an emphasis on prospecting alternative
energy sources in the future, reports of larger than expected
supplies from the International Energy Agency, and mild weather in
the U.S. Northeast. Further losses in the energy markets were
recorded during March from short positions in the aforementioned
markets as prices reversed higher early in the month on supply
fears. In May, losses were incurred from long futures positions in
crude oil and its related products as prices fell after supply
data showed an increase in domestic gasoline and crude oil
<page> inventories. Additional losses were incurred from short
positions in natural gas as prices moved higher on fears of a
possible supply shortage. Smaller losses were experienced during
June from newly established long positions in natural gas futures
as prices reversed higher on reports of a supply surplus and fears
of a slowing global economy. Losses of approximately 0.8% were
incurred in the agricultural complex from long positions in wheat
futures as prices fell in March, April, and June on forecasts for
favorable weather in U.S. wheat-growing regions. Elsewhere in the
agricultural complex, short futures positions in soybeans recorded
losses as prices moved higher in April on speculative buying and
increased demand. Losses were also recorded in soybean futures
during June from newly established long positions as prices moved
lower on forecasts for rain in the drought-suffering regions of
the U.S. Additionally, short positions in soybean oil also
recorded losses during the first quarter.
<page>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures, forwards, and options. The
market-sensitive instruments held by the Partnership are acquired
for speculative trading purposes only and, as a result, all or
substantially all of the Partnership?s assets are at risk of
trading loss. Unlike an operating company, the risk of market-
sensitive instruments is inherent to the primary business activity
of the Partnership.
The futures, forwards, and options traded by the Partnership
involve varying degrees of related market risk. Market risk is
often dependent upon changes in the level or volatility of
interest rates, exchange rates, and prices of financial
instruments and commodities, factors that result in frequent
changes in the fair value of the Partnership?s open positions,
and consequently in its earnings, whether realized or unrealized,
and cash flow. Gains and losses on open positions of exchange-
traded futures, 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
<page> 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.
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.
<page> Limited partners will not be liable for losses exceeding
the current net asset value of their investment.
Quantifying the Partnership?s Trading Value at Risk
The following quantitative disclosures regarding the Partnership?s
market risk exposures contain ?forward-looking statements? within
the meaning of the safe harbor from civil liability provided for
such statements by the Private Securities Litigation Reform Act of
1995 (set forth in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934). All
quantitative disclosures in this section are deemed to be forward-
looking statements for purposes of the safe harbor, except for
statements of historical fact.
The Partnership accounts for open positions on the basis of mark
to market accounting principles. Any loss in the market value of
the Partnership?s open positions is directly reflected in the
Partnership?s earnings and cash flow.
The Partnership?s risk exposure in the market sectors traded by
the Trading Advisors is estimated below in terms of VaR. The
Partnership estimates VaR using a model based upon historical
simulation (with a confidence level of 99%) which involves
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
<page> 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.
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.
<page> 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 June 30, 2007, and 2006. At
June 30, 2007, and 2006, the Partnership?s total capitalization
was approximately $555 million and $565 million, respectively.
Primary Market June 30, 2007 June 30, 2006
Risk Category Value at Risk Value at Risk
Equity (1.54)% (0.39)%
Interest Rate (1.33) (1.70)
Currency (1.11) (0.55)
Commodity (0.47) (0.49)
Aggregate Value at Risk (2.74)% (1.73)%
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
<page> 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 July 1, 2006, through June 30, 2007.
Primary Market Risk Category High Low Average
Equity (1.95)% (0.62)% (1.39)%
Interest Rate (1.46) (0.59) (1.05)
Currency (1.53) (0.99) (1.22)
Commodity (0.75) (0.47) (0.60)
Aggregate Value at Risk (2.74)% (1.86)% (2.23)%
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;
<page>
* changes in portfolio value caused by market movements may
differ from those of the VaR model;
* VaR results reflect past market fluctuations applied to
current trading positions while future risk depends on future
positions;
* VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
* the historical market risk factor data used for VaR estimation
may provide only limited insight into losses that could be
incurred under certain unusual market movements.
In addition, the VaR tables above, as well as the past performance
of the Partnership, give no indication of the Partnership?s
potential ?risk of ruin?.
The VaR tables provided present the results of the Partnership?s
VaR for each of the Partnership?s market risk exposures and on an
aggregate basis at June 30, 2006, and for the four quarter-end
reporting periods from July 1, 2006, through June 30, 2007. 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
<page> or that such losses will not occur more than once in 100
trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances. These balances and any market risk they may represent
are immaterial.
The Partnership also maintains a substantial portion of its
available assets in cash at MS&Co.; as of June 30, 2007, such
amount is equal to approximately 89% 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
<page> the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership?s primary market risk exposures, as
well as the strategies used and to be used by Demeter and the
Trading Advisors for managing such exposures, are subject to
numerous uncertainties, contingencies and risks, any one of which
could cause the actual results of the Partnership?s risk controls
to differ materially from the objectives of such strategies.
Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx of
new market participants, increased regulation, and many other
factors could result in material losses, as well as in material
changes to the risk exposures and the risk management strategies
of the Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the
Partnership at June 30, 2007, by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.
Equity. The largest market exposure of the Partnership at June
30, 2007, was 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., Britain, 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
<page> (Japan), NASDAQ 100 (U.S.), DAX (Germany), Hang Seng
(China), S&P 500 (U.S.), TOPIX (Japan), Euro Stoxx 50 (Europe),
AEX (Netherlands), TAIWAN (Taiwan), CAC 40 (France), Dow Jones
(U.S.), FTSE 100 (United Kingdom), SPI 200 (Australia), IBEX 35
(Spain), and Canadian S&P 60 (Canada) stock indices. The
Partnership is typically exposed to the risk of adverse price
trends or static markets in the European, U.S., Chinese,
Japanese, 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. The second largest market exposure of the
Partership at June 30, 2007, was to the global interest rate
sector. Exposure was primarily spread across U.S., European,
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.
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
<page> 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.
Currency. The third largest market exposure of the Partnership
at June 30, 2007, was 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 June 30, 2007, the Partnership?s major exposures
were to euro, Japanese yen, Swiss franc, British pound, Norwegian
krone, Polish zloty, and Canadian dollar currency crosses, as
well as 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.
Energy. At June 30, 2007, the Partnership had market
exposure to the energy sector. The Partnership?s energy
exposure was shared primarily by futures contracts in crude
oil and its related products, and natural gas. Price
<page> 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.
Soft Commodities and Agriculturals. At June 30, 2007, the
Partnership had market exposure to the markets that comprise
these sectors. Most of the exposure was to the cocoa,
soybean oil, soybeans, coffee, soybean meal, wheat, live
cattle, sugar, feeder cattle, lean hogs, and orange juice
markets. Supply and demand inequalities, severe weather
disruptions, and market expectations affect price movements
in these markets.
Metals. At June 30, 2007, the Partnership had market
exposure in the metals sector. The Partnership's metals
exposure was to fluctuations in the price of precious
metals, such as gold, platinum, palladium, and silver and
base metals, such as copper, lead, and tin. 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 Partnership
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 June 30, 2007:
Foreign Currency Balances. The Partnership?s primary foreign
currency balances at June 30, 2007, were in euros, Hong Kong
dollars, British pounds, Canadian dollars, Australian
dollars, Swiss francs, Japanese yen, Norwegian krone, and
Swedish krona. The Partnership controls the non-trading
risk of foreign currency balances by regularly converting
them back into U.S. dollars upon liquidation of their
respective positions.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to
manage the risk of the Partnership?s open positions in essentially
the same manner in all market categories traded. Demeter attempts
to manage market exposure by diversifying the Partnership?s assets
among different Trading Advisors in a multi-advisor Partnership,
each of whose strategies focus on different market sectors and
trading approaches, and by monitoring the performance of the
Trading Advisors daily. In addition, the Trading Advisors
establish diversification guidelines, often set in terms of the
maximum margin to be committed to positions in any one market
sector or market-sensitive instrument.
<page>
Demeter monitors and controls the risk of the Partnership?s non-
trading instrument, cash. Cash is the only Partnership investment
directed by Demeter, rather than the Trading Advisors.
Item 4. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this quarterly
report, the President and Chief Financial Officer of
Demeter, the general partner of the Partnership, have
evaluated the effectiveness of the Partnership?s
disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act), and have
judged such controls and procedures to be effective.
(b) There have been no material changes during the period
covered by this quarterly report in the Partnership?s
internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) or in
other factors that could significantly affect these
controls subsequent to the date of their evaluation.
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, 2006, and the Partnership?s
Report on Form 10Q for the quarter ended March 31, 2007.
<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 28,191,045.140
Units unsold through 6/30/07 13,808,954.860
Total Units sold
through 6/30/07 42,805,012.240
(pre and post conversion)
</table>
<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 June 30, 2007, was
$960,403,868.
Since no expenses are chargeable against proceeds, 100% of the
proceeds of the offering have been applied to the working capital
of the Partnership for use in accordance with the ?Use of
Proceeds? section of the prospectus included as part of the above
referenced Registration Statements.
Item 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.
<page>
32.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
<page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Morgan Stanley Spectrum Select L.P.
(Registrant)
By: Demeter Management Corporation
(General Partner)
August 14, 2007 By:/s/ Lee Horwitz
Lee Horwitz
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.