10-Q 1 ppssf.txt PSF UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2008 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to__________________ Commission File Number 0-19046 MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. (Exact name of registrant as specified in its charter) Delaware 13-3589337 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Demeter Management Corporation 522 Fifth Avenue, 13th Floor New York, NY 10036 (Address of principal executive offices) (Zip Code) Registrant?s telephone number, including area code (212) 296-1999 (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___________ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer_______ Accelerated filer_______ Non-accelerated filer X Smaller reporting company_______ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes___ No X MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. INDEX TO QUARTERLY REPORT ON FORM 10-Q September 30, 2008
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Financial Condition as of September 30, 2008 (Unaudited) and December 31, 2007............................2 Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007 (Unaudited)................3 Statements of Changes in Partners? Capital for the Nine Months Ended September 30, 2008 and 2007 (Unaudited) ...4 Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)......................5 Condensed Schedules of Investments as of September 30, 2008 (Unaudited) and December 31, 2007............................6 Notes to Financial Statements (Unaudited).................7-16 Item 2. Management?s Discussion and Analysis of Financial Condition and Results of Operations.........17-32 Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................33?47 Item 4. Controls and Procedures..................................47 Item 4T. Controls and Procedures..................................48 PART II. OTHER INFORMATION Item 1A. Risk Factors.............................................49 Item 5. Other Information.....................................49-50 Item 6. Exhibits.................................................51
PART I. FINANCIAL INFORMATION Item 1. Financial Statements MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. STATEMENTS OF FINANCIAL CONDITION
September 30, December 31, 2008 2007 $ $ (Unaudited) ASSETS Trading Equity: Unrestricted cash 16,636,013 18,351,654 Restricted cash 770,532 1,945,251 Total cash 17,406,545 20,296,905 Net unrealized gain on open contracts (MS&Co.) 1,049,560 74,614 Net unrealized gain (loss) on open contracts (MSIP) 341,234 (2,035) Total net unrealized gain on open contracts 1,390,794 72,579 Options purchased (proceeds paid $0 and $820,994, respectively) ? 666,251 Total Trading Equity 18,797,339 21,035,735 Interest receivable (MS&Co.) 11,867 41,169 Total Assets 18,809,206 21,076,904 LIABILITIES AND PARTNERS? CAPITAL Liabilities Redemptions payable 1,576,116 334,659 Management fees payable 28,604 33,924 Accrued incentive fees 17,482 ? Accrued administrative expenses 12,000 13,000 Options written (premiums received $0 and $908,725, respectively ) ? 666,251 Total Liabilities 1,634,202 1,047,834 Partners? Capital Limited Partners (8,006.479 and 11,462.204 Units, respectively) 16,970,864 19,810,763 General Partner (96.309 and 126.309 Units, respectively) 204,140 218,307 Total Partners? Capital 17,175,004 20,029,070 Total Liabilities and Partners? Capital 18,809,206 21,076,904 NET ASSET VALUE PER UNIT 2,119.64 1,728.36 The accompanying notes are an integral part of these financial statements.
- 2 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30,__ 2008 2007 2008 2007 $ $ $ $ INVESTMENT INCOME Interest income (MS&Co.) 55,929 229,541 218,348 822,561 EXPENSES Brokerage commissions (MS&Co.) 132,724 353,295 398,189 1,116,700 Management fees 88,627 126,395 300,657 425,043 Incentive fees 17,482 ? 17,482 ? Administrative expenses 12,000 16,000 39,000 22,000 Transaction fees and costs 6,447 10,296 21,298 49,483 Total Expenses 257,280 505,986 776,626 1,613,226 NET INVESTMENT LOSS (201,351) (276,445) (558,278) (790,665) TRADING RESULTS Trading profit (loss): Realized 1,273,147 (3,126,092) 3,268,295 (5,006,334) Net change in unrealized 1,058,765 422,157 1,230,484 340,623 Total Trading Results 2,331,912 (2,703,935) 4,498,779 (4,665,711) NET INCOME (LOSS) 2,130,561 (2,980,380) 3,940,501 (5,456,376) NET INCOME (LOSS) ALLOCATION Limited Partners 2,106,198 (2,948,370) 3,897,080 (5,396,571) General Partner 24,363 (32,010) 43,421 (59,805) NET INCOME (LOSS) PER UNIT Limited Partners 244.02 (226.52) 391.28 (381.90) General Partner 244.02 (226.52) 391.28 (381.90) Units Units Units Units WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 9,146.947 12,879.299 10,268.625 13,927.626 The accompanying notes are an integral part of these financial statements.
- 3 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. STATEMENTS OF CHANGES IN PARTNERS? CAPITAL For the Nine Months Ended September 30, 2008 and 2007 (Unaudited)
Units of Partnership Limited General Interest Partners Partner Total $ $ $ Partners? Capital, December 31, 2006 15,398.886 33,711,181 370,296 34,081,477 Net Loss ? (5,396,571) (59,805) (5,456,376) Redemptions (2,935.855) (5,749,399) (51,707) (5,801,106) Partners? Capital, September 30, 2007 12,463.031 22,565,211 258,784 22,823,995 Partners? Capital, December 31, 2007 11,588.513 19,810,763 218,307 20,029,070 Net Income ? 3,897,080 43,421 3,940,501 Redemptions (3,485.725) (6,736,979) (57,588) (6,794,567) Partners? Capital, September 30, 2008 8,102.788 16,970,864 204,140 17,175,004 The accompanying notes are an integral part of these financial statements.
- 4 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2008 2007 $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) 3,940,501 (5,456,376) Noncash item included in net income (loss): Net change in unrealized (1,230,484) (340,623) (Increase) decrease in operating assets: Restricted cash 1,174,719 2,158,679 Proceeds paid for options purchased 820,994 (1,039,340) Interest receivable (MS&Co.) 29,302 63,017 Due from MS&Co. ? 86,178 Increase (decrease) in operating liabilities: Accrued management fees (5,320) (19,165) Accrued incentive fees 17,482 ? Accrued administrative expenses (1,000) (97,849) Premiums received for options written (908,725) 1,169,855 Net cash provided by (used for) operating activities 3,837,469 (3,475,624) CASH FLOWS FROM FINANCING ACTIVITIES Cash paid for redemptions of Units (5,553,110) (5,713,500) Net cash used for financing activities (5,553,110) (5,713,500) Net decrease in unrestricted cash (1,715,641) (9,189,124) Unrestricted cash at beginning of period 18,351,654 31,507,335 Unrestricted cash at end of period 16,636,013 22,318,211 The accompanying notes are an integral part of these financial statements.
- 5 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. CONDENSED SCHEDULES OF INVESTMENTS September 30, 2008 (Unaudited) and December 31, 2007
Futures and Forward Contracts Long Unrealized Gain/(Loss) Percentage of Net Assets Short Unrealized Gain/(Loss) Percentage of Net Assets Net Unrealized Gain/(Loss) $ % $ % $ September 30, 2008, Partnership Net Assets: $17,175,004 Commodity ? ? 823,168 4.79 823,168 Equity ? ? 219,813 1.28 219,813 Foreign currency (766,078) (4.46) 180,128 1.05 (585,950) Interest rate 58,481 0.34 ? ? 58,481 Grand Total: (707,597) (4.12) 1,223,109 7.12 515,512 Unrealized Currency Gain 875,282 Total Net Unrealized Gain December 31, 2007, Partnership Net Assets: $20,029,070 1,390,794 Commodity (6,625) (0.03) 240,043 1.20 233,418 Equity ? ? 65,377 0.33 65,377 Foreign currency (50,991) (0.25) (192,550) (0.96) (243,541) Interest rate (10,837) (0.05) 34,365 0.17 23,528 Grand Total: (68,453) (0.33) 147,235 0.74 78,782 Unrealized Currency Loss (6,203) Total Net Unrealized Gain Fair Value $ Percentage of Net Assets % Options purchased on Futures Contracts ? ? Options purchased on Forward Contracts 666,251 3.33 Options written on Futures Contracts ? ? Options written on Forward Contracts (666,251) (3.33) 72,579 - 6 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. NOTES TO FINANCIAL STATEMENTS September 30, 2008 (Unaudited) The unaudited financial statements contained herein include, in the opinion of management, all adjustments necessary for a fair presentation of the financial condition and results of operations of Morgan Stanley Portfolio Strategy Fund L.P. (the ?Partner- ship?). The financial statements and condensed notes herein should be read in conjunction with the Partnership?s December 31, 2007, Annual Report on Form 10-K. 1. Organization Morgan Stanley Portfolio Strategy Fund L.P. is a Delaware limited partnership organized in 1990 to engage primarily in the speculative trading of futures contracts, options on futures and forward contracts, and forward contracts on physical commodities and other commodity interests, including, but not limited to, foreign currencies, financial instruments, metals, energy, and agricultural products (collectively, ?Futures Interests?). The Partnership may buy or write put and call options through listed exchanges and the over-the-counter market. The buyer has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of a specific Futures Interest or underlying asset at a specified price prior to - 7 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) or on a specified expiration date. The writer of an option is exposed to the risk of loss if the market price of the underlying asset declines (in the case of a put option) or increases (in the case of a call option). The writer of an option can never profit by more than the premium paid by the buyer but can lose an unlimited amount. Premiums received/proceeds paid from writing/purchasing options are recorded as liabilities/assets on the Statements of Financial Condition and are subsequently adjusted to current values. The difference between the current value of the options and the premiums received/proceeds paid is treated as an unrealized gain or loss. The Partnership?s general partner is Demeter Management Corporation (?Demeter?). The commodity brokers are Morgan Stanley & Co. Incorporated (?MS&Co.?) and Morgan Stanley & Co. International plc (?MSIP?). MS&Co. also acts as the counterparty on all trading of foreign currency forward contracts. Morgan Stanley Capital Group Inc. (?MSCG?) acts as the counterparty on all trading of options on foreign currency forward contracts. MSIP serves as the commodity broker for trades on the London Metal Exchange. Demeter, MS&Co., MSIP, and MSCG are wholly-owned - 8 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) subsidiaries of Morgan Stanley. Hyman Beck & Company Inc. (the ?Trading Advisor?) is the trading advisor to the Partnership. 2. Related Party Transactions The Partnership?s cash is on deposit with MS&Co. and MSIP in futures, forward, and options trading accounts to meet margin requirements as needed. MS&Co. pays the Partnership interest income on 80% of the Partnership?s average daily Net Assets for the month at a rate equal to the monthly average yield on the 4- week U.S. Treasury bill discount rate during such month. The Partnership pays brokerage commissions to MS&Co. 3. Income Taxes No provision for income taxes has been made in the accompanying financial statements, as partners are individually responsible for reporting income or loss based upon their respective share of the Partnership?s revenues or expenses for income tax purposes. The Partnership files U.S. federal and state tax returns. The 2004 through 2007 tax years generally remain subject to examination by U.S. federal and most state tax authorities. 4. Financial Instruments The Partnership trades Futures Interests. Futures and forwards - 9 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 Partnership?s contracts are accounted for on a trade-date basis and marked to market on a daily basis. The Partnership accounts for its derivative investments in accordance with the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 defines a derivative as a financial instrument or other contract that has all three of the following characteristics: - 10 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1) One or more underlying notional amounts or payment provisions; 2) Requires no initial net investment or a smaller initial net investment than would be required relative to changes in market factors; 3) Terms require or permit net settlement. Generally, derivatives include futures, forward, swap or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars. The net unrealized gains (losses) on open contracts, reported as a component of "Trading Equity" on the Statements of Financial Condition, and their longest contract maturities were as follows:
Net Unrealized Gains/(Losses) on Open Contracts Longest Maturities Off- Off- Exchange- Exchange- Exchange- Exchange- Date Traded Traded Total Traded Traded $ $ $ Sep. 30, 2008 1,976,744 (585,950) 1,390,794 Jun. 2009 Dec. 2008 Dec. 31, 2007 316,134 (243,555) 72,579 Sep. 2008 Aug. 2008
The Partnership has credit risk associated with counterparty non- performance. As of the date of the financial statements, the credit risk associated with the instruments in which the - 11 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Partnership trades is limited to the amounts reflected in the Partnership?s Statements of Financial Condition. The Partnership also has credit risk because MS&Co., MSIP, and/or MSCG act as the futures commission merchants or the counterparties, with respect to most of the Partnership?s assets. Exchange-traded futures, exchange-traded forward, and exchange- traded futures-styled options contracts are marked to market on a daily basis, with variations in value settled on a daily basis. MS&Co. and MSIP, each acting as a commodity broker for the Partnership?s exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, are required, pursuant to regulations of the Commodity Futures Trading Commission ("CFTC"), to segregate from their own assets, and for the sole benefit of their commodity customers, all funds held by them with respect to exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, including an amount equal to the net unrealized gains (losses) on all open exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, which funds, in the aggregate, totaled $19,383,289 and $20,613,039 at September 30, 2008, and December 31, 2007, respectively. With respect to the Partnership?s off-exchange-traded forward currency contracts and forward currency options contracts, there are no daily settlements - 12 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) of variation in value, nor is there any requirement that an amount equal to the net unrealized gains (losses) on such contracts be segregated. However, the Partnership is required to meet margin requirements equal to the net unrealized loss on open forward currency contracts in the Partnership accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at MS&Co. With respect to those off-exchange-traded forward currency contracts, the Partnership is at risk to the ability of MS&Co., the sole counterparty on all such contracts, to perform. With respect to those off-exchange-traded forward currency options contracts, the Partnership is at risk to the ability of MSCG, the sole counterparty on all such contracts, to perform. The Partnership has a netting agreement with each counterparty. These agreements, which seek to reduce both the Partnership?s and the counterparties? exposure on off-exchange-traded forward currency contracts, including options on such contracts, should materially decrease the Partnership?s credit risk in the event of MS&Co.?s or MSCG?s bankruptcy or insolvency. 5. New Accounting Developments In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. - 13 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 157 ("SFAS 157"), "Fair Value Measurements". SFAS 157 requires use of a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 - quoted market prices in active markets for identical assets and liabilities; Level 2 - inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly (including quoted prices for similar investments, interest rates, credit risk); and Level 3 - unobservable inputs for the asset or liability (including the Partnership?s own assumptions used in determining the fair value of investments). Demeter evaluated the impact of adopting SFAS 157 on the Partnership?s financial statements. The Partnership adopted SFAS 157 as of January 1, 2008. Based on its analysis, the effect of applying SFAS 157 to the investments included in the financial statements does not have a material impact on the Partnership?s financial statements. The following table summarizes the valuation of the Partnership?s investments by the above SFAS 157 fair value hierarchy as of September 30, 2008: - 14 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Assets Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Unrealized gain (loss) on open contracts $1,976,744 $(585,950) n/a $1,390,794
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (?SFAS 161?). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand how those instruments and activities are accounted for; how and why they are used; and their effects on a Partnership?s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Partnership is currently evaluating the impact that the adoption of SFAS No. 161 will have on its financial statement disclosures. 6. Restricted and Unrestricted Cash As reflected on the Partnership?s Statements of Financial Condition, restricted cash equals the cash portion of assets on deposit to meet margin requirements plus the cash required to - 15 - MORGAN STANLEY PORTFOLIO STRATEGY FUND L.P. NOTES TO FINANCIAL STATEMENTS (CONCLUDED) offset unrealized losses on foreign currency forwards and options and offset losses on offset London Metal Exchange positions. All of these amounts are maintained separately. Cash that is not classified as restricted cash is therefore classified as unrestricted cash. 7. Reclassifications Certain prior year amounts relating to options on the Statements of Cash Flows and Condensed Schedules of Investments for December 31, 2007, were reclassified to conform to 2008 presentation. Certain prior year amounts on the Statements of Operations were reclassified to conform to 2008 presentation. Such reclassifications have no impact on the Partnership?s reported net income (loss). - 16 - Item 2. MANAGEMENT?S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity. The Partnership deposits its assets with MS&Co. and MSIP as commodity brokers in separate futures, forward, and options trading accounts established for the Trading Advisor. Such assets are used as margin to engage in trading and may be used as margin solely for the Partnership?s trading. The assets are held in either non-interest bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds. Since the Partnership?s sole purpose is to trade in futures, forwards, and options, it is expected that the Partnership will continue to own such liquid assets for margin purposes. The Partnership?s investment in futures, forwards, and options, may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as ?daily price fluctuations limits? or ?daily limits?. Trades may not be executed at prices beyond the daily limit. If the price for a particular futures or options contract has increased or decreased by an amount equal to the daily limit, positions in that futures or options contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily - 17 - 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 of units of limited partnership interest (?Unit(s)?) in the future will affect the amount of funds available for investments in futures, - 18 - forwards, and options in subsequent periods. It is not possible to estimate the amount, and therefore the impact, of future outflows of Units. There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership?s capital resource arrangements at the present time. Off-Balance Sheet Arrangements and Contractual Obligations. The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments that would affect its liquidity or capital resources. Results of Operations General. The Partnership?s results depend on the Trading Advisor and the ability of the Trading Advisor?s trading program to take advantage of price movements in the futures, forward, and options markets. The following presents a summary of the Partnership?s operations for the three and nine month periods ended September 30, 2008 and 2007, and a general discussion of its trading activities during each period. It is important to note, however, that the Trading Advisor trades 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 Advisor or - 19 - 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 Advisor?s trading activities on behalf of the Partnership during the period in question. Past performance is no guarantee of future results. The Partnership?s results of operations set forth in the financial statements on pages 2 through 16 of this report are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: The contracts the Partnership trades are accounted for on a trade- date basis and marked to market on a daily basis. The difference between their cost and market value is recorded on the Statements of Operations as ?Net change in unrealized trading gain (loss)? for open (unrealized) contracts, and recorded as ?Realized trading gain (loss)? when open positions are closed out. The sum of these amounts constitutes the Partnership?s trading results. The market value of a futures contract is the settlement price on the exchange on which that futures contract is traded on a particular day. The value of a foreign currency forward contract, is based on the spot rate as of the close of business. Interest income, as well as management fees, incentive fees, brokerage - 20 - commissions, administrative expenses, and transaction fees and costs 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. For the Three and Nine Months Ended September 30, 2008 The Partnership recorded total trading results including interest income totaling $2,387,841 and expenses totaling $257,280, resulting in net income of $2,130,561 for the three months ended September 30, 2008. The Partnership?s net asset value per Unit increased from $1,875.62 at June 30, 2008, to $2,119.64 at September 30, 2008. The most significant trading gains of approximately 5.0% were experienced within the currency sector, primarily during August and September. Such gains were recorded from short positions in the euro, British pound, and New Zealand dollar versus the U.S. dollar as the value of the U.S. dollar increased relative to most of its rivals in August after the U.S. Commerce Department reported a larger-than-previously-estimated increase in Gross Domestic Product during the second quarter. The U.S. dollar then moved sharply higher against these currencies during September in - 21 - tandem with surging U.S. Treasury prices amid a worldwide "flight-to-quality" due to fears of an intense credit crunch and subsequent global recession, resulting in further gains from short positions in these currencies versus the U.S. dollar. Meanwhile, short positions in the Australian dollar versus the euro resulted in gains as the value of the Australian dollar decreased relative to the euro during September amid speculation that the Reserve Bank of Australia would cut interest rates to combat slowing economic growth. Within the global stock index sector, gains of approximately 2.7% were recorded, primarily during September, from short positions in U.S., European, and Pacific Rim equity index futures as prices moved sharply lower amid unprecedented U.S. financial market volatility and turmoil following news of the collapse of a major U.S. investment bank and the government rescue of a U.S. insurance giant. Furthermore, global equity prices plunged after the U.S. House of Representatives rejected the Economic Stabilization Act of 2008, which would have allowed the U.S. Treasury to purchase troubled mortgage-backed securities from U.S. financial institutions. Within the metals markets, gains of approximately 1.9% were experienced, primarily during August and September, from short futures positions in copper, aluminum, and zinc as prices dropped on concerns that turmoil in the financial markets would further weaken the global economy and erode demand for base metals. Elsewhere, short positions in silver futures resulted in gains - 22 - during August and September as prices declined due to a rise in the value of the U.S. dollar. Within the energy markets, gains of approximately 1.4% were recorded throughout the majority of the quarter from short futures positions in natural gas as prices decreased amid rising inventories and news that the Atlantic hurricane season's first storm had avoided the gas- producing fields in the Gulf of Mexico. Additional gains were experienced from short positions in crude oil futures as prices moved lower throughout the quarter amid signs that the U.S. economic slump would extend into 2009 and curb future energy demand. Further gains of approximately 0.2% were recorded within the agricultural markets, primarily during September, from short futures positions in soybean oil and corn as prices declined amid news that favorable weather might improve crop conditions in the U.S. Midwest and speculation that a slowing U.S. economy might reduce demand for alternative biofuels. Smaller gains were experienced from short positions in cotton futures as prices dropped to a one-year low in September after the U.S. Department of Agriculture reported exports had remained below average due to a decline in demand. A portion of the Partnership?s gains for the quarter was offset by losses of approximately 1.2% incurred within the global interest rate sector, primarily during July, from short positions in U.S. and European fixed-income futures as prices increased amid a ?flight-to-quality? due to the aforementioned drop in the global equity markets and worries - 23 - regarding the fundamental health of the global economy. The Partnership recorded total trading results including interest income totaling $4,717,127 and expenses totaling $776,626, resulting in net income of $3,940,501 for the nine months ended September 30, 2008. The Partnership?s net asset value per Unit increased from $1,728.36 at December 31, 2007, to $2,119.64 at September 30, 2008. The most significant trading gains of approximately 13.8% were recorded within the currency sector from long positions in the euro and Swiss franc versus the U.S. dollar as the value of the U.S. dollar moved lower against these currencies during January, February, March, and June due to disappointing economic data in the U.S. Newly established short positions in the euro versus the U.S. dollar resulted in additional gains as the value of the U.S. dollar increased relative to most of its rivals in August after the U.S. Commerce Department reported a larger-than- previously-estimated increase in Gross Domestic Product during the second quarter. The U.S. dollar then moved sharply higher against the euro during September in tandem with surging U.S. Treasury prices amid a worldwide "flight-to-quality" due to fears of an intense credit crunch and subsequent global recession, resulting in further gains from short positions in these - 24 - currencies versus the U.S. dollar. Finally, short positions in the Australian dollar versus the euro experienced gains as the value of the Australian dollar decreased relative to the euro during September amid speculation that the Reserve Bank of Australia would cut interest rates to combat slowing economic growth. Within the global stock index sector, gains of approximately 5.6% were recorded, primarily during the first quarter, from short positions in U.S., European, and Pacific Rim equity index futures as prices declined on concerns that a persistent U.S. housing slump, mounting losses linked to U.S. sub-prime mortgage investments, rising commodity prices, and a weakening job market might restrain consumer spending, erode corporate earnings, and curb global economic growth. Additional gains were experienced in September from short positions in global stock index futures as prices dropped sharply amid unprecedented U.S. financial market volatility and turmoil. Within the global interest rate sector, gains of approximately 4.1% were recorded, primarily during January and February, from long positions in U.S., German, and Japanese interest rate futures as prices increased in a ?flight-to-quality? following the aforementioned sharp decline in global equity prices and concerns that an economic slowdown in the United States would weaken the global economy. During May, newly established short positions in European fixed-income futures resulted in additional gains as prices declined after government reports revealed - 25 - accelerating inflation in the Euro-Zone. Within the energy markets, gains of approximately 1.0% were experienced, primarily during the third quarter, from short positions in crude oil futures as prices moved lower on signs that the U.S. economic slump would extend into 2009 and curb future energy demand. Additional gains were recorded from short futures positions in natural gas as prices decreased throughout the third quarter amid rising inventories and news that the Atlantic hurricane season's first storm had avoided the gas-producing fields in the Gulf of Mexico. Further gains of approximately 0.2% were experienced within the agricultural sector from long futures positions in soybean oil and corn as prices increased during January and February following news that global production might drop, while rising energy prices might boost demand for alternative biofuels. Smaller gains were recorded during September from newly established short positions in soybean oil and corn futures as prices declined amid news that favorable weather might improve crop conditions in the U.S. Midwest and speculation that a slowing U.S. economy would reduce demand for alternative biofuels. A portion of the Partnership?s gains for the first nine months of the year was offset by losses of approximately 1.7% incurred with the metals markets, primarily during the first quarter, from short futures positions in aluminum, zinc, and copper as prices increased in January and February due to news of weak global supplies amid rising demand from China and India. - 26 ? During March, additional losses were experienced from newly established long positions in aluminum futures as prices reversed lower amid speculation that a slumping U.S. economy would lead to a decline in global demand for base metals. Smaller losses were recorded from short futures positions in gold as prices reversed sharply higher during September due to ?safe haven? buying amid global credit-market turmoil and uncertainty regarding the U.S. financial system. For the Three and Nine Months Ended September 30, 2007 The Partnership recorded total trading results including interest income totaling $(2,474,394) and expenses totaling $505,986, resulting in a net loss of $2,980,380 for the three months ended September 30, 2007. The Partnership?s net asset value per Unit decreased from $2,057.86 at June 30, 2007, to $1,831.34 at September 30, 2007. The most significant trading losses of approximately 5.5% were recorded in the global interest rate sector, primarily during July and August, from short positions in U.S., European, Australian, and Canadian fixed-income futures as prices reversed sharply higher in a worldwide ?flight-to-quality? after the significant decline in the global equity markets resulted in substantially higher demand for the ?safe haven? of government bonds. Further losses were incurred during September from newly - 27 - established long futures positions in European interest rates as prices reversed lower after a rebound in global equities and the U.S. Federal Reserve's decision to cut benchmark interest rates. Within the global stock index sector, losses of approximately 2.1% were experienced, primarily during July and August, from long positions in U.S., European, and Japanese equity index futures as prices reversed lower on persistent concerns that the collapsing U.S. sub-prime mortgage market and decreasing U.S. real estate prices would pull the global economy into a recession. Furthermore, global equity index futures prices fell after news that China and India had increased their bank reserve requirements, which added to worries about global cash liquidity declining in the near future. During September, further losses were recorded from newly established short positions in U.S. and European stock index futures as prices moved higher after the U.S. Federal Reserve cut its benchmark lending rate by half a percentage point in order to prevent the aforementioned real estate slump from dragging down the economy. Additional losses of approximately 2.0% were incurred within the agricultural sector, primarily during August, from long futures positions in coffee as prices decreased amid technically-based selling. Meanwhile, additional losses were experienced throughout the majority of the quarter from both long and short positions in cocoa futures as prices moved without consistent direction amid conflicting news regarding supply and demand. - 28 ? Elsewhere, long positions in sugar futures resulted in further losses as prices decreased during August on concern that increased supplies from India, the second-largest producer, would contribute to a global surplus. A portion of the Partnership?s overall losses for the quarter was offset by gains of approximately 0.3% recorded within the currency sector, primarily during July and September, from long positions in the British pound and Swiss franc versus the U.S. dollar as the value of the U.S. dollar declined relative to its major rivals amid continued concerns over the U.S. housing market and following news that the U.S. Federal Reserve had cut interest rates at its September 18, 2007 meeting. Furthermore, the value of the U.S. dollar moved lower amid growing sentiment that the U.S. Federal Reserve would cut borrowing costs a second time in 2007. Smaller gains of approximately 0.1% were recorded in the metals markets during August and September from short positions in aluminum futures as prices fell amid increasing stockpiles and speculation that losses in the global financial markets would cut demand for raw materials. Additional gains of approximately 0.1% were experienced within the energy sector, primarily during July and August, from short futures positions in natural gas as prices decreased on signs that inventories were sufficient to meet demand. - 29 - The Partnership recorded total trading results including interest income totaling $(3,843,150) and expenses totaling $1,613,226, resulting in a net loss of $5,456,376 for the nine months ended September 30, 2007. The Partnership?s net asset value per Unit decreased from $2,213.24 at December 31, 2006, to $1,831.34 at September 30, 2007. The most significant trading losses of approximately 4.0% were incurred within the currency sector, primarily during January and February, from long positions in the British pound, euro, and Australian dollar versus the U.S. dollar as the value of the U.S. dollar moved higher in January after stronger-than-expected economic data suggested that the U.S. Federal Reserve might not cut interest rates during the first quarter of 2007. Additional losses were recorded during January and March from both short and long positions in the South African rand versus the U.S. dollar as the value of the South African rand moved without consistent direction amid conflicting economic data. Further losses were experienced during August from short U.S. dollar positions relative to the British pound, euro, and Australian dollar as the value of the U.S. dollar reversed higher against most of its rivals after continued volatility in the global equity markets and widening credit losses tied to U.S. subprime loans resulted in substantially stronger demand for U.S. dollar-denominated government bonds. Within the global interest rate sector, losses - 30 - of approximately 3.8% were incurred primarily during February from short positions in U.S., European, and Australian interest rate futures as prices moved higher following a massive sell-off in the global equity markets. Additional losses were experienced during March from newly established long positions in European, U.S., and Australian fixed-income futures as prices reversed lower due to reduced demand for the relative ?safety? of fixed-income investment after the stabilization of the global equity markets. Finally, losses were recorded during July and August from short futures positions in European, U.S., and Australian interest rates as prices reversed sharply higher in a worldwide ?flight-to-quality? after the significant decline in the global equity markets resulted in substantially higher demand for the ?safe haven? of government bonds. Within the agricultural sector, losses of approximately 3.3% were experienced, primarily during March, from long positions in corn futures as prices declined sharply after the U.S. Department of Agriculture?s Prospective Plantings report showed corn acreage might be up this year to its highest since 1944. Elsewhere in the agricultural complex, losses were incurred during March, May, June, and August from both short and long futures positions in sugar as prices moved without consistent direction due to conflicting data regarding supply and demand. Meanwhile, long positions in coffee futures resulted in losses, primarily during January and August, as prices decreased amid technically-based - 31 - selling. Additional losses of approximately 2.7% were recorded within the global stock index sector, primarily during the first and third quarters, from both short and long positions in U.S., European, and Japanese equity index futures. During March, short positions in U.S., European, and Japanese stock index futures resulted in losses as prices increased on investor sentiment that equities had been ?over-sold? and amid optimism about the long-term future of the Japanese economy. Additional losses were experienced during July and August from long positions in U.S., European, and Japanese equity index futures as prices reversed sharply lower on persistent concerns that a collapsing U.S. sub-prime mortgage market and decreasing U.S. real estate prices would pull the U.S. economy into a recession. Furthermore, global equity prices fell after news that China and India had increased their bank reserve requirements, which added to worries about global cash liquidity declining in the near future. Smaller losses of approximately 2.2% were incurred in the metals markets, primarily during March, May, and July, from long futures positions in gold and silver as prices declined amid heavy speculative selling and strength in the U.S. dollar. Additional losses of approximately 1.3% were recorded in the energy sector, primarily during February and May, from long positions in natural gas futures as prices fell amid speculation that mild weather in the U.S. would slow demand. Elsewhere in the energy markets, losses were incurred primarily during February, April, and May from both short and long futures positions in crude oil and its related products as prices moved inconsistently amid conflicting data regarding supply and demand. - 32 ? Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Introduction The Partnership is a commodity pool engaged primarily in the speculative trading of futures, forwards, and options. The market-sensitive instruments held by the Partnership are acquired for speculative trading purposes only and, as a result, all or substantially all of the Partnership?s assets are at risk of trading loss. Unlike an operating company, the risk of market- sensitive instruments is inherent to the primary business activity of the Partnership. The futures, forwards, and options on such contracts 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 and forward currency options contracts are settled upon termination of the contract. However, the - 33 - Partnership is required to meet margin requirements equal to the net unrealized loss on open forward currency contracts in the Partnership accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at MS&Co. The Partnership?s total market risk may increase or decrease as it is influenced by a wide variety of factors, including, but not limited to, the diversification among the Partnership?s open positions, the volatility present within the markets, and the liquidity of the markets. The face value of the market sector instruments held by the Partnership is typically many times the applicable margin requirements. Margin requirements generally range between 2% and 15% of contract face value. Additionally, the use of leverage causes the face value of the market sector instruments held by the Partnership typically to be many times the total capitalization of the Partnership. 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 - 34 - ruin?) that far exceed the Partnership?s experience to date under the ?Partnership?s Value at Risk in Different Market Sectors? section and significantly exceed the Value at Risk (?VaR?) tables disclosed. Limited partners will not be liable for losses exceeding the current net asset value of their investment. Quantifying the Partnership?s Trading Value at Risk The following quantitative disclosures regarding the Partnership?s market risk exposures contain ?forward-looking statements? within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward- looking statements for purposes of the safe harbor, except for statements of historical fact. The Partnership accounts for open positions on the basis of mark to market accounting principles. Any loss in the market value of the Partnership?s open positions is directly reflected in the Partnership?s earnings and cash flow. - 35 - The Partnership?s risk exposure in the market sectors traded by the Trading Advisor is estimated below in terms of VaR. The Partnership estimates VaR using a model based upon historical simulation (with a confidence level of 99%) which involves constructing a distribution of hypothetical daily changes in the value of a trading portfolio. The VaR model takes into account linear exposures to risk including equity and commodity prices, interest rates, foreign exchange rates, and correlation among these variables. The hypothetical changes in portfolio value are based on daily percentage changes observed in key market indices or other market factors (?market risk factors?) to which the portfolio is sensitive. The one-day 99% confidence level of the Partnership?s VaR corresponds to the negative change in portfolio value that, based on observed market risk factors, would have been exceeded once in 100 trading days, or one day in 100. VaR typically does not represent the worst case outcome. Demeter uses approximately four years of daily market data (1,000 observations) and re-values its portfolio (using delta-gamma approximations) for each of the historical market moves that occurred over this time period. This generates a probability distribution of daily ?simulated profit and loss? outcomes. The VaR is the appropriate percentile of this distribution. For example, the 99% one-day VaR would represent the 10th worst outcome from Demeter?s simulated profit and loss series. - 36 - 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 Advisor in their daily risk management activities. Please further note that VaR as described above may not be comparable to similarly-titled measures used by other entities. The Partnership?s Value at Risk in Different Market Sectors The following table indicates the VaR associated with the Partnership?s open positions as a percentage of total Net Assets by primary market risk category at September 30, 2008 and 2007. At September 30, 2008 and 2007, the Partnership?s total capitalization was approximately $17 million and $23 million, respectively. - 37 - Primary Market September 30, 2008 September 30, 2007 Risk Category Value at Risk Value at Risk Currency (0.59)% (1.05)% Interest Rate (0.53) (0.67) Equity (0.36) (0.10) Commodity (0.72) (0.62) Aggregate Value at Risk (1.44)% (1.52)% The VaR for a market category represents the one-day downside risk for the aggregate exposures associated with this market category. The Aggregate Value at Risk listed above represents the VaR of the Partnership?s open positions across all the market categories, and is less than the sum of the VaRs for all such market categories due to the diversification benefit across asset classes. Because the business of the Partnership is the speculative trading of futures, forwards, and options on such contracts, the composition of its trading portfolio can change significantly over any given time period, or even within a single trading day. Such changes could positively or negatively materially impact market risk as measured by VaR. The table below supplements the quarter-end VaR set forth above by presenting the Partnership?s high, low, and average VaR, as a - 38 - percentage of total Net Assets for the four quarter-end reporting periods from October 1, 2007, through September 30, 2008. Primary Market Risk Category High Low Average Currency (1.71)% (0.59)% (0.95)% Interest Rate (1.18) (0.53) (0.72) Equity (0.56) (0.28) (0.37) Commodity (0.75) (0.37) (0.60) Aggregate Value at Risk (2.63)% (1.00)% (1.56)% Limitations on Value at Risk as an Assessment of Market Risk VaR models permit estimation of a portfolio?s aggregate market risk exposure, incorporating a range of varied market risks, reflect risk reduction due to portfolio diversification or hedging activities, and can cover a wide range of portfolio assets. However, VaR risk measures should be viewed in light of the methodology?s limitations, which include, but may not be limited to the following: * past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements; * changes in portfolio value caused by market movements may differ from those of the VaR model; - 39 ? * 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 September 30, 2008 and 2007, and for the four quarter-end reporting periods from October 1, 2007, through September 30, 2008. VaR is not necessarily representative of the Partnership?s historic risk, nor should it be used to predict the Partnership?s future financial performance or its ability to manage or monitor risk. There can be no assurance that the Partnership?s actual losses on a particular day will not exceed the VaR amounts indicated above or that such losses will not occur more than once in 100 trading days. - 40 - Non-Trading Risk The Partnership has non-trading market risk on its foreign cash balances. These balances and any market risk they may represent are immaterial. The Partnership also maintains a substantial portion of its available assets in cash at MS&Co.; as of September 30, 2008, such amount was equal to approximately 105% of the Partnership?s net asset value. A decline in short-term interest rates would result in a decline in the Partnership?s cash management income. This cash flow risk is not considered to be material. Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality, and multiplier features of the Partnership?s market- sensitive instruments, in relation to the Partnership?s Net Assets. Qualitative Disclosures Regarding Primary Trading Risk Exposures The following qualitative disclosures regarding the Partnership?s market risk exposures - except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures ? constitute forward-looking statements within the meaning of Section 27A of - 41 - 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 Advisor for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership?s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership. Investors must be prepared to lose all or substantially all of their investment in the Partnership. The following were the primary trading risk exposures of the Partnership at September 30, 2008, by market sector. It may be anticipated, however, that these market exposures will vary materially over time. Currency. The third largest market exposure of the Partnership at September 30, 2008, was to the currency sector. The Partnership?s currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing - 42 - relationships between different currencies and currency pairs. Interest rate changes as well as political and general economic conditions influence these fluctuations. The Partnership trades a large number of currencies, including cross-rates - i.e., positions between two currencies other than the U.S. dollar. At September 30, 2008, the Partnership?s major exposures were to the British pound, Japanese yen, euro, and Australian 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 September 30, 2008, the Partnership had market exposure to the global interest rate sector. This exposure was primarily spread across European, Japanese, U.S., Australian, and Canadian interest rate sectors. Interest rate movements directly affect the price of the sovereign bond futures positions held by the Partnership and indirectly affect the value of its stock index and currency positions. Interest rate movements in one country, as well as relative interest rate movements between countries, materially impact the Partnership?s profitability. The Partnership?s primary interest rate exposure is generally to interest rate fluctuations in the U.S. and the other G-7 countries. The G-7 countries consist of France, the U.S., the - 43 - United Kingdom, Germany, Japan, Italy, and Canada. However, the Partnership also takes futures positions in the government debt of smaller countries ? e.g., Australia. Demeter anticipates that the G-7 countries? interest rates will remain the primary interest rate exposure of the Partnership for the foreseeable future. The speculative futures positions held by the Partnership may range from short to long-term instruments. Consequently, changes in short, medium, or long-term interest rates may have an effect on the Partnership. Equity. At September 30, 2008, the Partnership had market exposure to the global stock index sector, primarily to equity price risk in the G-7 countries. The stock index futures traded by the Partnership are by law limited to futures on broadly?based indices. At September 30, 2008, the Partnership?s primary exposures were to the Nikkei 225 (Japan), FTSE 100 (United Kingdom), S&P 500 (U.S.), CAC 40 (France), SPI 200 (Australia), and DAX (Germany) stock indices. The Partnership is exposed to the risk of adverse price trends or static markets in the U.S., European, and Pacific Rim 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. - 44 - Commodity. Soft Commodities and Agriculturals. The largest market exposure of the Partnership at September 30, 2008, was to the markets that comprise these sectors. Most of the exposure was to the coffee, soybean oil, cotton, sugar, cocoa, corn, and wheat markets. Supply and demand inequalities, severe weather disruptions, and market expectations affect price movements in these markets. Metals. The second largest market exposure of the Partnership at September 30, 2008, was to the metals sector. The Partnership's metals exposure was to fluctuations in the price of base metals, such as zinc, copper, lead, and aluminum, as well as precious metals, such as silver. Economic forces, supply and demand inequalities, geopolitical factors, and market expectations influence price movements in these markets. The Trading Advisor utilizes its trading systems to take positions when market opportunities develop, and Demeter anticipates that the Trading Advisor will continue to do so. Energy. At September 30, 2008, the Partnership had market exposure to the energy sector. The Partnership?s energy exposure was primarily to futures contracts in crude oil and natural gas. Price movements in these markets result from - 45 - 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 pattern and supply and demand factors and will likely continue in this choppy pattern. Qualitative Disclosures Regarding Non-Trading Risk Exposure The following was the only non-trading risk exposure of the Partnership at September 30, 2008: Foreign Currency Balances. The Partnership?s primary foreign currency balances at September 30, 2008, were in Australian dollars, Japanese yen, euros, British pounds, Canadian dollars, Swiss francs, Mexican pesos, and Turkish lira. The Partnership controls the non-trading risk of foreign currency balances by regularly converting them back into U.S. dollars upon liquidation of their respective positions. Qualitative Disclosures Regarding Means of Managing Risk Exposure The Partnership and the Trading Advisor, separately, attempt to manage the risk of the Partnership?s open positions in essentially the same manner in all market categories traded. Demeter attempts to manage market exposure by diversifying the Partnership?s assets among different market sectors through the selection of a - 46 ? Commodity Trading Advisor and by daily monitoring its performance. In addition, the Trading Advisor establishes 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 Advisor. Item 4. CONTROLS AND PROCEDURES As of the end of the period covered by this quarterly report, the President and Chief Financial Officer of Demeter, the general partner of the Partnership, have evaluated the effectiveness of the Partnership?s disclosure controls and procedures (as defined in Rules 13a?15(e) and 15d?15(e) of the Exchange Act), and have judged such controls and procedures to be effective. Changes in Internal Control Over Financial Reporting There have been no material changes during the period covered by this quarterly report in the Partnership?s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) or in other factors that could significantly affect these controls subsequent to the date of their evaluation. - 47 - Item 4T. CONTROLS AND PROCEDURES Not applicable. - 48 - PART II. OTHER INFORMATION Item 1A. RISK FACTORS Information regarding risk factors appears in Item 2. ?Management?s Discussion and Analysis of Financial Condition and Results of Operations? and Item 3. ?Quantitative and Qualitative Disclosures about Market Risk? of this Form 10-Q. There have been no other material changes from the risk factors previously referenced in the Partnership?s Report on Form 10-K for the fiscal year ended December 31, 2007, and the Partnership?s Reports on Form 10Q for the quarters ended March 31, 2008, and June 30, 2008. Item 5. OTHER INFORMATION Limited Partners of the Partnership are advised that Demeter has determined to withdraw from the Partnership effective November 30, 2008, and thereafter will commence dissolution of the Partnership pursuant to the Partnership?s Limited Partnership Agreement. In connection with such withdrawal, Demeter terminated trading for the Partnership effective October 31, 2008. Following termination of trading for the Partnership, all Partnership assets will be paid interest at the rate equal to the average yield on 4-week U.S. Treasury Bills, with your share of interest credited to your Units. The management and brokerage fees on any assets remaining in the Partnership after October 31, 2008, will be waived, given the absence of any further futures trading by the Partnership. - 49 - Through November 30, 2008, qualified Limited Partners may, under certain conditions, redeem some or all of their interest in the Partnership and use the proceeds of such redemption to purchase an interest in another Morgan Stanley managed futures partnership for which Demeter is the general partner (an offering in any such managed futures partnership is by prospectus or offering memorandum only). Otherwise, Limited Partners may simply redeem their interest in the Partnership and receive the proceeds of such redemption in cash. Whether you exchange or redeem your Partnership Units, there will be no minimum holding period requirement or redemption charge. Limited Partners who do not redeem their interest in the Partnership prior to November 30, 2008, should be aware that final distribution of any remaining Partnership assets is anticipated to be made on or about December 15, 2008. - 50 - Item 6. EXHIBITS 31.01 Certification of President of Demeter Management Corporation, the general partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.02 Certification of Chief Financial Officer of Demeter Management Corporation, the general partner of the Partnership, pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. 32.01 Certification of President of Demeter Management Corporation, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.02 Certification of Chief Financial Officer of Demeter Management Corporation, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - 51 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Morgan Stanley Portfolio Strategy Fund L.P. (Registrant) By: Demeter Management Corporation (General Partner) November 14, 2008 By:/s/Christian Angstadt Christian Angstadt Chief Financial Officer The General Partner which signed the above is the only party authorized to act for the Registrant. The Registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors. - 52 -