UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the year ended December 31, 2006 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ________________ to ___________________
Commission File Number 0-19511
MORGAN STANLEY SPECTRUM SELECT L.P.
(Exact name of registrant as specified in its Limited Partnership Agreement)
DELAWARE 13-3619290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Demeter Management Corporation
330 Madison Avenue, 8th Floor
New York, NY 10017
(Address of principal executive offices) (Zip Code)
Registrant?s telephone number, including area code (212) 905-2700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
Indicate by check mark if the registrant
is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act. Yes No X
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein,
and will not be contained, to the best of
registrant?s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of
this Form 10-K or any amendment of this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of ?accelerated
filer and large accelerated filer? in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer___ Accelerated filer____ Non-accelerated filer __X__
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes No X
State the aggregate market value of the Units of Limited Partnership Interest
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which Units were sold as of the last
business day of the registrant?s most recently completed second fiscal quarter:
$558,553,514 at June 30, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2006
<caption>
Page No.
<s> <c>
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . . . 1
Part I .
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . .2?6
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . .6
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . .6
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders. . . .7
Part II.
Item 5. Market for Registrant's Partnership Units
and Related Security Holder Matters . . . . . . . . . . 8-10
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 12?33
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . .33-47
Item 8. Financial Statements and Supplementary Data. . . . . . . .48
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . .48
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . .48-51
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . 51
Part III.
Item 10. Directors, Executive Officers and Corporate
Governance . . . . . . . . . . . . . . . . . . . . . . 52-59
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . .60
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Security Holder Matters . . . .60
Item 13. Certain Relationships and Related Transactions,
and Director Independence . . . . . . . . . . . . . . .60-61
Item 14. Principal Accountant Fees and Services . . . . . . . . 61-62
Part IV.
Item 15. Exhibits and Financial Statement Schedules . . . . . . 63?64
</table>
<page>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
as follows:
Documents Incorporated Part of Form 10-K
Partnership?s Prospectus dated
May 1, 2006 I
Partnership's Supplement to the
Prospectus dated January 18, 2007 I
Annual Report to Morgan Stanley
Spectrum Series Limited Partners
for the year ended December 31,
2006 II, III, and IV
<page> PART I
Item 1. BUSINESS
(a) General Development of Business. Morgan Stanley Spectrum
Select L.P. (the "Partnership") is a Delaware limited partnership
organized in 1991 to engage primarily in the speculative trading of
futures contracts, options on futures contracts, and forward
contracts on physical commodities and other commodity interests,
including, but not limited to, foreign currencies, financial
instruments, metals, energy, and agricultural products. The
Partnership commenced trading operations on August 1, 1991. The
Partnership is one of the Morgan Stanley Spectrum series of funds,
comprised of the Partnership, Morgan Stanley Spectrum Currency
L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley
Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P.
(collectively, the ?Spectrum Series?).
The Partnership?s general partner is Demeter Management Corporation
(?Demeter?). The non-clearing commodity broker is Morgan Stanley DW
Inc. (?Morgan Stanley DW?). The clearing commodity brokers are
Morgan Stanley & Co. Incorporated (?MS&Co.?) and Morgan Stanley &
Co. International Limited (?MSIL?). MS&Co. acts as the counterparty
on all of the foreign currency forward contracts. In 2007, Morgan
Stanley intends to merge Morgan
Stanley DW into MS&Co. Upon completion of the merger, the
<page> surviving entity, MS&Co., will be the Partnership?s
principal U.S. commodity broker-dealer. Demeter, Morgan Stanley
DW, MS&Co., and MSIL are wholly-owned subsidiaries of Morgan
Stanley. The trading advisors to the Partnership are EMC Capital
Management, Inc. (?EMC?), Northfield Trading L.P., Rabar Market
Research, Inc. (?Rabar?), Sunrise Capital Management, Inc.
(?Sunrise?), and Graham Capital Management, L.P. (?Graham?) (each
individually, a ?Trading Advisor?, or collectively, the ?Trading
Advisors?).
Effective February 1, 2007, subscriptions are allocated among the
Trading Advisors as follows: EMC (10%), Rabar (30%), Sunrise (30%),
and Graham (30%); redemptions are allocated as follows: Rabar
(33.33%), Sunrise (33.33%), and Graham (33.33%).
Units of limited partnership interest (?Unit(s)?) are sold at
monthly closings at a purchase price equal to 100% of the net
asset value per Unit as of the close of business on the last day
of each month.
The managing underwriter for the Partnership is Morgan Stanley
DW.
The Partnership began the year at a net asset value per Unit of
$27.45 and returned 5.9% to $29.06 on December 31, 2006. For a
<page> more detailed description of the Partnership's business, see
subparagraph (c).
(b) Financial Information about Segments. For financial infor-
mation reporting purposes, the Partnership is deemed to engage in
one industry segment, the speculative trading of futures,
forwards, and options on such contracts. The relevant financial
information is presented in Items 6 and 8.
(c) Narrative Description of Business. The Partnership is in the
business of speculative trading of futures, forwards, and options
pursuant to trading instructions provided by the Trading Advisors.
For a detailed description of the different facets of the
Partnership's business, see those portions of the Partnership's
prospectus, dated May 1, 2006 (the ?Prospectus?), and the
Partnership's supplement to the Prospectus dated January 18, 2007
(the "Supplement"), incorporated by reference in this Form 10-K,
set forth below.
Facets of Business
1. Summary 1. "Summary" (Pages 1-9 of the
Prospectus and Page S-1
of the Supplement).
2. Futures, Options, and 2. "The Futures, Options, and
Forwards Markets Forwards Markets" (Pages
150-154 of the Prospectus).
<page>
3. Partnership?s Trading 3. ?Use of Proceeds? (Pages 29-31
Arrangements and of the Prospectus and Page
Policies S-5 of the Supplement), ?The
Trading Advisors? (Pages 78-
126 of the Prospectus and
Pages S-33 ? S-39 of the
Supplement).
4. Management of the Part- 4. ?The Trading Advisors ?
nership Management Agreements? (Page
78 of the Prospectus), ?The
General Partner? (Pages 75-
77 of the Prospectus and
Page S-32 of the Supple-
ment), ?The Commodity
Brokers? (Pages 129-130 of
the Prospectus) and ?The
Limited Partnership Agree-
ments? (Pages 133-136 of
the Prospectus and page
S-41 of the Supplement).
5. Taxation of the Partner- 5. ?Material Federal Income Tax
ship?s Limited Partners Considerations? and ?State
and Local Income Tax
Aspects? (Pages 142-148 of
the Prospectus and Page
S-41 of the Supplement).
(d) Financial Information about Geographic Areas. The Partnership
has not engaged in any operations in foreign countries; however,
the Partnership (through the commodity brokers) enters into forward
contract transactions where foreign banks are the contracting party
and trades futures, forwards, and options on foreign exchanges.
(e) Available Information. The Partnership files an annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on
<page> Form 8-K, and all amendments to these reports with the
Securities and Exchange Commission (?SEC?). You may read and copy
any document filed by the Partnership at the SEC?s Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for information on the Public Reference
Room. The Partnership does not maintain an internet website,
however, the SEC maintains a website that contains annual,
quarterly, and current reports, proxy statements, and other
information that issuers (including the Partnership) file
electronically with the SEC. The SEC?s website address is
http://www.sec.gov.
Item 1A. RISK FACTORS
The Partnership is in the business of speculative trading of
futures, forwards, and options. For a detailed description of the
risks that may affect the business of the Partnership or the
limited partnership interests offered by the Partnership, see those
portions of the Partnership?s Prospectus dated May 1, 2006, and the
Partnership?s Supplement dated January 18, 2007, incorporated by
reference in this Form 10-K, set forth in the ?Risk Factors?
section of the Prospectus at pages 10-15 and the ?Risk Factors?
section of the Supplement at pages S-2?S-4.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
<page>
Item 2. PROPERTIES
The Partnership?s executive and administrative offices are located
within the offices of Morgan Stanley DW. The Morgan Stanley DW
offices utilized by the Partnership are located at 330 Madison
Avenue, 8th Floor, New York, NY 10017.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<page> PART II
Item 5. MARKET FOR REGISTRANT'S PARTNERSHIP UNITS AND RELATED
SECURITY HOLDER MATTERS
(a) Market Information. There is no established public trading
market for Units of the Partnership.
(b) Holders. The number of holders of Units at December 31, 2006,
was approximately 44,664.
(c) Distributions. No distributions have been made by the
Partnership since it commenced trading operations on August 1,
1991. Demeter has sole discretion to decide what distributions, if
any, shall be made to investors in the Partnership. Demeter
currently does not intend to make any distributions of the
Partnership?s profits.
(d) Securities Sold; Consideration. Units are continuously sold at
monthly closings at a purchase price equal to 100% of the net asset
value per Unit as of the close of business on the last day of each
month.
The aggregate price of the Units sold through December 31, 2006,
was $932,307,794.
<page> (e) Underwriter. The managing underwriter for the
Partnership is Morgan Stanley DW.
(f) Use of Proceeds.
SEC
Registration Statement on Form S-1 Units Registered Effective Date
File Number
Initial Registration 60,000.000 May 17, 1991 33-39667
Supplemental Closing 10,000.000 August 23, 1991 33-42380
Additional Registration 75,000.000 August 31, 1993 33-65072
Additional Registration 60,000.000 October 27, 1997 333-01918
Pre-conversion 205,000.000
Units sold through 10/17/97 146,139.671
Units unsold through 10/17/97 58,860.329
(Ultimately de-registered)
Commencing with the April 30, 1998, monthly closing, when the
Partnership became 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 27,210,537.693
Units unsold through 12/31/06 14,789,462.307
Total Units sold
through 12/31/06 41,824,504.793
(pre and post conversion)
<page> Since no expenses are chargeable against proceeds, 100% of
the proceeds of the offering have been applied to the working
capital of the Partnership for use in accordance with the ?Use of
Proceeds? section of the Prospectus and the Supplement included as
part of the above referenced Registration Statements.
<page> <table> Item 6. SELECTED FINANCIAL DATA (in dollars)
<caption>
For the Years Ended December 31, __
2006 2005 2004 2003 2002 .
<s> <c> <c> <c> <c> <c>
Total Trading Results
including interest
income 79,402,767 23,039,815 33,923,907 74,213,042 67,605,728
Net Income (Loss) 31,117,372 (29,214,513) (23,311,900) 34,186,905 40,823,199
Net Income (Loss)
Per Unit (Limited
& General Partners) 1.61 (1.43) (1.43) 2.66 3.69
Total Assets 555,435,805 550,467,763 595,823,205 449,549,242 299,604,379
Total Limited
Partners' Capital 537,667,844 527,198,790 579,155,164 436,666,633 292,226,000
Net Asset Value
Per Unit 29.06 27.45 28.88 30.31 27.65
</table>
<page> Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership deposits its assets with Morgan Stanley
DW as non-clearing broker, and MS&Co. and MSIL as clearing brokers
in separate futures, forwards, and options trading accounts
established for each Trading Advisor. Such assets are used as
margin to engage in trading and may be used as margin solely for
the Partnership?s trading. The assets are held in either non-
interest bearing bank accounts or in securities and instruments
permitted by the Commodity Futures Trading Commission for
investment of customer segregated or secured funds. Since the
Partnership?s sole purpose is to trade in futures, forwards, and
options, it is expected that the Partnership will continue to own
such liquid assets for margin purposes.
The Partnership?s investment in futures, forwards, and options may,
from time to time, be illiquid. Most U.S. futures exchanges limit
fluctuations in prices during a single day by regulations referred
to as ?daily price fluctuations limits? or ?daily limits?. Trades
may not be executed at prices beyond the daily limit. If the price
for a particular futures or options contract has increased or
decreased by an amount equal to the daily limit, positions in that
futures or options contract can neither be taken nor liquidated
unless traders are willing to affect trades at or
<page> within the limit. Futures prices have occasionally moved
the daily limit for several consecutive days with little or no
trading. These market conditions could prevent the Partnership
from promptly liquidating its futures or options contracts and
result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currencies. The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets, subjecting it to substantial
losses. Either of these market conditions could result in
restrictions on redemptions. For the periods covered by this
report, illiquidity has not materially affected the Partnership?s
assets.
There are no known material trends, demands, commitments, events,
or uncertainties at the present time that are reasonably likely to
result in the Partnership?s liquidity increasing or decreasing in
any material way.
Capital Resources. The Partnership does not have, nor does it
expect to have, any capital assets. Redemptions, exchanges, and
<page> sales of Units 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 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.
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, forwards, and options
markets. The following presents a summary of the Partnership's
operations for each of the three years in the period ended December
31, 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 the period in question. Past
performance is no guarantee of future results.
<page> The Partnership?s results of operations set forth in the
Financial Statements are prepared in accordance with accounting
principles generally accepted in the United States of America,
which require the use of certain accounting policies that affect
the amounts reported in these Financial Statements, including the
following: The contracts the Partnership trades are accounted for
on a trade-date basis and marked to market on a daily basis. The
difference between their cost and market value is recorded on the
Statements of Operations as ?Net change in unrealized trading
profit (loss)? for open (unrealized) contracts, and recorded as
?Realized trading profit (loss)? when open positions are closed
out. The sum of these amounts, along with the ?Proceeds from
Litigation Settlement?, constitutes the Partnership?s trading
results. The market value of a futures contract is the settlement
price on the exchange on which that futures contract is traded on a
particular day. The value of 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
critical accounting policies other than those presently used
could reasonably affect reported amounts.
<page> The Partnership recorded total trading results including
interest income totaling $79,402,767 and expenses totaling
$48,285,395, resulting in net income of $31,117,372 for the year
ended December 31, 2006. The Partnership?s net asset value per
Unit increased from $27.45 at December 31, 2005, to $29.06 at
December 31, 2006. Total redemptions and subscriptions for the
year were $97,503,224 and $76,905,995, respectively, and the
Partnership?s ending capital was $543,522,485 at December 31,
2006, an increase of $10,520,143 from ending capital at December
31, 2005, of $533,002,342.
The most significant trading gains of approximately 6.1% were
recorded in the metals markets primarily during the first six
months of the year from long futures positions in copper, nickel,
zinc, and aluminum as base metals prices rallied on strong global
demand and reports of falling inventories. 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 precious metals
increased on continued geopolitical concerns, inflation fears,
and consistent demand from foreign central banks. In addition,
silver prices were pressured higher after news that a silver-
backed Exchange Traded Fund would launch. Gains were extended
during October from long positions in base metals as prices
continued to trend higher amid labor protests in producer
<page> countries and news that inventories had declined more than
expected. Additionally, prices were pressured higher after the
National Bureau of Statistics said that China's industrial
production had increased significantly from a year earlier,
reaffirming expectations that demand from China would stay
strong. Additional gains of approximately 5.6% were recorded
within the global stock index markets from long positions in
European, U.S., and Pacific Rim stock index futures as global
equity prices trended higher throughout 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 and July on positive
performance in the technology sector, speculation that the U.S.
Federal Reserve could be near the end of its interest rate
tightening campaign, and news that Gross Domestic Product in
China had surged to 10.9% in the first six months of the year.
Further gains in the global stock index futures markets were
experienced during September from long positions in European
equity index futures as prices were supported higher on merger
and acquisition activity and solid corporate earnings. During
the fourth quarter, further gains were recorded from long
positions in U.S., European, and Pacific Rim equity index futures
as prices continued to move higher amid the U.S. Federal
Reserve?s decision to hold interest rates steady, consistent
merger and acquisition activity, and news of the world?s largest
<page> initial public offering in China. Smaller gains of
approximately 1.3% were experienced within the global interest
rates sector, primarily during March and April, from short
positions in U.S. and European 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 and the
European Union might rise in order to combat inflation. U.S.
fixed-income futures continued to move lower into the second
quarter following the release of consistently strong U.S.
economic data resulting in further gains from short positions.
Finally, during November, gains were recorded from long positions
in U.S. fixed-income futures as prices moved higher on new
concerns of a slowing U.S. economy after reports showed an
increase in jobless claims, while consumer sentiment unexpectedly
weakened. A portion of the Partnership?s overall gains for the
year was offset by losses of approximately 1.7% in the
agricultural markets from positions in wheat, soybeans, and cocoa
futures. Long positions in wheat futures incurred losses as
prices fell in March, April, and June on forecasts for favorable
weather in U.S. wheat-growing regions, while short futures
positions in soybeans recorded losses as prices moved higher in
March on speculative buying and increased demand. During the
third quarter, losses were incurred primarily during July from
long futures positions in wheat and soybean oil as prices <page>
decreased on forecasts of improved weather conditions
across the growing regions of the U.S. Additional losses were
incurred during July from long positions in cocoa futures as
prices reversed lower on news from the International Cocoa
Organization that global supplies were still adequate to meet
demand. Further losses in the agricultural markets were
experienced during October, November, and December from both
short and long positions in the soybean complex as prices moved
without consistent direction due to conflicting news regarding
supply and demand. Smaller losses of approximately 1.1% were
incurred within the energy markets throughout the year from
futures positions in crude oil and its related products, as well
as in natural gas. 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, and mild weather in the U.S. Northeast. Further losses
were recorded during March from short futures positions in crude
oil and its related products as prices reversed higher early in
the month on supply fears. During 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
inventories. Further losses were incurred from short positions
in natural gas as prices moved higher on fears of a possible
supply shortage. During June, newly established long positions
<page> in natural gas futures recorded losses as prices reversed
lower on reports of a supply surplus and fears of a slowing
global economy. During July and August, losses were also
experienced from long futures positions in crude oil and its
related products as prices moved lower after weaker than expected
U.S. economic data led investors to believe that energy demand
would be negatively affected and the U.S. Department of Labor
reported an unexpected climb in domestic gasoline supplies. In
addition, prices were pressured lower after news of an official
cease-fire between Israel and Hezbollah militants in Lebanon and
news that OPEC had reduced its 2006 oil demand growth forecast.
Finally, during November, losses were incurred from newly
established short positions in crude oil futures and its related
products as prices moved higher amid concern over OPEC's
production cut after the U.S. Department of Energy reported a
sharp fall in domestic inventories.
The Partnership recorded total trading results including interest
income totaling $23,039,815 and expenses totaling $52,254,328,
resulting in a net loss of $29,214,513 for the year ended December
31, 2005. The Partnership?s net asset value per Unit decreased
from $28.88 at December 31, 2004, to $27.45 at December 31, 2005.
<page> Total redemptions and subscriptions for the year were
$115,415,285 and $92,326,015, respectively, and the Partnership?s
ending capital was $533,002,342 at December 31, 2005, a decrease of
$52,303,783 from ending capital at December 31, 2004, of
$585,306,125.
The most significant trading losses of approximately 5.5% were
recorded in the currency markets during the first and third
quarters, as well as during December, from positions in foreign
currencies versus the U.S. dollar. During January, long positions
in the euro versus the U.S. dollar incurred losses after the U.S.
dollar?s value reversed sharply higher amid conflicting economic
data, improvements in U.S. trade deficit numbers, and speculation
for higher U.S. interest rates. The U.S. dollar?s value also
advanced in response to expectations that the Chinese government
would announce postponement of Chinese yuan re-valuation for the
foreseeable future. Additional losses were recorded during
February from short positions in the euro versus the U.S. dollar as
the U.S. dollar weakened in response to concern for the
considerable U.S. Current-Account deficit expressed by U.S.
Federal Reserve Chairman Alan Greenspan. The value of the U.S.
dollar was further weakened during the remainder of February by a
larger than expected drop in January leading economic indicators
and news that South Korea?s Central Bank would be reducing its U.S.
dollar currency reserves. Long European currency positions
<page> versus the U.S. dollar also recorded losses during March
after the value of the U.S. dollar reversed sharply higher
benefiting from higher U.S. interest rates and consumer prices.
During August, long U.S. dollar positions against the British pound
and euro resulted in losses as the value of the U.S. dollar
declined amid higher crude oil prices, lower durable goods orders,
the U.S. trade imbalance, and economic warnings from U.S. Federal
Reserve Chairman Alan Greenspan. During December, the largest
losses were incurred from long U.S. dollar positions versus the
euro after the euro?s value increased during mid-month on the
possibility that the European Central Bank would raise interest
rates in 2006. Additional losses resulted from long U.S. dollar
positions versus the South African rand and both the Australian and
the New Zealand dollars as their values reversed higher with gold
prices. Sector losses also stemmed from short U.S. dollar
positions against the British pound. Partnership losses of
approximately 0.9% were recorded in the global interest rate
markets primarily during the third quarter from long positions in
U.S. interest rate futures. During July, long positions
experienced losses as prices declined following a rise in interest
rates and after the U.S. Labor Department released its June
employment report. During September, long positions incurred
additional losses as prices weakened after it was revealed that
Hurricane Katrina?s economic impact was not significant enough to
deter the U.S. Federal Reserve from its policy of raising interest
<page> rates. Smaller Partnership losses of approximately 0.6%
were incurred in the agricultural markets primarily during the
second and third quarters from long futures positions in wheat and
corn. During April, long futures positions in wheat resulted in
losses as prices fell in response to favorable weather in growing
regions and reduced foreign demand. During July and August, long
positions in corn futures experienced losses after prices weakened
in response to higher silo rates and forecasts for supply
increases. A portion of the Partnership?s overall losses for the
year was offset by gains of approximately 4.4% established in the
global stock index markets during the third and fourth quarters
from positions in Japanese and European stock index futures.
During July, long positions in Pacific Rim and European stock index
futures benefited after positive economic
data out of the U.S. and Japan pushed global equity prices higher.
Prices continued to strengthen after China reformed its U.S. dollar
currency peg policy. Strong corporate earnings out of the
European Union, Japan, and the U.S. resulted in optimistic investor
sentiment and pushed prices further. During September, long
positions in Japanese stock index futures experienced gains as
prices increased on positive comments from Bank of Japan
Governor Toshihiko Fukui, who said the Japanese economy was in the
process of emerging from a soft patch. Additional sector gains
resulted from long positions in European stock index futures as oil
prices declined and investors embraced signs that the global
<page> economy could move forward despite Hurricane Katrina's
devastation of the U.S. Gulf Coast. During the fourth quarter,
long positions in Japanese and European stock index futures
supplied gains as prices increased in response to falling energy
prices, strong corporate earnings, and positive economic data out
of the U.S. European stock markets also found support from the
possibility of an end to U.S. interest rate increases. Partnership
gains of approximately 3.3% were recorded in metals during the
third and fourth quarters from long futures positions in copper,
aluminum, and zinc as prices strengthened amid supply tightness and
strong demand from China, India, and the Middle East. In the energy
markets, gains of approximately 1.0% were achieved primarily during
August from long futures positions in natural gas and crude oil and
its related products as prices rose on supply and demand concerns.
After Hurricane Katrina struck the Gulf of Mexico, prices advanced
further to touch record highs.
The Partnership recorded total trading results including interest
income totaling $33,923,907 and expenses totaling $57,235,807,
resulting in a net loss of $23,311,900 for the year ended December
31, 2004. The Partnership?s net asset value per Unit decreased
from $30.31 at December 31, 2003, to $28.88 at December 31, 2004.
Total redemptions and subscriptions for the year were $43,132,131
and $210,227,672, respectively, and the Partnership?s ending
capital was $585,306,125 at December 31, 2004, an increase of
<page>
$143,783,641 from ending capital at December 31, 2003, of
$441,522,484.
The most significant trading gains of approximately 4.7% were
recorded in the energy markets, primarily during February, May,
throughout the third quarter, and in October, from long futures
positions in crude oil and its related products as prices advanced
upwards amid concerns for market supply, falling inventory levels,
and heavy market demand. Additional Partnership gains of
approximately 1.7% achieved in the agricultural markets, primarily
during the first quarter, resulted from long futures positions in
corn, soybeans, and soybean-related products as prices for these
commodities finished higher amid strong, steady demand from Asia.
In the metals markets, gains of approximately 1.5% were recorded
primarily during the first quarter from long futures positions in
base metals as prices moved higher in response to increased demand
from China coupled with a weaker U.S. dollar. Long futures
positions in industrial metals held during October were also
profitable due to the drop in the U.S. dollar prompted by the
investment community?s perception that the Bush Administration
would not take steps to stem the U.S. dollar?s decline. Relatively
smaller Partnership gains of approximately 0.8%
resulted from trading in the currency markets, primarily during
October and November. Long positions in the euro and Swiss franc
versus the U.S. dollar benefited from a declining U.S. dollar
<page> trend triggered by prospects for lower U.S. interest rates,
higher oil prices, concern for the growing U.S. Current-Account
deficit, and beliefs that the Bush Administration would not act to
curb the decline in the U.S. dollar. A portion of the
Partnership?s overall gains for the year was offset by losses of
approximately 2.5% incurred in the global interest rate sector,
particularly during the second and third quarters, from positions
in U.S. and Australian interest rate futures. During January, long
positions in U.S. interest rate futures experienced losses as
prices declined following comments from the U.S. Federal Reserve
concerning a shift in the U.S. Federal Reserve?s interest rate
policy. Short positions in Australian interest rate futures
deepened sector losses as prices reversed higher during the final
week of January. During April, long U.S. interest rate futures
positions incurred losses as prices tumbled following the release
of stronger than expected U.S. jobs data. During May, short
positions in global bond futures experienced losses as prices moved
higher during the latter half of the month due to uncertainty in
global equity prices, weaker than expected economic data, stronger
energy prices, and geopolitical concerns. During June, short
positions experienced losses as prices rallied on weaker than
expected economic reports and expectations that the
U.S. Federal Reserve would not aggressively tighten U.S. interest
rates. During July, short positions in U.S. interest rate futures
recorded losses as prices moved higher after the release of
<page> disappointing U.S. unemployment data. Additional losses
were incurred from newly established long U.S. interest rate
futures positions after prices moved lower following U.S. Federal
Reserve Chairman Alan Greenspan?s upbeat assessment of the U.S.
economy.
During September, long positions in U.S. interest rate futures
resulted in losses as prices declined due to expectations for
rising U.S. interest rates prompted by the release of positive U.S.
economic data. Smaller Partnership losses of approximately
0.4% resulted from trading in the global stock index sector,
primarily during the second and third quarters, via positions in
Asian equity index futures. During the second quarter, long
positions in these markets incurred losses as global equity prices
were negatively impacted by geopolitical concerns and expanding
energy prices. Newly established short Asian equity index
positions experienced losses as prices rebounded during the second
quarter amid a slight pullback in oil prices and strong earnings
from technology companies. During the third quarter, long Asian
equity index positions experienced losses as prices reversed lower
due to the release of disappointing U.S. employment data, surging
energy prices, and new warnings concerning potential terrorist
attacks.
<page> For an analysis of unrealized gains and (losses) by contract
type and a further description of 2006 trading results, refer to
the Partnership?s Annual Report to Limited Partners for the year
ended December 31, 2006, which is incorporated by reference to
Exhibit 13.01 of this Form 10-K.
The Partnership's gains and losses are allocated among its partners
for income tax purposes.
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.
Market Risk.
The Partnership is a party to financial instruments with elements
of off-balance sheet market and credit risk. The Partnership
trades futures contracts, options on futures contracts, and
forward contracts on physical commodities and other commodity
interests, including, but not limited to, foreign currencies,
financial instruments, metals, energy, and agricultural products.
In entering into these contracts, the Partnership is subject to
the market risk that such contracts may be significantly
influenced by market conditions, such as interest rate
volatility, resulting in such contracts being less valuable. If
<page> the markets should move against all of the positions held
by the Partnership at the same time, and the Trading Advisors
were unable to offset positions of the Partnership, the
Partnership could lose all of its assets and the limited partners
would realize a 100% loss.
In addition to the Trading Advisors? internal controls, the Trading
Advisors must comply with the Partnership?s trading policies that
include standards for liquidity and leverage that must be
maintained. The Trading Advisors and Demeter monitor the
Partnership's trading activities to ensure compliance with the
trading policies and Demeter can require the Trading Advisors to
modify positions of the Partnership if Demeter believes they
violate the Partnership's trading policies.
Credit Risk.
In addition to market risk, in entering into futures, forward, and
options contracts, there is a credit risk to the Partnership that
the counterparty on a contract will not be able to meet its
obligations to the Partnership. The ultimate counterparty or
guarantor of the Partnership for futures, forward, and options
contracts traded in the United States and most foreign exchanges on
which the Partnership trades is the clearinghouse associated with
such exchange. In general, a clearinghouse is backed by the
membership of the exchange and will act in the event of non-
performance by one of its members or one of its member?s
<page> customers, which should significantly reduce this credit
risk.
There is no assurance that a clearinghouse, exchange, or other
exchange member will meet its obligations to the Partnership, and
Demeter and the commodity brokers will not indemnify the
Partnership against a default by such parties. Further, the law is
unclear as to whether a commodity broker has any obligation to
protect its customers from loss in the event of an exchange or
clearinghouse defaulting on trades affected for the broker?s
customers. In cases where the Partnership trades off-exchange
forward contracts with a counterparty, the sole recourse of the
Partnership will be the forward contract?s counterparty.
Demeter deals with these credit risks of the Partnership in
several ways. First, Demeter monitors the Partnership?s credit
exposure to each exchange on a daily basis. The commodity
brokers inform the Partnership, as with all their customers, of
the Partnership?s net margin requirements for all its existing
open positions, and Demeter has installed a system which permits
it to monitor the Partnership?s potential net credit exposure,
exchange by exchange, by adding the unrealized trading gains on
each exchange, if any, to the Partnership?s margin liability
thereon.
<page> Second, the Partnership?s trading policies limit the amount
of its Net Assets that can be committed at any given time to
futures contracts and require a minimum amount of diversification
in the Partnership?s trading, usually over several different
products and exchanges. Historically, the Partnership?s exposure
to any one exchange has typically amounted to only a small
percentage of its total Net Assets and on those relatively few
occasions where the Partnership?s credit exposure climbs above such
level, Demeter deals with the situation on a case by case basis,
carefully weighing whether the increased level of credit exposure
remains appropriate. Material changes to the trading policies may
be made only with the prior written approval of the limited
partners owning more than 50% of Units then outstanding.
Third, with respect to forward contract trading, the Partnership
trades with only those counterparties which Demeter, together with
Morgan Stanley DW, have determined to be creditworthy. The
Partnership presently deals with MS&Co. as the sole counterparty on
forward contracts.
For additional information, see the ?Financial Instruments?
section under ?Notes to Financial Statements? in the
Partnership?s Annual Report to Limited Partners for the year
ended December 31, 2006, which is incorporated by reference to
Exhibit 13.01 of this Form 10-K.
<page> Inflation has not been a major factor in the Partnership?s
operations.
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
is effective for fiscal years beginning after December 15, 2006.
The impact to the Partnership?s Financial Statements, if any, is
currently being assessed.
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.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, ?Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements? (?SAB No. 108?) to provide guidance
on how the effects of the carryover or reversal of prior year
<page> unrecorded misstatements should be considered in quantifying
a current year misstatement. SAB No. 108 requires a company to
apply an approach that considers the amount by which the current
year income statement is misstated (?rollover approach?) and an
approach that considers the cumulative amount by which the current
year balance sheet is misstated (?iron-curtain approach?). Prior
to the issuance of SAB No. 108, many companies applied either the
rollover or iron-curtain approach for purposes of assessing
materiality of misstatements. SAB No. 108 is effective for the
Partnership as of January 1, 2007. Upon adoption, SAB No. 108
allows a one-time cumulative effect adjustment against Partners?
Capital for those prior year misstatements that were not material
under the Partnership?s prior approach, but are deemed material
under the SAB No. 108 approach. Demeter does not expect the
adoption of SAB No. 108 to have a material impact on the
Partnership?s Financial Statements.
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures, forwards, and options. The
market-sensitive instruments held by the Partnership are acquired
for speculative trading purposes only and, as a result, all or
substantially all of the Partnership?s assets are at risk of
trading loss. Unlike an operating company, the risk of market-
sensitive instruments is inherent to the primary business
activity of the Partnership.
<page> The futures, forwards, and options traded by the Partnership
involve varying degrees of related market risk. Market risk is
often dependent upon changes in the level or volatility of interest
rates, exchange rates, and prices of financial instruments and
commodities, factors that result in frequent changes in the fair
value of the Partnership?s open positions, and consequently in its
earnings, whether realized or unrealized, and cash flow. Gains and
losses on open positions of exchange-traded futures, 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 Morgan Stanley DW
for the benefit of MS&Co.
The Partnership?s total market risk may increase or decrease as
it is influenced by a wide variety of factors, including, but not
limited to, the diversification among the Partnership?s open
positions, the volatility present within the markets, and the
liquidity of the markets.
<page> The face value of the market sector instruments held by
the Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership 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 Partner-
ship?s market risk exposures contain ?forward-looking statements?
within the meaning of the safe harbor from civil liability
<page> 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 risks including equity and commodity prices,
interest rates, foreign exchange rates, and correlation among these
variables. The hypothetical changes in portfolio value are
based on daily percentage changes observed in key market indices or
other market factors (?market risk factors?) to which the portfolio
is sensitive. The one-day 99% confidence level of the
<page> 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. Please
<page> 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 December 31, 2006 and 2005.
At December 31, 2006 and 2005, the Partnership?s total
capitalization was approximately $544 million and $533 million,
respectively.
Primary Market December 31, 2006 December 31, 2005
Risk Category Value at Risk Value at Risk
Equity (1.95)% (1.95)%
Currency (1.27) (0.82)
Interest Rate (0.83) (0.45)
Commodity (0.65) (0.87)
Aggregate Value at Risk (2.40)% (2.86)%
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.
<page> 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 December 31, 2006, VaR set forth
above by presenting the Partnership?s high, low, and average VaR,
as a percentage of total Net Assets for the four quarter-end
reporting periods from January 1, 2006, through December 31,
2006.
Primary Market Risk Category High Low Average
Equity (1.95)% (0.39)% (1.35)%
Currency (1.27) (0.55) (0.86)
Interest Rate (1.70) (0.83) (1.41)
Commodity (0.75) (0.49) (0.61)
Aggregate Value at Risk (2.96)% (1.73)% (2.24)%
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.
<page> However, VaR risk measures should be viewed in light of the
methodology?s limitations, which include, but may not be limited to
the following:
* past changes in market risk factors will not always result
in accurate predictions of the distributions and
correlations of future market movements;
* changes in portfolio value caused by market movements may
differ from those of the VaR model;
* VaR results reflect past market fluctuations applied to
current trading positions while future risk depends on
future positions;
* VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
* the historical market risk factor data used for VaR
estimation may provide only limited insight into losses that
could be incurred under certain unusual market movements.
In addition, the VaR tables above, as well as the past
performance of the Partnership, give no indication of the
Partnership?s potential ?risk of ruin?.
The VaR tables provided present the results of the Partnership?s
VaR for each of the Partnership?s market risk exposures and on an
aggregate basis at December 31, 2005, and for the four quarter-
<page> end reporting periods during calendar year 2006. VaR is
not necessarily representative of the Partnership?s historic
risk, nor should it be used to predict the Partnership?s future
financial performance or its ability to manage or monitor risk.
There can be no assurance that the Partnership?s actual losses on
a particular day will not exceed the VaR amounts indicated above
or that such losses will not occur more than once in 100 trading
days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances. These balances and any market risk they may represent
are immaterial.
The Partnership also maintains a substantial portion of its
available assets in cash at Morgan Stanley DW; as of December 31,
2006, 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,
<page> optionality, and multiplier features of the Partnership?s
market-sensitive instruments, in relation to the Partnership?s
Net Assets.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership?s
market risk exposures ? except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures ? constitute
forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act.
The Partnership?s primary market risk exposures, as well as the
strategies used and to be used by Demeter and the Trading Advisors
for managing such exposures, are subject to numerous uncertainties,
contingencies and risks, any one of which could cause the actual
results of the Partnership?s risk controls to differ materially
from the objectives of such strategies. Government interventions,
defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx of
new market participants, increased regulation, and many other
factors could result in material losses, as well as in material
changes to the risk exposures and the risk management strategies of
the Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
<page> The following were the primary trading risk exposures of
the Partnership at December 31, 2006, by market sector. It may
be anticipated, however, that these market exposures will vary
materially over time.
Equity. The largest market exposure of the Partnership at
December 31, 2006, 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 Partner-ship?s primary market exposures were to the
DAX (Germany), S&P 500 (U.S.), NIKKEI 225 (Japan), Euro Stoxx 50
(Europe), NASDAQ 100 (U.S.), TOPIX (Japan), Hang Seng (China),
CAC 40 (France), FTSE 100 (United Kingdom), S&P/MIB (Italy), Dow
Jones (U.S.), TAIWAN (Taiwan), SPI 200 (Australia), IBEX 35
(Spain), and Canadian S&P 60 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.
Currency. The second largest market exposure of the Partnership
at December 31, 2006, was to the currency sector. The Partner-
ship?s currency market exposure was to exchange rate
<page> 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
Partner-ship trades a large number of currencies, including
cross-rates ? i.e., positions between two currencies other than
the U.S. dollar. At December 31, 2006, the Partnership?s major
exposures were to British pounds, Japanese yen, euros, Norwegian
krone, Swiss franc, Australian dollar, and Canadian 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.
Interest Rate. At December 31, 2006, the Partnership had market
exposure to the global interest rate sector. Exposure was
primarily spread across U.S., European, Japanese, Canadian, and
Australian interest rate sectors. Interest rate movements
directly affect the price of the sovereign bond futures positions
held by the Partnership and indirectly affect the value of its
stock index and currency positions. Interest rate movements in
one country, as well as relative interest rate movements between
countries, materially impact the Partnership?s profitability.
The Partnership?s interest rate exposure is generally to interest
<page> 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 rates will remain the primary
interest rate exposure of the Partnership for the foreseeable
future. The speculative futures positions held by the
Partnership may range from short to long-term instruments.
Consequently, changes in short, medium, or long-term interest
rates may have an effect on the Partnership.
Commodity.
Energy. The third largest market exposure of the
Partnership at December 31, 2006, was 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 movements in these markets result from
geopolitical developments, particularly in the Middle East,
as well as weather patterns and other economic fundamentals.
Significant profits and losses, which have been experienced
in the past, are expected to continue to be experienced in
the future. Natural gas has exhibited volatility in prices
resulting from weather patterns and supply and demand
factors and will likely continue in this choppy pattern.
<page> Metals. At December 31, 2006, the Partnership had
market exposure in the metals sector. The Partnership's
metals exposure was to fluctuations in the price of base
metals, such as aluminum, copper, nickel, and zinc and
precious metals, such as gold and palladium. 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
develop, and Demeter anticipates that the Partnership will
continue to do so.
Soft Commodities and Agriculturals. At December 31, 2006,
the Partnership had market exposure to the markets that
comprise these sectors. Most of the exposure was to the
coffee, soybean oil, sugar, soybeans, corn, live cattle,
cocoa, soybean meal, cotton, wheat, pork bellies, and lean
hogs markets. Supply and demand inequalities, severe
weather disruptions, and market expectations affect price
movements in these markets.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at December 31, 2006:
<page> Foreign Currency Balances. The Partnership?s primary
foreign currency balances at December 31, 2006, were in
euros, Hong Kong dollars, Japanese yen, British pounds,
Swiss francs, Canadian dollars, Australian dollars, and
Norwegian krone. The Partnership controls the non-trading
risk of foreign currency balances by regularly converting
them back into U.S. dollars upon liquidation of their
respective positions.
Qualitative Disclosure Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to
manage the risk of the Partnership?s open positions in
essentially the same manner in all market categories traded.
Demeter attempts to manage market exposure by diversifying the
Partnership?s assets among different Trading Advisors in a multi-
advisor Partnership, each of whose strategies focus on different
market sectors and trading approaches, and by monitoring the
performance of the Trading Advisors daily. In addition, the
Trading Advisors establish diversification guidelines, often set
in terms of the maximum margin to be committed to positions in
any one market sector or market-sensitive instrument.
Demeter monitors and controls the risk of the Partnership?s non-
trading instrument, cash. Cash is the only Partnership
investment directed by Demeter, rather than the Trading Advisors.
<page>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are incorporated by reference to the
Partnership's Annual Report, which is filed as Exhibit 13.01
hereto.
Supplementary data specified by Item 302 of Regulation S-K:
Summary of Quarterly Results (Unaudited)
Quarter Total Trading Results Net Net Income/
Ended including interest income Income/(Loss) (Loss) Per Unit
2006
March 31 $ 31,802,353 $ 19,972,754 $ 1.03
June 30 36,753,206 24,144,618 1.26
September 30 (18,019,116) (30,155,561) (1.59)
December 31 28,866,324 17,155,561 0.91
Total $ 79,402,767 $ 31,117,372 $ 1.61
2005
March 31 $(35,305,346) $ (49,599,774) $ (2.43)
June 30 15,493,277 1,766,194 0.07
September 30 19,873,375 7,636,287 0.37
December 31 22,978,509 10,982,780 0.56
Total $ 23,039,815 $ (29,214,513) $ (1.43)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACOUNTING AND FINANCIAL DISCLOSURE
None.
<page>
Item 9A. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this annual report, the
President and Chief Financial Officer of Demeter, the
general partner of the Partnership, have evaluated the
effectiveness of the Partnership?s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the Exchange Act), and have judged such controls and
procedures to be effective.
(b) There have been no material changes during the period covered
by this annual report in the Partnership?s internal control
over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act) or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.
Management?s Report on Internal Control Over Financial Reporting
Demeter is responsible for the management of the Partnership.
Management of Demeter (?Management?) is responsible for
establishing and maintaining adequate internal control over
financial reporting. The internal control over financial
reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of Financial
Statements for external purposes in accordance with generally
accepted accounting principles.
<page>
The Partnership?s internal control over financial reporting
includes those policies and procedures that:
- - 49 -
* Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Partnership;
* Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of Financial Statements in
accordance with generally accepted accounting principles, and
that the Partnership?s transactions are being made only in
accordance with authorizations of Management and directors;
and
* Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
the Partnership?s assets that could have a material effect on
the Financial Statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
<page> Management assessed the effectiveness of the Partnership?s
internal control over financial reporting as of December 31,
2006. In making this assessment, Management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework.
Based on our assessment and those criteria, Management believes
that the Partnership maintained effective internal control over
financial reporting as of December 31, 2006.
Deloitte & Touche LLP, the Partnership?s independent registered
public accounting firm, has issued an attestation report on
Management?s assessment of the Partnership?s internal control over
financial reporting and on the effectiveness of the Partnership?s
internal control over financial reporting. This report, which
expresses an unqualified opinion on Management?s assessment and on
the effectiveness of the Partnership?s internal control over
financial reporting, appears under ?Report of Independent
Registered Public Accounting Firm? in the Partnership?s Annual
Report to Limited Partners for the year ended December 31, 2006.
Item 9B. OTHER INFORMATION
None.
<page> PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
There are no directors or executive officers of the Partnership.
The Partnership is managed by Demeter, its general partner.
Directors and Officers of the General Partner
The directors and executive officers of Demeter are as follows:
Effective May 1, 2006, Mr. Walter Davis, age 41, is a Director,
Chairman of the Board of Directors, and President of Demeter. Mr.
Davis is an Executive Director of Morgan Stanley and the Director
of Morgan Stanley?s Managed Futures Department. Prior to joining
Morgan Stanley in 1999, Mr. Davis worked for Chase Manhattan Bank?s
Alternative Investment Group. Throughout his career, Mr. Davis has
been involved with the development, management, and marketing of a
diverse array of commodity pools, hedge funds, and other
alternative investment funds. Mr. Davis received an MBA in Finance
and International Business from the Columbia University Graduate
School of Business in 1992 and a B.A. in Economics from the
University of the South in 1987.
Effective December 5, 2002, Mr. Frank Zafran, age 51, is a Director
of Demeter. Mr. Zafran is a Managing Director of Morgan Stanley
and, in November 2005, was named Managing Director of
<page> Wealth Solutions. Previously, Mr. Zafran was Chief
Administrative Officer of Morgan Stanley?s Client Solutions
Division. Mr. Zafran joined the firm in 1979 and has held various
positions in Corporate Accounting and the Insurance Department,
including Senior Operations Officer ? Insurance Division, until
his appointment in 2000 as Director of Retirement Plan Services,
responsible for all aspects of 401(k) Plan Services, including
marketing, sales, and operations. Mr. Zafran received a B.S.
degree in Accounting from Brooklyn College, New York.
Effective March 31, 2003, Mr. Douglas J. Ketterer, age 41, is a
Director of Demeter. Mr. Ketterer is a Managing Director of Morgan
Stanley and is head of Morgan Stanley?s Managed Money Group. The
Managed Money Group is comprised of a number of departments
(including the Alternative Investments Group, Consulting Services
Group, and Mutual Fund Department) which offer products and
services through Morgan Stanley?s Global Wealth Management Group.
Mr. Ketterer joined Morgan Stanley in 1990 and has served in many
roles in the corporate finance/investment banking, asset
management, and distribution divisions of the firm. Mr. Ketterer
received his MBA from New York University?s Leonard N. Stern School
of Business and his B.S. in Finance from the University at Albany?s
School of Business.
Effective May 1, 2005, Mr. Harry Handler, age 48, is a Director of
Demeter. Mr. Handler serves as an Executive Director of Morgan
<page> Stanley?s Global Wealth Management Group. Mr. Handler works
in Morgan Stanley?s Capital Markets Division as Equity Risk
Officer. Additionally, Mr. Handler also serves as Chairman of the
Morgan Stanley DW Best Execution Committee and manages the Global
Wealth Management Group?s Stock Lending business. In his prior
position, Mr. Handler was a Systems Director in Information
Technology, in charge of Equity and Fixed Income Trading Systems
along with the Special Products, such as Unit Trusts, Managed
Futures, and Annuities. Prior to his transfer to the Information
Technology Area, Mr. Handler managed the Foreign Currency and
Precious Metals Trading Desk for Dean Witter, a predecessor company
to Morgan Stanley. He also held various positions in the Futures
Division where he helped to build the Precious Metals Trading
Operation of Dean Witter. Before joining Dean Witter, Mr. Handler
worked at Mocatta Metals as an Assistant to the Chairman. His roles
at Mocatta Metals included stints on the Futures Order Entry Desk
and the Commodities Exchange Trading Floor. Additional work
included building a computerized Futures Trading System and writing
a history of the company. Mr. Handler graduated on the Dean?s List
from the University of Wisconsin-Madison with a B.A. degree and a
double major in History and Political Science.
Effective May 1, 2006, Mr. Richard D. Gueren, age 45, is a Director
of Demeter. Mr. Gueren is Executive Director, Retail
Options and Transactional Futures at Morgan Stanley. He is
responsible for marketing the options product to the firm?s
<page> approximately 400 offices and 8,000 Financial Advisors. Mr.
Gueren first joined Dean Witter in August 1986, as a member of the
Options Strategy/Trading team. In 1997, Dean Witter merged with
Morgan Stanley. Mr. Gueren is the firm?s Senior Registered Options
Principal. He is a member of several Morgan Stanley committees,
including the firm?s National Error Committee and Best Execution
Committee. He is an advisory member to the Credit & Risk
Committee. Mr. Gueren is also an active member of several exchange
and industry committees, including the Retail Advisory committees
for the Chicago Board Options Exchange, the American Stock
Exchanges, the Philadelphia Stock Exchange, the Pacific Stock
Exchange, and the International Securities Exchange. Mr. Gueren is
also an Industry Arbitrator for the NASD and has been seated on
numerous industry cases over the past eight years. He has also been
asked to testify as an expert witness regarding
options on numerous occasions. Mr. Gueren holds a Bachelor of
Science in Economics from the University of Hartford.
Effective May 1, 2006, Mr. Michael P. McGrath, age 38, is a
Director of Demeter. Mr. McGrath is a Managing Director and the
Director of Product Development for Morgan Stanley?s Global Wealth
Management Group. In this role, Mr. McGrath oversees the flow of
new products and services being offered through Global Wealth
Management in the United States. He coordinates the firm?s New
Product Committee as well as being a voting member on the
committee. He is also a voting member of the Global Wealth
<page> Management Alternative Investments Due Diligence Committee,
the Global Wealth Management Insurance Due Diligence Committee, and
the Portfolio Architect Oversight Committee, and is a member of the
Global Advisor Research Due Diligence Committee. Mr. McGrath
joined Morgan Stanley in 2004, after three years with Nuveen
Investments, a publicly traded investment management company
headquartered in Chicago, Illinois. At Nuveen, Mr. McGrath served
as a Managing Director and oversaw the development of alternative
investment products catering to the ultra-high net worth investor.
Mr. McGrath received his BA degree from Saint Peters College in
1990 and his MBA in Finance from New York University in 1996.
Effective May 1, 2006, Mr. Andrew Saperstein, age 39, is a Director
of Demeter. Mr. Saperstein is Chief Operating Officer of
National Sales for Morgan Stanley?s Global Wealth Management Group,
and serves as a member of the group?s Executive Committee.
One of the largest businesses of its kind in the world with $640
billion in client assets, the Global Wealth Management Group
provides a range of wealth management products and services to
individuals, businesses, and institutions. These include brokerage
and investment advisory services, financial and wealth planning,
credit and lending, banking and cash management, annuities and
insurance, retirement and trust. Prior to joining Morgan Stanley
in March 2006, Mr. Saperstein was with Merrill Lynch as First Vice
President and Chief Operating Officer of the
<page>
Direct Division, and served as a member of the Global Private
Client Executive Committee. In this capacity, he was responsible
for the oversight of the online brokerage unit and the Financial
Advisory Center, including the Retail Client Relationship
Management group, the Services, Operations and Technology group,
the Client Acquisition team, and the Business Development and
Analysis team. Mr. Saperstein joined Merrill Lynch in November
2001. Prior to Merrill Lynch, Mr. Saperstein was a partner in the
Financial Institutions group of McKinsey & Co. Additionally, he
served as co-leader of both the North American Asset Management and
Brokerage Practice and North American Recruiting. Mr. Saperstein
graduated cum laude from Harvard Law School and summa cum laude
from the Wharton School/College of Arts and Sciences at the
University of Pennsylvania with a dual degree in Economics and
Finance.
Effective September 22, 2006, Mr. Jacques Chappuis, age 37, is a
Director of Demeter. Mr. Chappuis is a Managing Director of
Morgan Stanley and Head of Alternative Investments of Morgan
Stanley?s Global Wealth Management Group. Prior to joining
Morgan Stanley in 2006, Mr. Chappuis was Head of Alternative
Investments for Citigroup?s Global Wealth Management Group and
prior to that, a Managing Director at Citigroup Alternative
Investments. Before joining Citigroup, Mr. Chappuis was a
<page> consultant at the Boston Consulting Group, where he
focused on the financial services sector, and a corporate finance
Associate at Bankers Trust Company. Mr. Chappuis received an MBA
in Finance, with honors, from the Columbia University Graduate
School of Business in 1998 and a B.A. in finance from Tulane
University in 1991.
Effective November 6, 2006, Mr. Lee Horwitz, age 55, is the Chief
Financial Officer of Demeter and a Principal of Demeter. Mr.
Horwitz currently serves as an Executive Director within Morgan
Stanley?s Financial Control Group. Mr. Horwitz joined Morgan
Stanley in March 1984 and has held a variety of positions
throughout Morgan Stanley?s organization during his tenure. Mr.
Horwitz received a B.A. degree from Queens College and an MBA
from Rutgers University. Mr. Horwitz is a Certified Public
Accountant.
All of the foregoing directors have indefinite terms.
Effective May 1, 2006, Mr. Jeffrey A. Rothman resigned his position
as a Director of Demeter.
Effective May 1, 2006, Mr. Richard A. Beech resigned his position
as a Director of Demeter.
<page> Effective May 1, 2006, Ms. Shelley Hanan resigned her
position as a Director of Demeter.
Effective November 6, 2006, Mr. Kevin Perry resigned his position
as Chief Financial Officer of Demeter.
The Audit Committee
The Partnership is operated by its general partner, Demeter, and
has no audit committee and, thus, no audit committee financial
expert.
Code of Ethics
The Partnership has not adopted a code of ethics that applies to
the Partnership?s principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions. The Partnership is operated by its
general partner, Demeter. The President, Chief Financial Officer,
and each member of the Board of Directors of Demeter are employees
of Morgan Stanley and are subject to the code of ethics adopted by
Morgan Stanley, the text of which can be viewed on Morgan Stanley?s
website at http://www.morganstanley.com/ourcommitment/
codeofconduct.html.
<page> Item 11. EXECUTIVE COMPENSATION
The Partnership has no directors and executive officers. As a
limited partnership, the business of the Partnership is managed by
Demeter, which is responsible for the administration of the
business affairs of the Partnership but receives no compensation
for such services.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SECURITY HOLDER MATTERS
(a) Security Ownership of Certain Beneficial Owners - At December
31, 2006, there were no persons known to be beneficial owners of
more than 5 percent of the Units.
(b) Security Ownership of Management - At December 31, 2006,
Demeter owned 201,460.769 Units of general partnership interest,
representing a 1.08 percent interest in the Partnership.
(c) Changes in Control ? None.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Refer to Note 2 - "Related Party Transactions" of "Notes to
Financial Statements", in the accompanying Annual Report to Limited
Partners for the year ended December 31, 2006, which is
<page> incorporated by reference to Exhibit 13.01 of this Form 10-
K. In its capacity as the Partnership's retail commodity broker,
Morgan Stanley DW received commodity brokerage fees (paid and
accrued by the Partnership) of $32,847,913 for the year ended
December 31, 2006.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Morgan Stanley DW, on behalf of the Partnership, pays all
accounting fees. The Partnership reimburses Morgan Stanley DW
through the brokerage fees it pays, as discussed in the Notes to
Financial Statements in the Annual Report to the Limited Partners
for the year ended December 31, 2006.
(1) Audit Fees. The aggregate fees for professional services
rendered by Deloitte & Touche LLP in connection with their audit of
the Partnership?s Financial Statements and review of the Financial
Statements included in the Quarterly Reports on Form 10-Q, audit
of Management?s assessments on the effectiveness of the internal
control over financial reporting, and in connection with statutory
and regulatory filings were approximately $60,928 for the year
ended December 31, 2006, and $61,741 for the year ended December
31, 2005.
(2) Audit-Related Fees. None.
<page>
(3) Tax Fees. The Partnership did not pay Deloitte & Touche LLP
any amounts in 2006 and 2005 for professional services in
connection with tax compliance, tax advice, and tax planning. The
Partnership engaged another unaffiliated professional firm to
provide services in connection with tax compliance, tax advice, and
tax planning.
(4) All Other Fees. None.
Because the Partnership has no audit committee, the Board of
Directors of Demeter, its general partner, functions as the audit
committee with respect to the Partnership. The Board of Directors
of Demeter has not established pre-approval policies and procedures
with respect to the engagement of audit or permitted non-audit
services rendered to the Partnership. Consequently, all audit and
permitted non-audit services provided by Deloitte & Touche LLP that
are borne by Morgan Stanley DW through the brokerage fees paid for
by the Partnership are approved by Morgan Stanley?s Board Audit
Committee and the Board of Directors of Demeter.
<page> PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Listing of Financial Statements
The following Financial Statements and report of independent
registered public accounting firm, all appearing in the
accompanying Annual Report to Limited Partners for the year
ended December 31, 2006 are incorporated by reference to
Exhibit 13.01 of this Form 10-K:
? Report of Deloitte & Touche LLP, independent registered
public accounting firm, for the years ended December 31,
2006, 2005, and 2004.
? Statements of Financial Condition, including the Schedules
of Investments, as of December 31, 2006 and 2005.
? Statements of Operations, Changes in Partners? Capital, and
Cash Flows for the years ended December 31, 2006, 2005, and
2004.
? Notes to Financial Statements.
With the exception of the aforementioned information and the
information incorporated in Items 7, 8, and 13, the Annual
Report to Limited Partners for the year ended December 31, 2006
is not deemed to be filed with this report.
2. Listing of Financial Statements Schedules
No Financial Statement schedules are required to be filed with
this report.
<page>
3. Exhibits
For the exhibits incorporated by reference or filed herewith to
this report, refer to Exhibit Index on Page E-1 to E-4.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MORGAN STANLEY SPECTRUM SELECT L.P.
(Registrant)
BY: Demeter Management Corporation,
General Partner
March 8, 2007 BY: /s/ Walter Davis
Walter Davis,
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Demeter Management Corporation.
BY: /s/ Walter Davis March 8, 2007
Walter Davis, President
/s/ Frank Zafran March 8, 2007
Frank Zafran, Director
/s/ Douglas J. Ketterer March 8, 2007
Douglas J. Ketterer, Director
/s/ Harry Handler March 8, 2007
Harry Handler, Director
/s/ Richard Gueren March 8, 2007
Richard Gueren, Director
/s/ Michael McGrath March 8, 2007
Michael McGrath, Director
/s/ Andrew Saperstein March 8, 2007
Andrew Saperstein, Director
/s/ Jacques Chappuis March 8, 2007
Jacques Chappuis, Director
/s/ Lee Horwitz March 8, 2007
Lee Horwitz, Chief Financial Officer
<page> EXHIBIT INDEX
ITEM
3.01 Form of Amended and Restated Limited Partnership Agreement
of the Partnership, is incorporated by reference to
Exhibit A of the Partnership?s Prospectus, dated May 1,
2006, filed with the Securities and Exchange Commission
pursuant to Rule 424(b)(3) under the Securities Act of
1933 on May 4, 2006 and to pages S-122 ? S-124 of the
Supplement dated January 18, 2007, to that Prospectus,
filed with the Securities and Exchange Commission pursuant
to Rule 424(b)(3) under the Securities Act of 1933 on
January 24, 2007.
3.02 Certificate of Limited Partnership, dated March 19, 1991,
is incorporated by reference to Exhibit 3.02 of the
Partnership?s Registration Statement on Form S-1 (File No.
333-47829) filed with the Securities and Exchange
Commission on March 12, 1998.
3.03 Certificate of Amendment of Certificate of Limited
Partnership, dated April 28, 1998 (changing its name from
Dean Witter Select Futures Fund L.P.), is incorporated by
reference to Exhibit 3.03 of the Partnership's 10-K for
fiscal year ended December 31, 1998 filed with the
Securities and Exchange Commission on March 31, 1999.
3.04 Certificate of Amendment of Certificate of Limited
Partnership, dated April 6, 1999, (changing its name from
Dean Witter Spectrum Select L.P.), is incorporated by
reference to Exhibit 3.03 of the Partnership's
Registration Statement on Form S-1 (File No. 333-68773)
filed with the Securities and Exchange Commission on April
12, 1999.
3.05 Certificate of Amendment of Certificate of Limited
Partnership, dated November 1, 2001 (changing its name
from Morgan Stanley Dean Witter Spectrum Select L.P.), is
incorporated by reference to Exhibit 3.01 of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on November 1, 2001.
10.01 Amended and Restated Management Agreement, dated as of
June 1, 1998, among the Partnership, Demeter, and Rabar
Market Research, Inc. is incorporated by reference to
Exhibit 10.01 of the Partnership's Form 10-K (File No.
0-19511) for fiscal year ended December 31, 1998 filed
with the Securities and Exchange Commission on March 31,
1999.
<page>
10.01(a) Amendment No. 1 to Amended and Restated Management
Agreement among the Partnership, Demeter, and Rabar Market
Research, Inc., dated as of October 3, 2006, is
incorporated by reference to Exhibit 10.01(a) of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on October 10, 2006.
10.02 Amended and Restated Management Agreement, dated as of
June 1, 1998, among the Partnership, Demeter, and EMC
Capital Management, Inc., is incorporated by reference to
Exhibit 10.02 of the Partnership's Form 10-K (File No. 0-
19511) for fiscal year ended December 31, 1998 filed with
the Securities and Exchange Commission on March 31, 1999.
10.02(a) Amendment No. 1 to Amended and Restated Management
Agreement among the Partnership, Demeter, and EMC Capital
Management, Inc., dated as of October 3, 2006, is
incorporated by reference to Exhibit 10.02(a) of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on October 10, 2006.
10.03 Amended and Restated Management Agreement, dated as of
June 1, 1998, among the Partnership, Demeter, and Sunrise
Capital Management, Inc., is incorporated by reference to
Exhibit 10.03 of the Partnership's Form 10-K (File No.
0-19511) for fiscal year ended December 31, 1998 filed
with the Securities and Exchange Commission on March 31,
1999.
10.04 Management Agreement, dated as of January 1, 2004, among
the Partnership, Demeter, and Graham Capital Management,
L.P., is incorporated by reference to Exhibit 10.04 of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on March 10, 2004.
10.07 Form of Subscription and Exchange Agreement and Power of
Attorney to be executed by purchasers of Units is
incorporated by reference to Exhibit B of the
Partnership?s Prospectus, dated May 1, 2006, filed with
the Securities and Exchange Commission pursuant to Rule
424(b)(3) under the Securities Act of 1933 on May 4, 2006.
<page>
10.10 Amended and Restated Escrow Agreement, among the
Partnership, Morgan Stanley Spectrum Strategic L.P.,
Morgan Stanley Spectrum Global Balanced L.P., Morgan
Stanley Spectrum Technical L.P., Morgan Stanley Spectrum
Currency L.P., Morgan Stanley Spectrum Commodity L.P.,
Morgan Stanley DW, and The Chase Manhattan Bank as escrow
agent, dated March 10, 2000, is incorporated by reference
to Exhibit 10.10 of the Partnership's Registration
Statement on Form S-1 (File No. 333-90467) filed with the
Securities and Exchange Commission on November 5, 2001.
10.11 Form of Subscription Agreement Update Form to be executed
by purchasers of Units is incorporated by reference to
Exhibit C of the Partnership?s Prospectus, dated May 1,
2006, filed with the Securities and Exchange Commission
pursuant to Rule 424(b)(3) under the Securities Act of
1933 on May 4, 2006.
10.12 Amended and Restated Customer Agreement between the
Partnership and Morgan Stanley DW, dated as of October 16,
2000, is incorporated by reference to Exhibit 10.01 of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on November 1, 2001.
10.12(a)Amendment No. 1 to the Amended and Restated Customer
Agreement between the Partnership and Morgan Stanley DW
Inc., dated July 1, 2005, is incorporated by reference to
Exhibit 10.12(a) of the Partnership?s Form 10-Q (File No.
0-19511) filed with the Securities and Exchange Commission
on August 10, 2005.
10.13 Commodity Futures Customer Agreement between MS&Co. and
the Partnership, and acknowledged and agreed to by Morgan
Stanley DW, dated as of June 6, 2000, is incorporated by
reference to Exhibit 10.02 of the Partnership?s Form 8-K
(File No. 0-19511) filed with the Securities and Exchange
Commission on November 1, 2001.
10.14 Customer Agreement between the Partnership and MSIL, dated
as of June 6, 2000, is incorporated by reference to
Exhibit 10.04 of the Partnership?s Form 8-K (File No.
0-19511) filed with the Securities and Exchange Commission
on November 1, 2001.
10.15 Foreign Exchange and Options Master Agreement between
MS&Co. and the Partnership, dated as of April 30, 2000, is
incorporated by reference to Exhibit 10.05 of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on November 1, 2001.
<page>
10.16 Management Agreement, dated as of May 1, 2001, among the
Partnership, Demeter, and Northfield Trading L.P., is
incorporated by reference to Exhibit 10.01 of the
Partnership?s Form 8-K (File No. 0-19511) filed with the
Securities and Exchange Commission on April 25, 2001.
10.17 Securities Account Control Agreement among the
Partnership, MS&Co., and Morgan Stanley DW, dated as of
May 1, 2000, is incorporated by reference to Exhibit
10.03 of the Partnership?s Form 8-K (File No. 0-19511)
filed with the Securities and Exchange Commission on
November 1, 2001.
13.01 December 31, 2006, Annual Report to Limited Partners is
filed herewith.
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.
Morgan Stanley
Spectrum Series
December 31, 2006
Annual Report
[LOGO] Morgan Stanley
MORGAN STANLEY SPECTRUM SERIES
HISTORICAL FUND PERFORMANCE
Presented below is the percentage change in Net Asset Value per Unit from the
start of every calendar year each Fund has traded. Also provided is the
inception-to-date return and the compound annualized return since inception for
each Fund. Past performance is no guarantee of future results.
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
FUND % % % % % % % % % % % % % % % %
- --------------------------------------------------------------------------------------------------------------------------
Spectrum Currency. -- -- -- -- -- -- -- -- -- 11.7 11.1 12.2 12.4 (8.0) (18.3) (3.4)
(6 mos.)
- --------------------------------------------------------------------------------------------------------------------------
Spectrum Global
Balanced......... -- -- -- (1.7) 22.8 (3.6) 18.2 16.4 0.8 0.9 (0.3) (10.1) 6.2 (5.6) 4.2 2.4
(2 mos.)
- --------------------------------------------------------------------------------------------------------------------------
Spectrum Select... 31.2 (14.4) 41.6 (5.1) 23.6 5.3 6.2 14.2 (7.6) 7.1 1.7 15.4 9.6 (4.7) (5.0) 5.9
(5 mos.)
- --------------------------------------------------------------------------------------------------------------------------
Spectrum Strategic -- -- -- 0.1 10.5 (3.5) 0.4 7.8 37.2 (33.1) (0.6) 9.4 24.0 1.7 (2.6) 20.9
(2 mos.)
- --------------------------------------------------------------------------------------------------------------------------
Spectrum Technical -- -- -- (2.2) 17.6 18.3 7.5 10.2 (7.5) 7.8 (7.2) 23.3 23.0 4.4 (5.4) 5.4
(2 mos.)
- --------------------------------------------------------------------------------------------------------------------------
INCEPTION- COMPOUND
TO-DATE ANNUALIZED
RETURN RETURN
FUND % %
- ----------------------------------------
Spectrum Currency. 13.8 2.0
- ----------------------------------------
Spectrum Global
Balanced......... 56.0 3.7
- ----------------------------------------
Spectrum Select... 190.6 7.2
- ----------------------------------------
Spectrum Strategic 71.5 4.5
- ----------------------------------------
Spectrum Technical 135.7 7.3
- ----------------------------------------
DEMETER MANAGEMENT CORPORATION
330 Madison Avenue, 8th Floor
New York, NY 10017
(212) 905-2700
MORGAN STANLEY SPECTRUM SERIES
ANNUAL REPORT
2006
Dear Limited Partner:
This marks the seventh annual report for Morgan Stanley Spectrum Currency
L.P., the thirteenth annual report for Morgan Stanley Spectrum Global Balanced
L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum
Technical L.P., and the sixteenth annual report for Morgan Stanley Spectrum
Select L.P. The Net Asset Value per Unit for each of the five Morgan Stanley
Spectrum funds ("Fund(s)") as of December 31, 2006 was as follows:
% CHANGE
FUNDS N.A.V. FOR YEAR
----------------------------------------
Spectrum Currency $11.38 (3.4)%
----------------------------------------
Spectrum Global Balanced $15.60 2.4%
----------------------------------------
Spectrum Select $29.06 5.9%
----------------------------------------
Spectrum Strategic $17.15 20.9%
----------------------------------------
Spectrum Technical $23.57 5.4%
----------------------------------------
Since its inception in July 2000, Spectrum Currency has returned 13.8% (a
compound annualized return of 2.0%). Since their inception in November 1994,
Spectrum Global Balanced has returned 56.0% (a compound annualized return of
3.7%), Spectrum Strategic has returned 71.5% (a compound annualized return of
4.5%), and Spectrum Technical has returned 135.7% (a compound annualized return
of 7.3%). Since its inception in August 1991, Spectrum Select has returned
190.6% (a compound annualized return of 7.2%).
Detailed performance information for each Fund is located in the body of the
financial report. For each Fund, we provide a trading results by sector chart
that portrays trading gains and trading losses for the year in each sector in
which the Fund participates. In the case of Spectrum Currency, we provide the
trading gains and trading losses for the five major currencies in which the
Fund participates, and composite information for all other "minor" currencies
traded within the Fund.
The trading results by sector charts indicate the year's composite percentage
returns generated by the specific assets dedicated to trading within each
market sector in which each Fund participates. Please note that there is not an
equal amount of assets in each market sector, and the specific allocations of
assets by a Fund to each sector will vary over time within a predetermined
range. Below each chart is a description of the factors that influenced trading
gains and trading losses within each Fund during the year.
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation, 330 Madison Avenue, 8th Floor, New
York, NY 10017 or your Morgan Stanley Financial Advisor.
I hereby affirm, that to the best of my knowledge and belief, the information
contained in this report is accurate and complete. Past performance is no
guarantee of future results.
Sincerely,
/s/ Walter J. Davis
Walter J. Davis
Chairman of the Board of Directors and President
Demeter Management Corporation,
General Partner of
Morgan Stanley Spectrum Currency L.P.
Morgan Stanley Spectrum Global Balanced L.P.
Morgan Stanley Spectrum Select L.P.
Morgan Stanley Spectrum Strategic L.P.
Morgan Stanley Spectrum Technical L.P.
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MORGAN STANLEY SPECTRUM CURRENCY L.P.
[CHART]
Year Ended
December 31, 2006
-----------------------
Australian dollar 0.07%
British pound 6.07%
Euro 0.90%
Japanese yen -2.29%
Swiss franc -5.95%
Minor Currencies 0.76%
Note:Reflects trading results only and does not include fees or interest income.
Minor currencies may include, but are not limited to, the South African
rand, Thai baht, Greek drachma, Singapore dollar, Mexican peso, New
Zealand dollar, Australian dollar, Polish zloty, Brazilian real, Norwegian
krone, and Czech koruna.
FACTORS INFLUENCING ANNUAL TRADING LOSSES:
.. The most significant trading losses resulted from short positions in the
Swiss franc and Japanese yen against the U.S. dollar. During January and
February, the Swiss franc rose after strong economic data out of
Switzerland, while the value of the Japanese yen increased on speculation
that the Bank of Japan would raise interest rates in the following months.
During April, further losses were recorded from short positions in the Swiss
franc versus the U.S. dollar as the value of the Swiss franc strengthened on
geopolitical tensions in the Middle East, while the value of the U.S. dollar
was pressured lower on news that foreign central banks were beginning to
diversify their currency reserves away from U.S. dollar-denominated assets.
Further losses were experienced towards the end of October and during
November from long positions in the U.S. dollar relative to the Swiss franc
and Japanese yen as the value of the U.S. dollar declined after the U.S.
Department of Commerce reported slower than expected growth in third quarter
U.S. Gross Domestic Product, as well as a faster than expected decline in
consumer core inflation. Meanwhile, the Japanese yen strengthened after the
Swiss National Bank said it had raised its holdings of the Japanese currency
in the previous quarter, while the Swiss franc strengthened in tandem with
the euro. Additional losses
MORGAN STANLEY SPECTRUM CURRENCY L.P.
FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
were experienced primarily during May and June from long positions in the
Brazilian real versus the U.S. dollar as the value of the Brazilian real
moved lower on political uncertainty out of Brazil. Finally, losses were
recorded throughout the year from both short and long positions in the
Mexican peso, Polish zloty, and Norwegian krone versus the U.S. dollar as the
value of these currencies moved without consistent direction.
FACTORS INFLUENCING ANNUAL TRADING GAINS:
.. Trading gains for the year were recorded from positions in the British
pound, New Zealand dollar, and Singapore dollar versus the U.S. dollar. Long
positions in the British pound versus the U.S. dollar experienced gains
throughout the second half of the year as the value of the British pound
increased on consistently strong economic data out of the United Kingdom,
spurring the Bank of England to lift its key interest rate to 5.0% by the
end of the year. Elsewhere, smaller gains resulted from long positions in
the Singapore dollar relative to the U.S. dollar as the value of the
Singapore dollar benefited from the U.S. dollar's weakness, particularly
during April, May, and November. During the fourth quarter, the value of the
U.S. dollar continued to move lower against most of its rivals on news that
China, the world's largest holder of foreign-exchange reserves, would begin
to more aggressively diversify its reserves away from the U.S. currency.
Also weighing on the U.S. dollar were concerns of a slowing U.S. economy
after reports showed an increase in jobless claims, while consumer sentiment
unexpectedly weakened. Elsewhere, short positions in the New Zealand dollar
versus the U.S. dollar experienced gains during March as the value of the
New Zealand dollar moved lower on expectations for an economic slow-down in
New Zealand. However, during the fourth quarter, gains were recorded from
long positions in the New Zealand dollar versus the U.S. dollar as the value
of the New Zealand dollar reversed higher after manufacturing sales figures
added to evidence that the New Zealand economy was expanding fast enough to
spur the Reserve Bank of New Zealand to raise interest rates in 2007.
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
[CHART]
Year ended December 31, 2006
----------------------------
Currencies 0.19%
Interest Rates -3.41%
Stock Indices 5.79%
Energies -0.85%
Metals 1.15%
Agriculturals -0.59%
Note: Reflects trading results only and does not include fees or interest
income.
FACTORS INFLUENCING ANNUAL TRADING GAINS:
.. The most significant trading gains were recorded in the global stock index
sector during January and March from long positions in U.S., European, and
Japanese equity index futures as prices trended higher on strong corporate
earnings and solid economic data. During August and September, additional
gains were experienced from long positions in U.S. and European equity index
futures as prices advanced after the U.S. Conference Board reported a
stronger than expected rebound in consumer confidence and data showing
increased merger and acquisition activity and solid corporate earnings in
Europe. During October, gains continued from long positions in U.S. and
European stock index futures as prices moved higher amid declining energy
prices and stronger than expected third quarter earnings. In addition, U.S.
equity index futures prices rose after the U.S. Federal Reserve's decision
to hold interest rates steady and its assessment that the U.S. economy would
continue to expand in the near-term but at a slower pace. Finally, gains
were experienced during December from long positions in U.S. and European
equity index futures as prices continued to move higher amid optimism about
the future of the global economy.
.. Further gains were experienced within the metals markets, primarily during
January and March, from long futures positions in copper, nickel, and zinc
as prices strengthened amid weak supplies, forecasts for continued buying by
China,
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)
and acceleration in global demand. During October, long positions in zinc
futures resulted in further gains as prices rose amid labor protests in
producer countries and news that inventories tracked by the London Metal
Exchange declined more than expected. Additional gains were recorded in
December from short positions in copper futures as prices dropped after
industrial output unexpectedly fell in the Euro-Zone countries, signaling
reduced demand for the metal.
.. Smaller gains were recorded in the currency markets, primarily from short
positions in the South African rand against the U.S. dollar as the rand
trended lower during the second quarter amid falling commodities prices,
news that South Africa's Current-Account deficit had widened to a 24-year
high and on expectations that the country's Gross Domestic Product growth
would be weaker than expected. During September, short positions in the
Norwegian krone versus the euro resulted in additional gains as the value of
the Norwegian krone moved lower on investor concern that a prolonged decline
in oil prices might negatively affect the Norwegian economy. In addition,
gains were experienced from long positions in the euro against the U.S.
dollar as the value of the U.S. dollar hit a 20-month low against the euro
in November due to expectations that the European Central Bank would
continue to raise interest rates and a marginal decline in unemployment
within Germany and France.
FACTORS INFLUENCING ANNUAL TRADING LOSSES:
.. Trading losses for the year were recorded in the global interest rate
sector. In January, short and long positions in European and U.S.
fixed-income futures incurred losses as prices moved without consistent
direction amid uncertainty regarding the future of global interest rate
policy. Additional losses were incurred from short positions in European
interest rates as fixed-income prices reversed higher during the second
quarter after weakness in the equity markets created strong demand for the
safe-haven of fixed-income investments. European interest rates were also
pushed higher after the May "ZEW" Institute survey showed investor
confidence in Germany falling for a fourth straight month. During June,
losses were incurred from long positions in Japanese interest rate futures
as prices fell on speculation that the Bank of Japan would raise interest
rates and end its "zero-interest-rate" policy. Losses were extended in
October and December from long positions in U.S., European, and Japanese
fixed-income futures as prices moved lower amid overall strength in the
equity markets and speculation of further interest rate hikes by the U.S.
Federal Reserve, European Central Bank, and Bank of Japan as a result of
robust global economic data.
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
.. Further losses were recorded in the energy markets during March from short
positions in gas oil futures as prices moved higher on fears of supply
disruptions fueled by news of geopolitical tensions in Nigeria. In May,
newly established long positions in gas oil experienced additional losses as
prices fell after supply data from the U.S. Department of Energy showed
crude oil inventory levels at an eight-year high. Gas oil prices continued
to fall into June on news of the death of Iraqi insurgent leader Abu Musab
al-Zarqawi and positive steps taken regarding the nuclear standoff between
the U.S. and Iran, resulting in additional losses from long positions.
During October and November, short positions in natural gas futures incurred
losses as prices reversed higher on speculation of increased demand after
near-term weather forecasts called for colder weather in much of the U.S.
Losses were also recorded from long positions in gas oil futures as prices
weakened due to uncertainty regarding OPEC's plan to cut production, as well
as a lower demand forecast. In December, long positions in gas oil futures
resulted in losses as prices weakened amid mild winter temperatures across
the U.S. Northeast.
.. Smaller losses were incurred in the agricultural markets, during July, from
long positions in orange juice futures as prices moved lower after the U.S.
Department of Agriculture reported an increase in orange juice production.
Additional losses were incurred from newly established short positions in
orange juice futures as prices reversed higher towards the end of the month
on concerns regarding poor harvest due to hot weather and labor shortages.
Finally, losses were incurred from both short and long positions in corn and
lean hog futures as prices moved without consistent direction throughout a
majority of the year due to conflicting news regarding supply and demand.
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MORGAN STANLEY SPECTRUM SELECT L.P.
[CHART]
Year Ended
December 31, 2006
-----------------------
Currencies 0.03%
Interest Rates 1.31%
Stock Indices 5.59%
Energies -1.08%
Metals 6.12%
Agriculturals -1.70%
Note: Reflects trading results only and does not include fees or interest
income.
FACTORS INFLUENCING ANNUAL TRADING GAINS:
.. The most significant trading gains were recorded in the metals markets
primarily during the first six months of the year from long futures
positions in copper, nickel, zinc, and aluminum as base metals prices
rallied on strong global demand and reports of falling inventories. 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 precious metals increased on continued
geopolitical concerns, inflation fears, and consistent demand from foreign
central banks. In addition, silver prices were pressured higher after news
that a silver-backed Exchange Traded Fund would launch. Gains were extended
during October from long positions in base metals as prices continued to
trend higher amid labor protests in producer countries and news that
inventories had declined more than expected. Additionally, prices were
pressured higher after the National Bureau of Statistics said that China's
industrial production had increased significantly from a year earlier,
reaffirming expectations that demand from China would stay strong.
.. Additional gains were recorded within the global stock index markets from
long positions in European, U.S., and Pacific Rim stock index futures as
global equity prices trended higher throughout the first quarter on strong
corporate earnings and
MORGAN STANLEY SPECTRUM SELECT L.P.
FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)
solid economic data. Long positions in Hong Kong equity index futures also
recorded gains as prices moved higher during April and July on positive
performance in the technology sector, speculation that the U.S. Federal
Reserve could be near the end of its interest rate tightening campaign, and
news that Gross Domestic Product in China had surged to 10.9% in the first
six months of the year. Further gains in the global stock index futures
markets were experienced during September from long positions in European
equity index futures as prices were supported higher on merger and
acquisition activity and solid corporate earnings. During the fourth quarter,
further gains were recorded from long positions in U.S., European, and
Pacific Rim equity index futures as prices continued to move higher amid the
U.S. Federal Reserve's decision to hold interest rates steady, consistent
merger and acquisition activity, and news of the world's largest initial
public offering in China.
.. Smaller gains were experienced within the global interest rates sector,
primarily during March and April, from short positions in U.S. and European
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 and the European
Union might rise in order to combat inflation. U.S. fixed-income futures
continued to move lower into the second quarter following the release of
consistently strong U.S. economic data resulting in further gains from short
positions. Finally, during November, gains were recorded from long positions
in U.S. fixed-income futures as prices moved higher on new concerns of a
slowing U.S. economy after reports showed an increase in jobless claims,
while consumer sentiment unexpectedly weakened.
FACTORS INFLUENCING ANNUAL TRADING LOSSES:
.. Trading losses for the year were recorded in the agricultural markets from
positions in wheat, soybeans, and cocoa futures. Long positions in wheat
futures incurred losses as prices fell in March, April, and June on
forecasts for favorable weather in U.S. wheat-growing regions, while short
futures positions in soybeans recorded losses as prices moved higher in
March on speculative buying and increased demand. During the third quarter,
losses were incurred primarily during July from long futures positions in
wheat and soybean oil as prices decreased on forecasts of improved weather
conditions across the growing regions of the U.S. Additional losses were
incurred during July from long positions in cocoa futures as prices reversed
lower on news from the International Cocoa Organization that global supplies
were still adequate to meet demand. Further losses in the agricultural
markets were experienced during October, November, and December from
MORGAN STANLEY SPECTRUM SELECT L.P.
FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
both short and long positions in the soybean complex as prices moved without
consistent direction due to conflicting news regarding supply and demand.
.. Smaller losses were incurred within the energy markets throughout the year
from futures positions in crude oil and its related products, as well as in
natural gas. 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, and mild weather in the U.S. Northeast. Further losses
were recorded during March from short futures positions in crude oil and its
related products as prices reversed higher early in the month on supply
fears. During 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 inventories. Further losses were incurred from short
positions in natural gas as prices moved higher on fears of a possible
supply shortage. During June, newly established long positions in natural
gas futures recorded losses as prices reversed lower on reports of a supply
surplus and fears of a slowing global economy. During July and August,
losses were also experienced from long futures positions in crude oil and
its related products as prices moved lower after weaker than expected U.S.
economic data led investors to believe that energy demand would be
negatively affected and the U.S. Department of Labor reported an unexpected
climb in domestic gasoline supplies. In addition, prices were pressured
lower after news of an official cease-fire between Israel and Hezbollah
militants in Lebanon and news that the OPEC had reduced its 2006 oil demand
growth forecast. Finally, during November, losses were incurred from newly
established short positions in crude oil futures and its related products as
prices moved higher amid concern over OPEC's production cut after the U.S.
Department of Energy reported a sharp fall in domestic inventories.
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MORGAN STANLEY SPECTRUM STRATEGIC L.P.
[CHART]
Year ended December 31, 2006
----------------------------
Currencies -0.42%
Interest Rates 2.44%
Stock Indices 4.24%
Energies -0.36%
Metals 22.87%
Agriculturals 1.66%
Note: Reflects trading results only and does not include fees or interest
income.
FACTORS INFLUENCING ANNUAL TRADING GAINS:
.. The most significant trading gains were recorded in the metals markets
throughout the first half of the year from long positions in copper, zinc,
and aluminum futures as base metals prices rallied on strong global demand,
particularly from China, and reports of falling inventories. Elsewhere in
the metals markets, long positions in gold futures experienced additional
gains as prices reached 25-year highs amid continued geopolitical concerns,
inflation concerns, and consistent demand from foreign central banks.
Further gains were experienced from long positions in silver futures as
prices moved higher due to the aforementioned factors that affected gold, as
well as on news that a silver-backed Exchange Traded Fund would launch.
Gains were extended during October from long positions in zinc and aluminum
futures as base metals prices continued to trend higher amid labor protests
in producer countries and news that inventories declined more than expected.
Additionally, prices were pressured higher after the National Bureau of
Statistics said that China's industrial production had increased
significantly from a year earlier, reaffirming expectations that demand from
China would stay strong.
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)
.. Additional gains were experienced within the global stock index markets
primarily during the first and fourth quarters from long positions in U.S.,
European, and Pacific Rim stock index futures as global equity markets
trended higher on strong corporate earnings and solid economic data. Long
positions in Hong Kong equity index futures recorded further gains during
April, July, August, October, November, and December as prices moved higher
amid positive performance in the technology and banking sectors and
consistently strong economic data out of China and Japan. During the fourth
quarter, European equity index futures prices moved higher due to consistent
merger and acquisition activity, as well as strong performance in the
automobile, industrial, and technology sectors, resulting in further gains
from long positions. Meanwhile, U.S. equity prices rose after the U.S.
Federal Reserve's decision to hold interest rates steady in October and its
assessment that the U.S. economy would continue to expand in the near-term
albeit at a slower pace.
.. Additional gains were experienced within the global interest rate markets
during the first quarter from short positions in U.S. and European interest
rate futures as prices trended lower amid strength in regional equity
markets and investor sentiment that interest rates in the United States and
the European Union would rise in order to combat inflation. U.S. and
European fixed-income futures continued to move lower into the second
quarter following the release of stronger than expected economic data out of
the U.S. and the Euro-Zone. During October, U.S. fixed-income futures prices
declined amid weak demand after U.S. economic reports showed unexpected
strength in retail sales, business inventories, and consumer sentiment,
while European fixed-income futures prices continued to decline on
speculation of another European Central Bank interest rate hike after
government reports showed higher industrial production in France and Italy.
Finally, in November, newly established long positions in European
fixed-income futures resulted in gains as prices rose after the release of
data indicating that economic expansion in the Euro-Zone might have peaked
during the first half of the year.
.. Smaller gains were recorded within the agricultural markets primarily during
the fourth quarter from long positions in corn futures as prices moved
higher after the U.S. Department of Agriculture's reduction of its world
ending stock estimate, increased demand from ethanol producers, and news
that Argentina, one of the world's major corn producers, would suspend new
export orders. Elsewhere in the agricultural complex, long positions in
coffee futures resulted in gains primarily during November as prices moved
higher on speculation that inventories might be insufficient to satisfy
growing demand.
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
FACTORS INFLUENCING ANNUAL TRADING LOSSES:
.. Trading losses for the year were experienced in the currency markets from
positions in the Japanese yen and Swiss franc relative to the U.S. dollar.
During the first half of the year, long positions in the U.S. dollar versus
the Swiss franc and Japanese yen experienced losses as the value of 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. In addition, the Japanese yen and Swiss
franc moved higher against the U.S. dollar as strong economic data out of
Japan and Switzerland increased speculation that the Bank of Japan and Swiss
National Bank would raise interest rates. Losses were extended during
October as the value of the U.S. dollar declined towards the latter half of
the month after the U.S. Department of Commerce reported slower than
expected growth in third quarter U.S. Gross Domestic Product, as well as a
faster than expected decline in consumer core inflation. Smaller losses in
the currency markets were experienced from both short and long positions in
the Swedish krona versus the U.S. dollar as the value of the Swedish krona
moved without consistent direction throughout a majority of the year.
.. Finally, losses were incurred within the energy markets during February,
May, August, and December from both short and long positions in heating oil
futures as prices experienced short-term volatility due to conflicting news
regarding supply and demand. Smaller losses were recorded during October
from long positions in gasoline futures as prices weakened due to
uncertainty regarding OPEC's plan to cut production, as well as a lower
demand forecast.
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MORGAN STANLEY SPECTRUM TECHNICAL L.P.
[CHART]
Year ended December 31, 2006
----------------------------
Currencies -1.07%
Interest Rates 0.33%
Stock Indices 9.68%
Energies -3.26%
Metals 8.42%
Agriculturals -2.75%
Note: Reflects trading results only and does not include fees or interest
income.
FACTORS INFLUENCING ANNUAL TRADING GAINS:
.. The most significant trading gains were recorded in the global stock index
markets primarily during January, March, April, and July from long positions
in Pacific Rim, European, and U.S. stock index futures as prices trended
higher on strong corporate earnings and solid global economic data. In
addition, Pacific Rim equity index futures prices moved higher during July
on news that Gross Domestic Product in China had surged to 10.9% in the
first six months of the year. During September, additional gains were
experienced from long positions in European equity index and U.S. equity
index futures as prices increased on falling energy prices. Furthermore,
U.S. equity index futures moved higher after the U.S. Conference Board
reported a stronger than expected rebound in consumer confidence in
September, while European equity index futures prices were supported higher
on merger and acquisition activity. During the fourth quarter, global stock
indices continued to rally amid declining energy prices and optimism about
the future of the global economy, resulting in further gains from long
positions. Additionally, Australian stock index futures prices increased on
speculation that strong commodity prices in 2007 might have a positive
effect on the Australian economy.
.. Additional gains were experienced in the metals markets throughout the first
half of the year from long positions in copper, zinc, and aluminum futures
as base metals prices
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
FACTORS INFLUENCING ANNUAL TRADING GAINS: (continued)
rallied on strong global demand and on reports of falling inventories. Within
precious metals, long positions in gold and silver futures experienced gains
as gold and silver prices reached 25-year highs in May, benefiting from
strong demand and lagging supply, continued geopolitical concerns regarding
Iran's nuclear program, and consistent demand from foreign central banks.
During October, gains were experienced in zinc and aluminum futures as prices
continued to trend higher amid labor protests in producer countries and news
that inventories declined more than expected. Prices were also pressured
higher after the National Bureau of Statistics said that China's industrial
production had increased 16.1% in September from a year earlier, reaffirming
expectations that demand from China would stay strong.
.. Smaller gains were recorded in the global interest rates markets primarily
during the first and second quarters from short positions in U.S., European,
and Australian fixed-income futures as prices trended lower amid strength in
regional equity markets and investor sentiment that interest rates in the
United States, the European Union, and Australia would rise in order to
combat inflation. In addition, U.S. fixed-income futures prices were
pressured lower following the release of stronger than expected U.S.
economic data and the sixteenth consecutive interest rate hike by the U.S.
Federal Reserve, while German fixed-income futures prices declined amid
rising equity prices and solid economic data out of the Euro-Zone.
FACTORS INFLUENCING ANNUAL TRADING LOSSES:
.. Trading losses for the year were experienced within the energy markets
during February from long futures positions in crude oil and its related
products 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, and
mild weather in the U.S. Northeast. During August and September, long
futures positions in crude oil and its related products incurred additional
losses as prices moved lower after weaker than expected U.S. economic data
led investors to believe that energy demand would be negatively affected and
the U.S. Department of Labor reported an unexpected climb in domestic
gasoline supplies. Prices were pressured lower during October due to
uncertainty regarding OPEC's plan to cut production, as well as a lower
demand forecast, resulting in additional losses from long positions. During
November, short futures positions in crude oil and its related products
incurred further losses as prices reversed higher on supply concerns.
Additionally, short positions in natural gas futures resulted in losses
during November as prices reversed
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
FACTORS INFLUENCING ANNUAL TRADING LOSSES: (continued)
higher on colder temperatures forecasted in the U.S. and expectations of a
decline in domestic inventories.
.. Additional losses were recorded within the agricultural markets during
second and third quarters, primarily from short positions in live cattle
futures as prices moved higher on strong demand and technically-based
buying. Meanwhile, losses were incurred during July and August from long
positions in cocoa futures as prices fell on news from the International
Cocoa Organization that global supplies were adequate to meet demand.
Elsewhere in the agricultural complex, losses were incurred from short
positions in soybean and soybean meal futures as prices rose during October
on news of a smaller than expected crop from Brazil.
.. Smaller losses were incurred within the currency markets, primarily during
the first half of the year, from short positions in the Swiss franc and
Japanese yen versus the U.S. dollar as the value of the U.S. dollar moved
lower against its major rivals 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. In addition,
the Swiss franc and Japanese yen moved higher against the U.S. dollar as
strong economic data out of Switzerland and Japan increased speculation that
the Swiss National Bank and Bank of Japan would raise interest rates.
Additionally, the Swiss franc moved higher on political tensions in the
Middle East, which increased the demand for the safe-haven currency.
Elsewhere in the currency markets, losses were experienced from both short
and long positions in the Norwegian krone relative to the U.S. dollar as the
value of the Norwegian krone moved without consistent direction throughout a
majority of the year.
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MORGAN STANLEY SPECTRUM SERIES
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Demeter Management Corporation ("Demeter"), the general partner of Morgan
Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P.,
Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P.,
and Morgan Stanley Spectrum Technical L.P. (individually, a "Partnership", or
collectively, the "Partnerships"), is responsible for the management of the
Partnerships.
Management of Demeter ("Management") is responsible for establishing and
maintaining adequate internal control over financial reporting. The internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles.
The Partnerships' internal control over financial reporting includes those
policies and procedures that:
.. Pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
Partnerships;
.. Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that the Partnerships' transactions are
being made only in accordance with authorizations of Management and
directors; and
.. Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Partnerships' assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of each Partnership's internal control
over financial reporting as of December 31, 2006. In making this assessment,
Management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control--Integrated
Framework. Based on our assessment and those criteria, Management believes that
each Partnership maintained effective internal control over financial reporting
as of December 31, 2006.
Deloitte & Touche LLP, the Partnerships' independent registered public
accounting firm, has issued an audit report on Management's assessment of the
Partnerships' internal control over financial reporting and on the
effectiveness of the Partnerships' internal control over financial reporting.
This report, which expresses unqualified opinions on Management's assessment
and on the effectiveness of the Partnerships' internal control over financial
reporting, appears under "Report of Independent Registered Public Accounting
Firm" on the following page.
/s/ Walter J. Davis
Walter J. Davis
President
Demeter Management Corporation
/s/ Lee Horwitz
Lee Horwitz
Chief Financial Officer
Demeter Management Corporation
New York, New York
February 28, 2007
MORGAN STANLEY SPECTRUM SERIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Limited Partners and the General Partner of Morgan Stanley Spectrum
Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley
Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan
Stanley Spectrum Technical L.P.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Morgan
Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P.,
Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P.,
and Morgan Stanley Spectrum Technical L.P. (collectively, the "Partnerships")
maintained effective internal control over financial reporting as of December
31, 2006, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Partnerships' management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Partnerships' internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Partnerships maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Partnerships
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the financial statements as of and
for the year ended December 31, 2006 of the Partnerships and our report dated
February 28, 2007 expressed an unqualified opinion on those financial
statements.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2007
MORGAN STANLEY SPECTRUM SERIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Limited Partners and the General Partner of Morgan Stanley Spectrum
Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley
Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan
Stanley Spectrum Technical L.P. :
We have audited the accompanying statements of financial condition of Morgan
Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P.,
Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P.,
and Morgan Stanley Spectrum Technical L.P. (collectively, the "Partnerships"),
including the schedules of investments, as of December 31, 2006 and 2005, and
the related statements of operations, changes in partners' capital, and cash
flows for each of the three years in the period ended December 31, 2006. These
financial statements are the responsibility of the Partnerships' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Morgan Stanley Spectrum Currency L.P.,
Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select
L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum
Technical L.P. at December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 1, in 2006 and 2005, the Partnerships modified their
classification of cash within the statements of cash flows.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Partnerships' internal control over financial reporting as of December 31,
2006, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 28, 2007 expressed an unqualified
opinion on management's assessment of the effectiveness of the Partnerships'
internal control over financial reporting and an unqualified opinion on the
effectiveness of the Partnerships' internal control over financial reporting.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2007
MORGAN STANLEY SPECTRUM CURRENCY L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-------------------------
2006 2005
------------ ------------
$ $
ASSETS
Equity in futures interests trading accounts:
Unrestricted cash 162,737,117 207,952,625
Restricted cash -- --
------------ ------------
Total Cash 162,737,117 207,952,625
Net unrealized gain on open contracts (MS & Co.) 4,534,033 6,202,194
------------ ------------
Total Trading Equity 167,271,150 214,154,819
Subscriptions receivable 759,216 1,355,204
Interest receivable (Morgan Stanley DW) 560,751 559,983
------------ ------------
Total Assets 168,591,117 216,070,006
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 4,643,347 6,346,278
Accrued brokerage fees (Morgan Stanley DW) 626,181 862,131
Accrued management fees 272,253 374,840
------------ ------------
Total Liabilities 5,541,781 7,583,249
------------ ------------
PARTNERS' CAPITAL
Limited Partners (14,173,942.826 and
17,508,991.514 Units, respectively) 161,303,764 206,199,270
General Partner (153,385.343 and
194,237.343 Units, respectively) 1,745,572 2,287,487
------------ ------------
Total Partners' Capital 163,049,336 208,486,757
------------ ------------
Total Liabilities and Partners' Capital 168,591,117 216,070,006
============ ============
NET ASSET VALUE PER UNIT 11.38 11.78
============ ============
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2006 2005 2004
---------- ----------- -----------
$ $ $
INVESTMENT INCOME
Interest income (Morgan Stanley DW) 6,632,240 5,391,828 2,064,338
---------- ----------- -----------
EXPENSES
Brokerage fees (Morgan Stanley DW) 8,151,647 10,921,579 10,011,029
Management fees 3,544,196 4,748,514 4,352,622
Incentive fee -- -- 177,763
---------- ----------- -----------
Total Expenses 11,695,843 15,670,093 14,541,414
---------- ----------- -----------
NET INVESTMENT LOSS (5,063,603) (10,278,265) (12,477,076)
---------- ----------- -----------
TRADING RESULTS
Trading profit (loss):
Realized (1,843,404) (28,979,835) (11,200,944)
Net change in unrealized (1,668,161) (10,445,759) 11,769,313
---------- ----------- -----------
Total Trading Results (3,511,565) (39,425,594) 568,369
---------- ----------- -----------
NET LOSS (8,575,168) (49,703,859) (11,908,707)
========== =========== ===========
NET LOSS ALLOCATION:
Limited Partners (8,482,159) (49,177,845) (11,774,885)
General Partner (93,009) (526,014) (133,822)
NET LOSS PER UNIT:
Limited Partners (0.40) (2.63) (1.25)
General Partner (0.40) (2.63) (1.25)
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-----------------------
2006 2005
----------- -----------
$ $
ASSETS
Equity in futures interests trading accounts:
Unrestricted cash 36,518,808 41,897,899
Restricted cash 3,363,695 2,476,604
----------- -----------
Total Cash 39,882,503 44,374,503
----------- -----------
Net unrealized gain on open contracts (MS&Co.) 1,135,527 562,409
Net unrealized gain on open contracts (MSIL) 56,239 40,229
----------- -----------
Total net unrealized gain on open contracts 1,191,766 602,638
----------- -----------
Total Trading Equity 41,074,269 44,977,141
Subscriptions receivable 224,965 295,999
Interest receivable (Morgan Stanley DW) 179,223 149,040
----------- -----------
Total Assets 41,478,457 45,422,180
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 919,278 851,645
Accrued brokerage fees (Morgan Stanley DW) 158,727 171,976
Accrued management fees 43,132 46,733
----------- -----------
Total Liabilities 1,121,137 1,070,354
----------- -----------
PARTNERS' CAPITAL
Limited Partners (2,558,814.213 and
2,879,808.149 Units, respectively) 39,917,674 43,870,162
General Partner (28,182.331 and
31,618.331 Units, respectively) 439,646 481,664
----------- -----------
Total Partners' Capital 40,357,320 44,351,826
----------- -----------
Total Liabilities and Partners' Capital 41,478,457 45,422,180
=========== ===========
NET ASSET VALUE PER UNIT 15.60 15.23
=========== ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
2006 2005 2004
------------ ------------ ----------
$ $ $
INVESTMENT INCOME
Interest income (Morgan Stanley DW) 2,044,009 1,370,806 625,965
------------ ------------ ----------
EXPENSES
Brokerage fees (Morgan Stanley DW) 1,987,699 2,126,114 2,332,241
Management fees 540,137 577,754 633,766
------------ ------------ ----------
Total Expenses 2,527,836 2,703,868 2,966,007
------------ ------------ ----------
NET INVESTMENT LOSS (483,827) (1,333,062) (2,340,042)
------------ ------------ ----------
TRADING RESULTS
Trading profit (loss):
Realized 981,659 3,338,207 1,049,835
Net change in unrealized 589,128 (214,685) (1,729,717)
------------ ------------ ----------
1,570,787 3,123,522 (679,882)
Proceeds from Litigation Settlement -- 2,230 2,296
------------ ------------ ----------
Total Trading Results 1,570,787 3,125,752 (677,586)
------------ ------------ ----------
NET INCOME (LOSS) 1,086,960 1,792,690 (3,017,628)
============ ============ ==========
NET INCOME (LOSS) ALLOCATION:
Limited Partners 1,074,038 1,769,412 (2,985,362)
General Partner 12,922 23,278 (32,266)
NET INCOME (LOSS) PER UNIT:
Limited Partners 0.37 0.62 (0.86)
General Partner 0.37 0.62 (0.86)
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-------------------------
2006 2005
------------ ------------
$ $
ASSETS
Equity in futures interests trading accounts:
Unrestricted cash 472,088,633 475,166,952
Restricted cash 64,801,445 51,242,347
------------ ------------
Total Cash 536,890,078 526,409,299
------------ ------------
Net unrealized gain on open contracts (MS&Co.) 11,039,855 9,019,008
Net unrealized gain on open contracts (MSIL) 921,756 9,166,796
------------ ------------
Total net unrealized gain on open contracts 11,961,611 18,185,804
------------ ------------
Total Trading Equity 548,851,689 544,595,103
Subscriptions receivable 4,725,710 4,455,213
Interest receivable (Morgan Stanley DW) 1,858,406 1,417,447
------------ ------------
Total Assets 555,435,805 550,467,763
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 7,988,976 13,439,853
Accrued brokerage fees (Morgan Stanley DW) 2,727,852 2,730,072
Accrued management fees 1,196,492 1,295,496
------------ ------------
Total Liabilities 11,913,320 17,465,421
------------ ------------
PARTNERS' CAPITAL
Limited Partners (18,501,387.237 and
19,209,338.858 Units, respectively) 537,667,844 527,198,790
General Partner (201,460.769 and
211,461.769 Units, respectively) 5,854,641 5,803,552
------------ ------------
Total Partners' Capital 543,522,485 533,002,342
------------ ------------
Total Liabilities and Partners' Capital 555,435,805 550,467,763
============ ============
NET ASSET VALUE PER UNIT 29.06 27.45
============ ============
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
$ $ $
INVESTMENT INCOME
Interest income (Morgan Stanley DW) 20,639,273 12,876,956 4,952,656
----------- ----------- -----------
EXPENSES
Brokerage fees (Morgan Stanley DW) 32,847,913 36,601,881 36,680,599
Management fees 15,437,482 15,652,447 14,450,217
Incentive fee -- -- 6,104,991
----------- ----------- -----------
Total Expenses 48,285,395 52,254,328 57,235,807
----------- ----------- -----------
NET INVESTMENT LOSS (27,646,122) (39,377,372) (52,283,151)
----------- ----------- -----------
TRADING RESULTS
Trading profit (loss):
Realized 64,987,687 7,018,678 50,580,928
Net change in unrealized (6,224,193) 3,059,181 (21,655,342)
----------- ----------- -----------
58,763,494 10,077,859 28,925,586
Proceeds from Litigation Settlement -- 85,000 45,665
----------- ----------- -----------
Total Trading Results 58,763,494 10,162,859 28,971,251
----------- ----------- -----------
NET INCOME (LOSS) 31,117,372 (29,214,513) (23,311,900)
=========== =========== ===========
NET INCOME (LOSS) ALLOCATION:
Limited Partners 30,776,254 (28,920,794) (23,067,010)
General Partner 341,118 (293,719) (244,890)
NET INCOME (LOSS) PER UNIT:
Limited Partners 1.61 (1.43) (1.43)
General Partner 1.61 (1.43) (1.43)
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-----------------------
2006 2005
----------- -----------
$ $
ASSETS
Equity in futures interests trading accounts:
Unrestricted cash 172,839,122 142,187,180
Restricted cash 20,250,647 19,593,820
----------- -----------
Total Cash 193,089,769 161,781,000
----------- -----------
Net unrealized gain on open contracts (MSIL) 9,283,006 5,662,270
Net unrealized gain on open contracts (MS&Co.) 7,766,985 7,823,513
----------- -----------
Total net unrealized gain on open contracts 17,049,991 13,485,783
Net option premiums 680,129 (568)
----------- -----------
Total Trading Equity 210,819,889 175,266,215
Subscriptions receivable 2,601,546 1,351,545
Interest receivable (Morgan Stanley DW) 670,338 445,924
----------- -----------
Total Assets 214,091,773 177,063,684
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 3,111,834 4,515,005
Accrued brokerage fees (Morgan Stanley DW) 1,024,464 837,558
Accrued management fees 478,411 381,027
Accrued incentive fee -- 1,704,356
----------- -----------
Total Liabilities 4,614,709 7,437,946
----------- -----------
PARTNERS' CAPITAL
Limited Partners (12,087,045.247 and
11,834,304.588 Units, respectively) 207,238,137 167,774,452
General Partner (130,584.135 Units) 2,238,927 1,851,286
----------- -----------
Total Partners' Capital 209,477,064 169,625,738
----------- -----------
Total Liabilities and Partners' Capital 214,091,773 177,063,684
=========== ===========
NET ASSET VALUE PER UNIT 17.15 14.18
=========== ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
$ $ $
INVESTMENT INCOME
Interest income (Morgan Stanley DW) 6,908,530 4,008,536 1,602,712
----------- ----------- -----------
EXPENSES
Brokerage fees (Morgan Stanley DW) 11,319,725 11,407,747 9,860,579
Incentive fees 5,369,200 2,251,786 2,751,859
Management fees 5,266,764 4,685,477 4,006,640
----------- ----------- -----------
Total Expenses 21,955,689 18,345,010 16,619,078
----------- ----------- -----------
NET INVESTMENT LOSS (15,047,159) (14,336,474) (15,016,366)
----------- ----------- -----------
TRADING RESULTS
Trading profit (loss):
Realized 47,135,224 (2,036,361) 21,527,423
Net change in unrealized 3,564,208 10,826,414 (5,262,416)
----------- ----------- -----------
50,699,432 8,790,053 16,265,007
Proceeds from Litigation Settlement -- 454 173
----------- ----------- -----------
Total Trading Results 50,699,432 8,790,507 16,265,180
----------- ----------- -----------
NET INCOME (LOSS) 35,652,273 (5,545,967) 1,248,814
=========== =========== ===========
NET INCOME (LOSS) ALLOCATION:
Limited Partners 35,264,632 (5,489,130) 1,239,931
General Partner 387,641 (56,837) 8,883
NET INCOME (LOSS) PER UNIT:
Limited Partners 2.97 (0.38) 0.25
General Partner 2.97 (0.38) 0.25
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-----------------------
2006 2005
----------- -----------
$ $
ASSETS
Equity in futures interests trading accounts:
Unrestricted cash 618,802,593 591,492,563
Restricted cash 113,620,432 127,922,335
----------- -----------
Total Cash 732,423,025 719,414,898
----------- -----------
Net unrealized gain (loss) on open contracts (MS&Co.) 30,280,000 (2,653,896)
Net unrealized gain on open contracts (MSIL) 1,537,347 24,718,032
----------- -----------
Total net unrealized gain on open contracts 31,817,347 22,064,136
Net option premiums 64,116 --
----------- -----------
Total Trading Equity 764,304,488 741,479,034
Subscriptions receivable 6,849,894 8,317,319
Interest receivable (Morgan Stanley DW) 2,538,494 1,887,334
----------- -----------
Total Assets 773,692,876 751,683,687
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 11,571,388 22,863,255
Accrued brokerage fees (Morgan Stanley DW) 3,693,334 3,775,150
Accrued management fees 1,607,196 1,629,189
----------- -----------
Total Liabilities 16,871,918 28,267,594
----------- -----------
PARTNERS' CAPITAL
Limited Partners (31,769,428.115 and
32,000,561.834 Units, respectively) 748,658,571 715,669,731
General Partner (346,372.001 Units) 8,162,387 7,746,362
----------- -----------
Total Partners' Capital 756,820,958 723,416,093
----------- -----------
Total Liabilities and Partners' Capital 773,692,876 751,683,687
=========== ===========
NET ASSET VALUE PER UNIT 23.57 22.36
=========== ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
$ $ $
INVESTMENT INCOME
Interest income (Morgan Stanley DW) 27,915,330 17,176,811 6,171,302
----------- ----------- -----------
EXPENSES
Brokerage fees (Morgan Stanley DW) 44,839,676 49,430,024 45,508,966
Management fees 19,618,375 19,268,955 16,226,640
Incentive fees 6,762,802 2,668,447 12,132,833
----------- ----------- -----------
Total Expenses 71,220,853 71,367,426 73,868,439
----------- ----------- -----------
NET INVESTMENT LOSS (43,305,523) (54,190,615) (67,697,137)
----------- ----------- -----------
TRADING RESULTS
Trading profit (loss):
Realized 72,015,436 19,045,879 122,928,230
Net change in unrealized 9,753,211 (5,277,614) (19,092,460)
----------- ----------- -----------
81,768,647 13,768,265 103,835,770
Proceeds from Litigation Settlement -- 4,209 3,018
----------- ----------- -----------
Total Trading Results 81,768,647 13,772,474 103,838,788
----------- ----------- -----------
NET INCOME (LOSS) 38,463,124 (40,418,141) 36,141,651
=========== =========== ===========
NET INCOME (LOSS) ALLOCATION:
Limited Partners 38,047,099 (39,990,714) 35,747,190
General Partner 416,025 (427,427) 394,461
NET INCOME (LOSS) PER UNIT:
Limited Partners 1.21 (1.27) 0.99
General Partner 1.21 (1.27) 0.99
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM CURRENCY L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
-------------- ----------- --------- -----------
$ $ $
Partners' Capital,
December 31, 2003 12,139,408.225 188,042,673 2,013,247 190,055,920
Offering of Units 8,372,327.316 114,539,377 990,000 115,529,377
Net loss -- (11,774,885) (133,822) (11,908,707)
Redemptions (1,557,346.356) (20,575,860) -- (20,575,860)
-------------- ----------- --------- -----------
Partners' Capital,
December 31, 2004 18,954,389.185 270,231,305 2,869,425 273,100,730
Offering of Units 3,336,357.445 40,295,529 170,000 40,465,529
Net loss -- (49,177,845) (526,014) (49,703,859)
Redemptions (4,587,517.773) (55,149,719) (225,924) (55,375,643)
-------------- ----------- --------- -----------
Partners' Capital,
December 31, 2005 17,703,228.857 206,199,270 2,287,487 208,486,757
Offering of Units 1,518,069.025 16,510,816 -- 16,510,816
Net loss -- (8,482,159) (93,009) (8,575,168)
Redemptions (4,893,969.713) (52,924,163) (448,906) (53,373,069)
-------------- ----------- --------- -----------
Partners' Capital,
December 31, 2006 14,327,328.169 161,303,764 1,745,572 163,049,336
============== =========== ========= ===========
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
------------- ----------- ------- -----------
$ $ $
Partners' Capital,
December 31, 2003 3,401,912.446 52,064,431 575,062 52,639,493
Offering of Units 778,018.263 11,587,284 -- 11,587,284
Net loss -- (2,985,362) (32,266) (3,017,628)
Redemptions (783,103.571) (11,597,531) -- (11,597,531)
------------- ----------- ------- -----------
Partners' Capital,
December 31, 2004 3,396,827.138 49,068,822 542,796 49,611,618
Offering of Units 345,735.053 4,999,666 -- 4,999,666
Net income -- 1,769,412 23,278 1,792,690
Redemptions (831,135.711) (11,967,738) (84,410) (12,052,148)
------------- ----------- ------- -----------
Partners' Capital,
December 31, 2005 2,911,426.480 43,870,162 481,664 44,351,826
Offering of Units 258,442.402 4,021,015 -- 4,021,015
Net income -- 1,074,038 12,922 1,086,960
Redemptions (582,872.338) (9,047,541) (54,940) (9,102,481)
------------- ----------- ------- -----------
Partners' Capital,
December 31, 2006 2,586,996.544 39,917,674 439,646 40,357,320
============= =========== ======= ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
-------------- ------------ --------- ------------
$ $ $
Partners' Capital,
December 31, 2003 14,565,503.079 436,666,633 4,855,851 441,522,484
Offering of Units 7,215,873.382 208,687,672 1,540,000 210,227,672
Net loss -- (23,067,010) (244,890) (23,311,900)
Redemptions (1,517,552.868) (43,132,131) -- (43,132,131)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2004 20,263,823.593 579,155,164 6,150,961 585,306,125
Offering of Units 3,482,044.148 91,946,015 380,000 92,326,015
Net loss -- (28,920,794) (293,719) (29,214,513)
Redemptions (4,325,067.114) (114,981,595) (433,690) (115,415,285)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2005 19,420,800.627 527,198,790 5,803,552 533,002,342
Offering of Units 2,664,130.689 76,905,995 -- 76,905,995
Net income -- 30,776,254 341,118 31,117,372
Redemptions (3,382,083.310) (97,213,195) (290,029) (97,503,224)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2006 18,702,848.006 537,667,844 5,854,641 543,522,485
============== ============ ========= ============
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
-------------- ----------- --------- -----------
$ $ $
Partners' Capital,
December 31, 2003 8,475,891.871 119,976,992 1,293,447 121,270,439
Offering of Units 5,057,597.578 73,841,018 720,000 74,561,018
Net income -- 1,239,931 8,883 1,248,814
Redemptions (948,261.723) (13,839,146) -- (13,839,146)
-------------- ----------- --------- -----------
Partners' Capital,
December 31, 2004 12,585,227.726 181,218,795 2,022,330 183,241,125
Offering of Units 2,346,340.284 31,611,503 -- 31,611,503
Net loss -- (5,489,130) (56,837) (5,545,967)
Redemptions (2,966,679.287) (39,566,716) (114,207) (39,680,923)
-------------- ----------- --------- -----------
Partners' Capital,
December 31, 2005 11,964,888.723 167,774,452 1,851,286 169,625,738
Offering of Units 2,517,218.118 40,403,751 -- 40,403,751
Net income -- 35,264,632 387,641 35,652,273
Redemptions (2,264,477.459) (36,204,698) -- (36,204,698)
-------------- ----------- --------- -----------
Partners' Capital,
December 31, 2006 12,217,629.382 207,238,137 2,238,927 209,477,064
============== =========== ========= ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
-------------- ------------ --------- ------------
$ $ $
Partners' Capital,
December 31, 2003 23,774,204.324 532,266,109 5,918,169 538,184,278
Offering of Units 11,745,240.279 259,052,698 1,900,000 260,952,698
Net income -- 35,747,190 394,461 36,141,651
Redemptions (2,558,198.900) (56,554,740) -- (56,554,740)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2004 32,961,245.703 770,511,257 8,212,630 778,723,887
Offering of Units 6,431,314.024 139,226,034 480,000 139,706,034
Net loss -- (39,990,714) (427,427) (40,418,141)
Redemptions (7,045,625.892) (154,076,846) (518,841) (154,595,687)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2005 32,346,933.835 715,669,731 7,746,362 723,416,093
Offering of Units 5,449,636.682 127,236,707 -- 127,236,707
Net income -- 38,047,099 416,025 38,463,124
Redemptions (5,680,770.401) (132,294,966) -- (132,294,966)
-------------- ------------ --------- ------------
Partners' Capital,
December 31, 2006 32,115,800.116 748,658,571 8,162,387 756,820,958
============== ============ ========= ============
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM CURRENCY L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss (8,575,168) (49,703,859) (11,908,707)
Noncash item included in net loss:
Net change in unrealized 1,668,161 10,445,759 (11,769,313)
(Increase) decrease in operating assets:
Restricted cash -- 169,680 (169,680)
Interest receivable
(Morgan Stanley DW) (768) (244,444) (213,650)
Increase (decrease) in operating
liabilities:
Accrued brokerage fees
(Morgan Stanley DW) (235,950) (145,868) 346,433
Accrued management fees (102,587) (63,421) 150,624
Accrued incentive fee -- -- (399,035)
----------- ----------- -----------
Net cash used for operating activities (7,246,312) (39,542,153) (23,963,328)
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Cash received from offering of Units 17,106,804 45,800,729 117,548,841
Cash paid for redemptions of Units (55,076,000) (51,528,518) (19,137,190)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (37,969,196) (5,727,789) 98,411,651
----------- ----------- -----------
Net increase (decrease) in
unrestricted cash (45,215,508) (45,269,942) 74,448,323
Unrestricted cash at beginning of
period 207,952,625 253,222,567 178,774,244
----------- ----------- -----------
Unrestricted cash at end of period 162,737,117 207,952,625 253,222,567
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2006 2005 2004
------------ ------------ -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) 1,086,960 1,792,690 (3,017,628)
Noncash item included in net
income (loss):
Net change in unrealized (589,128) 214,685 1,729,717
(Increase) decrease in operating assets:
Restricted cash (887,091) 1,501,795 (116,681)
Interest receivable
(Morgan Stanley DW) (30,183) (65,068) (43,862)
Net option premiums -- -- (39,600)
Decrease in operating liabilities:
Accrued brokerage fees
(Morgan Stanley DW) (13,249) (16,460) (6,455)
Accrued management fees (3,601) (4,473) (1,754)
------------ ------------ -----------
Net cash provided by (used for)
operating activities (436,292) 3,423,169 (1,496,263)
------------ ------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Cash received from offering of Units 4,092,049 5,343,828 11,983,540
Cash paid for redemptions of Units (9,034,848) (11,783,215) (12,047,859)
------------ ------------ -----------
Net cash used for financing activities (4,942,799) (6,439,387) (64,319)
------------ ------------ -----------
Net decrease in unrestricted cash (5,379,091) (3,016,218) (1,560,582)
Unrestricted cash at beginning of
period 41,897,899 44,914,117 46,474,699
------------ ------------ -----------
Unrestricted cash at end of period 36,518,808 41,897,899 44,914,117
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2006 2005 2004
------------ ------------ -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) 31,117,372 (29,214,513) (23,311,900)
Noncash item included in net
income (loss):
Net change in unrealized 6,224,193 (3,059,181) 21,655,342
(Increase) decrease in operating assets:
Restricted cash (13,559,098) 24,246,115 (15,987,079)
Interest receivable
(Morgan Stanley DW) (440,959) (659,466) (507,361)
Net option premiums -- 3,366,493 (2,134,005)
Increase (decrease) in operating
liabilities:
Accrued brokerage fees
(Morgan Stanley DW) (2,220) (738,682) 1,067,674
Accrued management fees (99,004) (60,615) 362,561
Accrued incentive fee -- -- (2,227,005)
------------ ------------ -----------
Net cash provided by (used for)
operating activities 23,240,284 (6,119,849) (21,081,773)
------------ ------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Cash received from offering of Units 76,635,498 100,607,663 210,179,028
Cash paid for redemptions of Units (102,954,101) (107,667,647) (39,845,039)
------------ ------------ -----------
Net cash provided by (used for)
financing activities (26,318,603) (7,059,984) 170,333,989
------------ ------------ -----------
Net increase (decrease) in
unrestricted cash (3,078,319) (13,179,833) 149,252,216
Unrestricted cash at beginning of
period 475,166,952 488,346,785 339,094,569
------------ ------------ -----------
Unrestricted cash at end of period 472,088,633 475,166,952 488,346,785
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) 35,652,273 (5,545,967) 1,248,814
Noncash item included in net
income (loss):
Net change in unrealized (3,564,208) (10,826,414) 5,262,416
(Increase) decrease in operating assets:
Restricted cash (656,827) (2,785,615) (3,161,765)
Net option premiums (680,697) 263,856 414,992
Interest receivable
(Morgan Stanley DW) (224,414) (207,268) (172,065)
Increase (decrease) in operating
liabilities:
Accrued brokerage fees
(Morgan Stanley DW) 186,906 (243,247) 430,756
Accrued management fees 97,384 (28,870) 140,911
Accrued incentive fees (1,704,356) 1,515,612 (622,506)
----------- ----------- -----------
Net cash provided by (used for)
operating activities 29,106,061 (17,857,913) 3,541,553
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Cash received from offering of Units 39,153,750 35,344,084 74,620,070
Cash paid for redemptions of Units (37,607,869) (36,891,247) (12,769,688)
----------- ----------- -----------
Net cash provided by (used for)
financing activities 1,545,881 (1,547,163) 61,850,382
----------- ----------- -----------
Net increase (decrease) in
unrestricted cash 30,651,942 (19,405,076) 65,391,935
Unrestricted cash at beginning of
period 142,187,180 161,592,256 96,200,321
----------- ----------- -----------
Unrestricted cash at end of period 172,839,122 142,187,180 161,592,256
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2006 2005 2004
------------ ------------ -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) 38,463,124 (40,418,141) 36,141,651
Noncash item included in net
income (loss):
Net change in unrealized (9,753,211) 5,277,614 19,092,460
(Increase) decrease in operating
assets:
Restricted cash 14,301,903 33,063,604 (71,797,043)
Net option premiums (64,116) -- 3,973,725
Interest receivable
(Morgan Stanley DW) (651,160) (887,041) (708,483)
Increase (decrease) in operating
liabilities:
Accrued brokerage fees
(Morgan Stanley DW) (81,816) (854,838) 1,682,213
Accrued management fees (21,993) (2,851) 547,516
Accrued incentive fee -- -- (4,924,640)
------------ ------------ -----------
Net cash provided by (used for)
operating activities 42,192,731 (3,821,653) (15,992,601)
------------ ------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Cash received from offering of Units 128,704,132 148,524,367 259,672,165
Cash paid for redemptions of Units (143,586,833) (138,199,116) (53,013,759)
------------ ------------ -----------
Net cash provided by (used for)
financing activities (14,882,701) 10,325,251 206,658,406
------------ ------------ -----------
Net increase in unrestricted cash 27,310,030 6,503,598 190,665,805
Unrestricted cash at beginning of
period 591,492,563 584,988,965 394,323,160
------------ ------------ -----------
Unrestricted cash at end of period 618,802,593 591,492,563 584,988,965
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM CURRENCY L.P.
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2006 AND 2005
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS
- ------------------------------ --------------- ------------- ---------------- -------------
2006 PARTNERSHIP NET ASSETS: $163,049,336 $ % $ %
Foreign currency 1,858,967 1.14 2,675,066 1.64
---------- ----- --------- ----
Grand Total: 1,858,967 1.14 2,675,066 1.64
========== ===== ========= ====
Unrealized Currency Gain/(Loss)
Total Net Unrealized Gain per Statement of Financial Condition
2005 PARTNERSHIP NET ASSETS: $208,486,757
Foreign currency (1,081,795) (0.52) 7,283,989 3.49
---------- ----- --------- ----
Grand Total: (1,081,795) (0.52) 7,283,989 3.49
========== ===== ========= ====
Unrealized Currency Gain/(Loss)
Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS)
- ------------------------------ --------------
2006 PARTNERSHIP NET ASSETS: $163,049,336 $
Foreign currency 4,534,033
---------
Grand Total: 4,534,033
Unrealized Currency Gain/(Loss) --
---------
Total Net Unrealized Gain per Statement of Financial Condition 4,534,033
=========
2005 PARTNERSHIP NET ASSETS: $208,486,757
Foreign currency 6,202,194
---------
Grand Total: 6,202,194
Unrealized Currency Gain/(Loss) --
---------
Total Net Unrealized Gain per Statement of Financial Condition 6,202,194
=========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P.
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2006 AND 2005
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS
- ------------------------------ --------------- ------------- ---------------- -------------
2006 PARTNERSHIP NET ASSETS: $40,357,320 $ % $ %
Commodity 65,101 0.16 127,695 0.32
Equity 269,904 0.66 -- --
Foreign currency (30,000) (0.07) (7,613) (0.02)
Interest rate (41,078) (0.10) 371,009 0.92
------- ----- ------- -----
Grand Total: 263,927 0.65 491,091 1.22
======= ===== ======= =====
Unrealized Currency Gain
Total Net Unrealized Gain per Statement of Financial Condition
2005 PARTNERSHIP NET ASSETS: $44,351,826
Commodity 74,261 0.17 (9,113) (0.02)
Equity 431,246 0.97 -- --
Foreign currency 25,515 0.06 (31,429) (0.07)
Interest rate 37,273 0.08 186,788 0.42
------- ----- ------- -----
Grand Total: 568,295 1.28 146,246 0.33
======= ===== ======= =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS)
- ------------------------------ --------------
2006 PARTNERSHIP NET ASSETS: $40,357,320 $
Commodity 192,796
Equity 269,904
Foreign currency (37,613)
Interest rate 329,931
---------
Grand Total: 755,018
Unrealized Currency Gain 436,748
---------
Total Net Unrealized Gain per Statement of Financial Condition 1,191,766
=========
2005 PARTNERSHIP NET ASSETS: $44,351,826
Commodity 65,148
Equity 431,246
Foreign currency (5,914)
Interest rate 224,061
---------
Grand Total: 714,541
Unrealized Currency Loss (111,903)
---------
Total Net Unrealized Gain per Statement of Financial Condition 602,638
=========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SELECT L.P.
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2006 AND 2005
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS
- ------------------------------ --------------- ------------- ---------------- -------------
2006 PARTNERSHIP NET ASSETS: $543,522,485 $ % $ %
Commodity 456,160 0.08 2,995,834 0.55
Equity 4,924,820 0.91 -- --
Foreign currency (247,846) (0.05) 2,552,915 0.47
Interest rate (2,248,119) (0.41) 4,585,113 0.84
---------- ----- ---------- -----
Grand Total: 2,885,015 0.53 10,133,862 1.86
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
2005 PARTNERSHIP NET ASSETS: $533,002,342
Commodity 15,589,813 2.92 (730,681) (0.14)
Equity 1,882,850 0.35 12,500 --
Foreign currency (2,386,026) (0.44) 4,136,927 0.78
Interest rate 684,290 0.13 1,798,925 0.34
---------- ----- ---------- -----
Grand Total: 15,770,927 2.96 5,217,671 0.98
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS)
- ------------------------------ --------------
2006 PARTNERSHIP NET ASSETS: $543,522,485 $
Commodity 3,451,994
Equity 4,924,820
Foreign currency 2,305,069
Interest rate 2,336,994
----------
Grand Total: 13,018,877
Unrealized Currency Loss (1,057,266)
----------
Total Net Unrealized Gain per Statement of Financial Condition 11,961,611
==========
2005 PARTNERSHIP NET ASSETS: $533,002,342
Commodity 14,859,132
Equity 1,895,350
Foreign currency 1,750,901
Interest rate 2,483,215
----------
Grand Total: 20,988,598
Unrealized Currency Loss (2,802,794)
----------
Total Net Unrealized Gain per Statement of Financial Condition 18,185,804
==========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM STRATEGIC L.P.
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2006 AND 2005
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS
- ------------------------------ --------------- ------------- ---------------- -------------
2006 PARTNERSHIP NET ASSETS: $209,477,064 $ % $ %
Commodity 12,403,353 5.92* 570,125 0.27
Equity 1,533,728 0.73 (775) --
Foreign currency 1,553,840 0.74 1,207,868 0.58
Interest rate (773,724) (0.37) 969,810 0.46
---------- ----- ---------- -----
Grand Total: 14,717,197 7.02 2,747,028 1.31
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
2005 PARTNERSHIP NET ASSETS: $169,625,738
Commodity 16,718,531 9.86* (28,242) (0.01)
Equity (96,027) (0.06) -- --
Foreign currency (1,327,499) (0.78) (2,048,373) (1.21)
Interest rate -- -- 582,959 0.34
---------- ----- ---------- -----
Grand Total: 15,295,005 9.02 (1,493,656) (0.88)
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS)
- ------------------------------ --------------
2006 PARTNERSHIP NET ASSETS: $209,477,064 $
Commodity 12,973,478
Equity 1,532,953
Foreign currency 2,761,708
Interest rate 196,086
----------
Grand Total: 17,464,225
Unrealized Currency Loss (414,234)
----------
Total Net Unrealized Gain per Statement of Financial Condition 17,049,991
==========
2005 PARTNERSHIP NET ASSETS: $169,625,738
Commodity 16,690,289
Equity (96,027)
Foreign currency (3,375,872)
Interest rate 582,959
----------
Grand Total: 13,801,349
Unrealized Currency Loss (315,566)
----------
Total Net Unrealized Gain per Statement of Financial Condition 13,485,783
==========
*No single contract's value exceeds 5% of Net Assets.
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM TECHNICAL L.P.
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2006 AND 2005
LONG UNREALIZED PERCENTAGE SHORT UNREALIZED PERCENTAGE
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS) OF NET ASSETS GAIN/(LOSS) OF NET ASSETS
- ------------------------------ --------------- ------------- ---------------- -------------
2006 PARTNERSHIP NET ASSETS: $756,820,958 $ % $ %
Commodity 1,502,376 0.20 2,066,014 0.27
Equity 7,860,426 1.04 -- --
Foreign currency 3,058,385 0.40 12,834,701 1.70
Interest rate (6,358,278) (0.84) 16,042,982 2.12
---------- ----- ---------- -----
Grand Total: 6,062,909 0.80 30,943,697 4.09
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
2005 PARTNERSHIP NET ASSETS: $723,416,093
Commodity 33,767,846 4.66 (1,474,466) (0.20)
Equity (1,753,796) (0.24) -- --
Foreign currency (4,881,736) (0.67) (2,151,613) (0.30)
Interest rate 1,726,772 0.24 2,349,450 0.32
---------- ----- ---------- -----
Grand Total: 28,859,086 3.99 (1,276,629) (0.18)
========== ===== ========== =====
Unrealized Currency Loss
Total Net Unrealized Gain per Statement of Financial Condition
NET UNREALIZED
FUTURES AND FORWARD CONTRACTS: GAIN/(LOSS)
- ------------------------------ --------------
2006 PARTNERSHIP NET ASSETS: $756,820,958 $
Commodity 3,568,390
Equity 7,860,426
Foreign currency 15,893,086
Interest rate 9,684,704
----------
Grand Total: 37,006,606
Unrealized Currency Loss (5,189,259)
----------
Total Net Unrealized Gain per Statement of Financial Condition 31,817,347
==========
2005 PARTNERSHIP NET ASSETS: $723,416,093
Commodity 32,293,380
Equity (1,753,796)
Foreign currency (7,033,349)
Interest rate 4,076,222
----------
Grand Total: 27,582,457
Unrealized Currency Loss (5,518,321)
----------
Total Net Unrealized Gain per Statement of Financial Condition 22,064,136
==========
The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Morgan Stanley Spectrum Currency L.P. ("Spectrum Currency"),
Morgan Stanley Spectrum Global Balanced L.P. ("Spectrum Global Balanced"),
Morgan Stanley Spectrum Select L.P. ("Spectrum Select"), Morgan Stanley
Spectrum Strategic L.P. ("Spectrum Strategic"), and Morgan Stanley Spectrum
Technical L.P. ("Spectrum Technical") (individually, a "Partnership", or
collectively, the "Partnerships"), are limited partnerships organized to engage
primarily in the speculative trading of futures contracts, options on futures
and forward contracts, and forward contracts on physical commodities and other
commodity interests, including, but not limited to, foreign currencies,
financial instruments, metals, energy, and agricultural products (collectively,
"Futures Interests").
The general partner of each Partnership is Demeter Management Corporation
("Demeter"). The non-clearing commodity broker is Morgan Stanley DW Inc.
("Morgan Stanley DW"). The clearing commodity brokers for Spectrum Global
Balanced, Spectrum Select, Spectrum Strategic, and Spectrum Technical are
Morgan Stanley & Co. Incorporated ("MS&Co.") and Morgan Stanley & Co.
International Limited ("MSIL"). Spectrum Currency's clearing commodity broker
is MS&Co. MS&Co. acts as the counterparty on all of the foreign currency
forward contracts for each Partnership. In 2007, Morgan Stanley intends to
merge Morgan Stanley DW into MS&Co. Upon completion of the merger, the
surviving entity, MS&Co., will be the Partnerships' principal U.S. commodity
broker-dealer. For Spectrum Strategic and Spectrum Technical, Morgan Stanley
Capital Group Inc. ("MSCG") acts as the counterparty on all of the options on
foreign currency forward contracts. Demeter, Morgan Stanley DW, MS&Co., MSIL,
and MSCG are wholly-owned subsidiaries of Morgan Stanley.
Demeter is required to maintain a 1% minimum interest in the equity of each
Partnership and income (losses) are shared by Demeter and the limited partners
based upon their proportional ownership interests.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
USE OF ESTIMATES. The financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require management to make estimates and assumptions that affect the reported
amounts in the financial statements and related disclosures. Management
believes that the estimates utilized in the preparation of the financial
statements are prudent and reasonable. Actual results could differ from those
estimates.
REVENUE RECOGNITION. Futures Interests are open commitments until settlement
date, at which time they are realized. They are valued at market on a daily
basis and the resulting net change in unrealized gains and losses is reflected
in the change in unrealized trading profit (loss) on open contracts from one
period to the next on the Statements of Operations. Monthly, Morgan Stanley DW
pays each Partnership interest income on 80% of the month's average daily "Net
Assets" (as defined in the Limited Partnership Agreements) in the case of
Spectrum Currency, Spectrum Select, Spectrum Strategic, and Spectrum Technical,
and on 100% in the case of Spectrum Global Balanced. The interest rate is equal
to a prevailing rate on U.S. Treasury bills. For purposes of such interest
payments, Net Assets do not include monies owed to the Partnerships on Futures
Interests.
The Partnerships' functional currency is the U.S. dollar; however, they
transact business in currencies other than the U.S. dollar. Assets and
liabilities denominated in currencies other than the U.S. dollar are translated
into U.S. dollars at the rates in effect at the date of the Statements of
Financial Condition. Income and expense items denominated in currencies other
than the U.S. dollar are translated into U.S. dollars at the rates in effect
during the period. Gains and losses resulting from the translation to U.S.
dollars are reported in income currently.
NET INCOME (LOSS) PER UNIT. Net income (loss) per unit of limited partnership
interest ("Unit(s)") is computed using the weighted average number of Units
outstanding during the period.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
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 is effective for fiscal years beginning after
December 15, 2006. The impact to the Partnerships' Financial Statements, if
any, is currently being assessed.
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 Partnerships as of January 1, 2008. The
impact to the Partnerships' Financial Statements, if any, is currently being
assessed.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108") to provide guidance on how the effects of the
carryover or reversal of prior year unrecorded misstatements should be
considered in quantifying a current year misstatement. SAB No. 108 requires a
company to apply an approach that considers the amount by which the current
year income statement is misstated ("rollover approach") and an approach that
considers the cumulative amount by which the current year balance sheet is
misstated ("iron-curtain approach"). Prior to the issuance of SAB No. 108, many
companies applied either the rollover or iron-curtain approach for purposes of
assessing materiality of misstatements. SAB No. 108 is effective for the
Partnerships as of January 1, 2007. Upon adoption, SAB No. 108 allows a
one-time cumulative effect adjustment against Partners' Capital for those prior
year misstatements that were not material under the Partnerships' prior
approach, but that are deemed material under the SAB No. 108 approach. Demeter
does not expect the adoption of SAB No. 108 to have a material impact on the
Partnerships' Financial Statements.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
EQUITY IN FUTURES INTERESTS TRADING ACCOUNTS. The Partnerships' asset "Equity
in futures interests trading accounts," reflected on the Statements of
Financial Condition, consists of (A) cash on deposit with Morgan Stanley DW,
MS&Co, and MSIL for Spectrum Global Balanced, Spectrum Select, Spectrum
Strategic, and Spectrum Technical, and with Morgan Stanley DW and MS&Co. for
Spectrum Currency, to be used as margin for trading; (B) net unrealized gains
or losses on open contracts, which are valued at market and calculated as the
difference between original contract value and market value; and (C) net option
premiums, which represent the net of all monies paid and/or received for such
option premiums.
The Partnerships, in their normal course of business, enter into various
contracts with MS&Co. and MSIL acting as their commodity brokers. Pursuant to
brokerage agreements with MS&Co. and MSIL to the extent that such trading
results in unrealized gains or losses, these amounts are offset and reported on
a net basis on the Partnerships' Statements of Financial Condition.
The Partnerships have offset the fair value amounts recognized for forward
and options on forward contracts executed with the same counterparty as
allowable under the terms of their master netting agreements with MS&Co., the
sole counterparty on such contracts. The Partnerships have consistently applied
their right to offset.
BROKERAGE AND RELATED TRANSACTION FEES AND COSTS. The brokerage fees for
Spectrum Currency and Spectrum Global Balanced are accrued at a flat monthly
rate of 1/12 of 4.6% (a 4.6% annual rate) of Net Assets as of the first day of
each month.
Brokerage fees for Spectrum Select, Spectrum Strategic, and Spectrum
Technical are currently accrued at a flat monthly rate of 1/12 of 6.00% (a
6.00% annual rate) of Net Assets as of the first day of each month.
Effective July 1, 2005, brokerage fees for Spectrum Select, Spectrum
Strategic, and Spectrum Technical were reduced from 1/12 of 7.25% (a 7.25%
annual rate) to 1/12 of 6.00% (a 6.00% annual rate) of Net Assets as of the
first day of each month.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
Such brokerage fees currently cover all brokerage fees, transaction fees and
costs, and ordinary administrative and continuing offering expenses.
OPERATING EXPENSES. The Partnerships incur monthly management fees and may
incur incentive fees. All common administrative and continuing offering
expenses including legal, auditing, accounting, filing fees, and other related
expenses are borne by Morgan Stanley DW through the brokerage fees paid by the
Partnerships.
CONTINUING OFFERING. Units of each Partnership are offered at a price equal to
100% of the Net Asset Value per Unit as of the close of business on the last
day of each month. No selling commissions or charges related to the continuing
offering of Units are paid by the limited partners or the Partnerships. Morgan
Stanley DW pays all such costs.
REDEMPTIONS. Limited partners may redeem some or all of their Units at 100% of
the Net Asset Value per Unit as of the end of the last day of any month that is
at least six months after the closing at which a person first becomes a limited
partner. The Request for Redemption must be delivered to a limited partner's
local Morgan Stanley Branch Office in time for it to be forwarded and received
by Demeter no later than 3:00 p.m., New York City time, on the last day of the
month in which the redemption is to be effective. Redemptions must be made in
whole Units, in a minimum amount of 50 Units required for each redemption,
unless a limited partner is redeeming his entire interest in a Partnership.
Units redeemed on or prior to the last day of the twelfth month from the date
of purchase will be subject to a redemption charge equal to 2% of the Net Asset
Value of a Unit on the Redemption Date. Units redeemed after the last day of
the twelfth month and on or prior to the last day of the twenty-fourth month
from the date of purchase will be subject to a redemption charge equal to 1% of
the Net Asset Value of a Unit on the Redemption Date. Units redeemed after the
last day of the twenty-fourth month from the date of purchase will not be
subject to a redemption charge. The foregoing redemption charges are paid to
Morgan Stanley DW.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
EXCHANGES. On the last day of the first month which occurs more than six
months after a person first becomes a limited partner in any of the
Partnerships, and at the end of each month thereafter, limited partners may
exchange their Units among the Partnerships (subject to certain restrictions
outlined in the Limited Partnership Agreements) without paying additional
charges.
DISTRIBUTIONS. Distributions, other than redemptions of Units, are made on a
pro-rata basis at the sole discretion of Demeter. No distributions have been
made to date. Demeter does not intend to make any distributions of the
Partnerships' profits.
INCOME TAXES. No provision for income taxes has been made in the accompanying
financial statements, as partners are individually responsible for reporting
income or loss based upon their respective share of each Partnership's revenues
and expenses for income tax purposes.
DISSOLUTION OF THE PARTNERSHIPS. Spectrum Currency, Spectrum Global Balanced,
Spectrum Strategic, and Spectrum Technical will terminate on December 31, 2035
and Spectrum Select will terminate on December 31, 2025, regardless of
financial condition at such time, or at an earlier date if certain conditions
occur as defined in each Partnership's Limited Partnership Agreement.
LITIGATION SETTLEMENT. Spectrum Global Balanced, Spectrum Select, Spectrum
Strategic, and Spectrum Technical received notification of a preliminary
entitlement to payment from the Sumitomo Copper Litigation Settlement
Administrator, and the Partnerships received settlement award payments in the
amounts of $0, $45,665, $173, and $3,018, respectively, during July 2004 and
$2,230, $85,000, $454, and $4,209, respectively, during November 2005. Spectrum
Global Balanced received a settlement award payment in the amount of $2,296
during October 2004. Any amounts received are accounted for in the period
received, for the benefit of the limited partners at the date of receipt.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
RECLASSIFICATIONS. Certain prior year amounts relating to cash balances were
reclassified on the Statements of Cash Flows to conform to 2006 and 2005
presentation. Such reclassifications have no impact on the Partnerships'
reported net income (loss).
- --------------------------------------------------------------------------------
2. RELATED PARTY TRANSACTIONS
The Partnerships pay brokerage fees to Morgan Stanley DW as described in Note
1. Spectrum Global Balanced, Spectrum Select, Spectrum Strategic, and Spectrum
Technical's cash is on deposit with Morgan Stanley DW, MS&Co., and MSIL, and
Spectrum Currency's cash is on deposit with Morgan Stanley DW and MS&Co., in
futures interests trading accounts to meet margin requirements as needed.
Morgan Stanley DW pays interest on these funds as described in Note 1.
- --------------------------------------------------------------------------------
3. TRADING ADVISORS
Demeter, on behalf of each Partnership, retains certain commodity trading
advisors to make all trading decisions for the Partnerships. The trading
advisors for each Partnership at December 31, 2006 were as follows:
Morgan Stanley Spectrum Currency L.P.
John W. Henry & Company, Inc.
Sunrise Capital Partners, LLC
Morgan Stanley Spectrum Global Balanced L.P.
SSARIS Advisors, LLC
Morgan Stanley Spectrum Select L.P.
EMC Capital Management, Inc. ("EMC")
Northfield Trading L.P. ("Northfield")
Rabar Market Research, Inc. ("Rabar")
Sunrise Capital Management, Inc. ("Sunrise")
Graham Capital Management, L.P. ("Graham")
Morgan Stanley Spectrum Strategic L.P.
Blenheim Capital Management, L.L.C. ("Blenheim")
Eclipse Capital Management, Inc. ("Eclipse")
FX Concepts (Trading Advisor), Inc. ("FX
Concepts"), effective November 1, 2004
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
Effective April 30, 2004, Allied Irish Capital Management Ltd. was terminated
as a trading advisor for Spectrum Strategic.
Morgan Stanley Spectrum Technical L.P.
Campbell & Company, Inc. ("Campbell")
Chesapeake Capital Corporation ("Chesapeake")
John W. Henry & Company, Inc. ("JWH")
Winton Capital Management Limited ("Winton")
Compensation to the trading advisors by the Partnerships consists of a
management fee and an incentive fee as follows:
MANAGEMENT FEE. The management fee for Spectrum Currency is accrued at a rate
of 1/12 of 2% per month of Net Assets allocated to each trading advisor on the
first day of each month (a 2% annual rate).
The management fee for Spectrum Global Balanced is accrued at a rate of 5/48
of 1% per month of Net Assets allocated to its sole trading advisor on the
first day of each month (a 1.25% annual rate).
The management fee for Spectrum Select is accrued at a rate of 1/4 of 1% per
month of Net Assets allocated to Northfield and Sunrise on the first day of
each month (a 3% annual rate), 5/24 of 1% per month of Net Assets allocated to
EMC and Rabar on the first day of each month (a 2.5% annual rate), and 1/12 of
2% per month of Net Assets allocated to Graham on the first day of each month
(a 2% annual rate).
Effective November 1, 2006, the monthly management fee payable to EMC and
Rabar was reduced from 1/4 of 1% (a 3% annual rate) to 5/24 of 1% (a 2.5%
annual rate) of Net Assets.
The management fee for Spectrum Strategic is accrued at a rate of 1/12 of 3%
per month of Net Assets allocated to Blenheim and Eclipse on the first day of
each month (a 3% annual rate) and 1/12 of 2% per month of Net Assets allocated
to FX Concepts on the first day of each month (a 2% annual rate).
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
The management fee for Spectrum Technical is accrued at the rate of 1/12 of
2% per month of Net Assets allocated to JWH and Winton on the first day of each
month (a 2% annual rate) and 1/12 of 3% per month of Net Assets allocated to
Campbell and Chesapeake on the first day of each month (a 3% annual rate).
INCENTIVE FEE. Spectrum Currency pays a monthly incentive fee equal to 20% of
the trading profits experienced with respect to each trading advisor's
allocated Net Assets as of the end of each calendar month.
Spectrum Global Balanced pays a monthly incentive fee equal to 15% of the
trading profits experienced with respect to the sole trading advisor's
allocated Net Assets as of the end of each calendar month.
Spectrum Select pays a monthly incentive fee equal to 17.5% of the trading
profits experienced with respect to the Net Assets allocated to EMC and Rabar
as of the end of each calendar month, 15% of the trading profits experienced
with respect to the Net Assets allocated to each of Northfield and Sunrise as
of the end of each calendar month, and 20% of the trading profits experienced
with respect to the Net Assets allocated to Graham as of the end of each
calendar month.
Effective November 1, 2006, the monthly incentive fee payable to EMC and
Rabar was increased from 15% to 17.5% of the trading profits experienced with
respect to the Net Assets as of the end of each calendar month.
Spectrum Strategic pays a monthly incentive fee equal to 15% of the trading
profits experienced with respect to the Net Assets allocated to each of
Blenheim and Eclipse as of the end of each calendar month and 20% of the
trading profits experienced with respect to the Net Assets allocated to FX
Concepts as of the end of each calendar month.
Spectrum Technical pays a monthly incentive fee equal to 20% of the trading
profits experienced with respect to the Net Assets allocated to each of
Campbell, JWH, and Winton as of the end of each calendar month and 19% of the
trading profits experienced with respect to the Net Assets allocated to
Chesapeake as of the end of each calendar month.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
Trading profits represent the amount by which profits from futures, forwards,
and options trading exceed losses after brokerage and management fees are
deducted.
For all Partnerships with trading losses, no incentive fee is paid in
subsequent months until all such losses are recovered. Cumulative trading
losses are adjusted on a pro-rata basis for the net amount of each month's
subscriptions and redemptions.
- --------------------------------------------------------------------------------
4. FINANCIAL INSTRUMENTS
The Partnerships trade Futures Interests. Futures and forwards represent
contracts for delayed delivery of an instrument at a specified date and price.
Risk arises from changes in the value of these contracts and the potential
inability of counterparties to perform under the terms of the contracts. There
are numerous factors which may significantly influence the market value of
these contracts, including interest rate volatility.
The market value of exchange-traded contracts is based on the settlement
price quoted by the exchange on the day with respect to which market value is
being determined. If an exchange-traded contract could not have been liquidated
on such day due to the operation of daily limits or other rules of the
exchange, the settlement price shall be the settlement price on the first
subsequent day on which the contract could be liquidated. The market value of
off-exchange-traded contracts is based on the fair market value quoted by the
counterparty.
The Partnerships' contracts are accounted for on a trade-date basis and
marked to market on a daily basis. The Partnerships account for their
derivative investments in accordance with the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 defines a derivative as
a financial instrument or other contract that has all three of the following
characteristics:
(1)One or more underlying notional amounts or payment provisions;
(2)Requires no initial net investment or a smaller initial net investment than
would be required relative to changes in market factors;
(3)Terms require or permit net settlement.
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
Generally, derivatives include futures, forward, swaps or options contracts,
and other financial instruments with similar characteristics such as caps,
floors, and collars.
The net unrealized gains (losses) on open contracts at December 31, reported
as a component of "Equity in futures interests trading accounts" on the
Statements of Financial Condition, and their longest contract maturities were
as follows:
SPECTRUM CURRENCY
NET UNREALIZED GAINS
ON OPEN CONTRACTS LONGEST MATURITIES
----------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- --------- --------- --------- --------- ---------
$ $ $
2006 -- 4,534,033 4,534,033 -- Mar. 2007
2005 -- 6,202,194 6,202,194 -- Mar. 2006
SPECTRUM GLOBAL BALANCED
NET UNREALIZED GAINS
ON OPEN CONTRACTS LONGEST MATURITIES
----------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- --------- --------- --------- --------- ---------
$ $ $
2006 1,191,766 -- 1,191,766 Jun. 2007 --
2005 581,983 20,655 602,638 Mar. 2006 Mar. 2006
SPECTRUM SELECT
NET UNREALIZED GAINS
ON OPEN CONTRACTS LONGEST MATURITIES
------------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- ---------- --------- ---------- --------- ---------
$ $ $
2006 10,738,293 1,223,318 11,961,611 Jun. 2008 Mar. 2007
2005 16,351,481 1,834,323 18,185,804 Jun. 2007 Mar. 2006
SPECTRUM STRATEGIC
NET UNREALIZED GAINS/
(LOSSES) ON OPEN CONTRACTS LONGEST MATURITIES
--------------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- ---------- ---------- ---------- --------- ---------
$ $ $
2006 14,262,116 2,787,875 17,049,991 Dec. 2008 May 2007
2005 16,488,302 (3,002,519) 13,485,783 Jun. 2010 Jul. 2006
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
SPECTRUM TECHNICAL
NET UNREALIZED GAINS/
(LOSSES) ON OPEN CONTRACTS LONGEST MATURITIES
--------------------------------- -------------------
OFF- OFF-
EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE-
YEAR TRADED TRADED TOTAL TRADED TRADED
---- ---------- ---------- ---------- --------- ---------
$ $ $
2006 21,920,150 9,897,197 31,817,347 Jun. 2008 Mar. 2007
2005 26,727,989 (4,663,853) 22,064,136 Jun. 2007 Mar. 2006
The Partnerships have credit risk associated with counterparty
nonperformance. As of the date of the financial statements, the credit risk
associated with the instruments in which the Partnerships trade is limited to
the amounts reflected in the Partnerships' Statements of Financial Condition.
The Partnerships also have credit risk because Morgan Stanley DW, MS&Co.,
MSIL, and/or MSCG act as the futures commission merchants or the
counterparties, with respect to most of the Partnerships' assets.
Exchange-traded futures, 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. Morgan Stanley DW, MS&Co., and
MSIL, each as a futures commission merchant for each 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, 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 at December 31, 2006 and 2005
respectively, $41,074,269 and $44,956,486 for Spectrum Global Balanced,
$547,628,371 and $542,760,780 for Spectrum Select, $207,351,885 and
$178,269,302 for Spectrum Strategic, and $754,343,175 and $746,142,887 for
Spectrum Technical. With respect to each 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
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
any requirement that an amount equal to the net unrealized gains (losses) on
such contracts be segregated. However, each 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 Morgan Stanley DW for the benefit of MS&Co. With respect to those
off-exchange-traded forward currency contracts, the Partnerships are at risk to
the ability of MS&Co., the sole counterparty on all such contracts, to perform.
With respect to those off-exchange-traded forward currency options contracts,
the Partnerships are at risk to the ability of MSCG, the sole counterparty on
all such contracts to perform. Each Partnership has a netting agreement with
the counterparties. These agreements, which seek to reduce both the
Partnerships' and the counterparties' exposure on off-exchange-traded forward
currency contracts, should materially decrease the Partnerships' credit risk in
the event of MS&Co.'s or MSCG's bankruptcy or insolvency.
- --------------------------------------------------------------------------------
5. FINANCIAL HIGHLIGHTS
SPECTRUM CURRENCY
2006 2005 2004
------- -------- -------
PER UNIT OPERATING
PERFORMANCE:
NET ASSET VALUE, JANUARY 1: $ 11.78 $ 14.41 $ 15.66
------- -------- -------
NET OPERATING RESULTS:
Interest Income 0.41 0.28 0.13
Expenses (0.73) (0.82) (0.89)
Realized Profit (Loss) 0.02 (1.54) (1.21)
Unrealized Profit (Loss) (0.10) (0.55) 0.72
------- -------- -------
Net Loss (0.40) (2.63) (1.25)
------- -------- -------
NET ASSET VALUE,
DECEMBER 31: $ 11.38 $ 11.78 $ 14.41
======= ======== =======
FOR THE CALENDAR YEAR:
RATIOS TO AVERAGE NET
ASSETS:
Net Investment Loss (2.9)% (4.4)% (5.6)%
Expenses before Incentive Fees 6.7 % 6.8 % 6.4 %
Expenses after Incentive Fees 6.7 % 6.8 % 6.5 %
Net Loss (4.9)% (21.4)% (5.3)%
TOTAL RETURN BEFORE
INCENTIVE FEES (3.4)% (18.3)% (7.9)%
TOTAL RETURN AFTER
INCENTIVE FEES (3.4)% (18.3)% (8.0)%
INCEPTION-TO-DATE RETURN 13.8 %
COMPOUND ANNUALIZED
RETURN 2.0 %
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(continued)
SPECTRUM GLOBAL BALANCED
2006 2005 2004
------- ------- -------
PER UNIT OPERATING
PERFORMANCE:
NET ASSET VALUE, JANUARY 1: $ 15.23 $ 14.61 $ 15.47
------- ------- -------
NET OPERATING RESULTS:
Interest Income 0.74 0.43 0.18
Expenses (0.91) (0.85) (0.87)
Realized Profit 0.33 1.11 0.34
Unrealized Profit (Loss) 0.21 (0.07) (0.51)
Proceeds from Litigation
Settlement -- 0.00 0.00
------- ------- -------
Net Income (Loss) 0.37 0.62 (0.86)
------- ------- -------
NET ASSET VALUE,
DECEMBER 31: $ 15.60 $ 15.23 14.61
======= ======= =======
FOR THE CALENDAR YEAR:
RATIOS TO AVERAGE NET
ASSETS:
Net Investment Loss (1.1)% (2.9)% (4.6)%
Expenses before Incentive Fees 5.9 % 5.9 % 5.9 %
Expenses after Incentive Fees 5.9 % 5.9 % 5.9 %
Net Income (Loss) 2.5 % 3.9 % (6.0)%
TOTAL RETURN BEFORE
INCENTIVE FEES 2.4 % 4.2 % (5.6)%
TOTAL RETURN AFTER
INCENTIVE FEES 2.4 % 4.2 % (5.6)%
INCEPTION-TO-DATE RETURN 56.0 %
COMPOUND ANNUALIZED
RETURN 3.7 %
SPECTRUM SELECT
2006 2005 2004
-------- ------- --------
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1: $ 27.45 $ 28.88 $ 30.31
-------- ------- --------
NET OPERATING RESULTS:
Interest Income 1.08 0.63 0.28
Expenses (2.54) (2.54) (3.20)
Realized Profit 3.40 0.33 2.70
Unrealized Profit (Loss) (0.33) 0.15 (1.21)
Proceeds from Litigation Settlement -- 0.00 0.00
-------- ------- --------
Net Income (Loss) 1.61 (1.43) (1.43)
-------- ------- --------
NET ASSET VALUE, DECEMBER 31: $ 29.06 $ 27.45 $ 28.88
======== ======= ========
FOR THE CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
Net Investment Loss (5.0)% (7.2)% (10.1)%
Expenses before Incentive Fees 8.8 % 9.5 % 9.9 %
Expenses after Incentive Fees 8.8 % 9.5 % 11.1 %
Net Income (Loss) 5.7 % (5.3)% (4.5)%
TOTAL RETURN BEFORE INCENTIVE FEES 5.9 % (5.0)% (3.6)%
TOTAL RETURN AFTER INCENTIVE FEES 5.9 % (5.0)% (4.7)%
INCEPTION-TO-DATE RETURN 190.6 %
COMPOUND ANNUALIZED RETURN 7.2 %
MORGAN STANLEY SPECTRUM SERIES
NOTES TO FINANCIAL STATEMENTS
(concluded)
SPECTRUM STRATEGIC
2006 2005 2004
------- ------- -------
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1: $ 14.18 $ 14.56 $ 14.31
------- ------- -------
NET OPERATING RESULTS:
Interest Income 0.58 0.31 0.15
Expenses (1.83) (1.44) (1.52)
Realized Profit (Loss) 3.92 (0.10) 2.10
Unrealized Profit (Loss) 0.30 0.85 (0.48)
Proceeds from Litigation Settlement -- 0.00 0.00
------- ------- -------
Net Income (Loss) 2.97 (0.38) 0.25
------- ------- -------
NET ASSET VALUE, DECEMBER 31: $ 17.15 $ 14.18 $ 14.56
======= ======= =======
FOR THE CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
Net Investment Loss (7.8)% (8.4)% (9.3)%
Expenses before Incentive Fees 8.6 % 9.4 % 8.6 %
Expenses after Incentive Fees 11.4 % 10.8 % 10.3 %
Net Income (Loss) 18.6 % (3.3)% 0.8 %
TOTAL RETURN BEFORE INCENTIVE FEES 24.1 % (1.4)% 3.5 %
TOTAL RETURN AFTER INCENTIVE FEES 20.9 % (2.6)% 1.7 %
INCEPTION-TO-DATE RETURN 71.5 %
COMPOUND ANNUALIZED RETURN 4.5 %
SPECTRUM TECHNICAL
2006 2005 2004
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PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE, JANUARY 1: $ 22.36 $ 23.63 $ 22.64
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NET OPERATING RESULTS:
Interest Income 0.87 0.51 0.21
Expenses (2.21) (2.10) (2.53)
Realized Profit 2.25 0.48 3.96
Unrealized Profit (Loss) 0.30 (0.16) (0.65)
Proceeds from Litigation Settlement -- 0.00 0.00
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Net Income (Loss) 1.21 (1.27) 0.99
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NET ASSET VALUE, DECEMBER 31: $ 23.57 $ 22.36 $ 23.63
======== ======= ========
FOR THE CALENDAR YEAR:
RATIOS TO AVERAGE NET ASSETS:
Net Investment Loss (5.8)% (7.3)% (10.5)%
Expenses before Incentive Fees 8.6 % 9.3 % 9.5 %
Expenses after Incentive Fees 9.5 % 9.6 % 11.4 %
Net Income (Loss) 5.1 % (5.4)% 5.6 %
TOTAL RETURN BEFORE INCENTIVE FEES 6.4 % (5.0)% 6.2 %
TOTAL RETURN AFTER INCENTIVE FEES 5.4 % (5.4)% 4.4 %
INCEPTION-TO-DATE RETURN 135.7 %
COMPOUND ANNUALIZED RETURN 7.3 %
Demeter Management Corporation
330 Madison Avenue, 8th Floor
New York, NY 10017
[LOGO] Morgan Stanley
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