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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, 1999 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 0-19046
DEAN WITTER PORTFOLIO STRATEGY FUND L.P.
(Exact name of registrant as specified in its Limited Partnership
Agreement)
DELAWARE 13-
3589337 (State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
c/o Demeter Management Corporation
Two World Trade Center, - 62nd Flr., New York, N.Y.
10048 (Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code
(212) 392-5454
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 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 (section 229.405 of this
chapter) 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 ]
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 a specified date within 60
days prior to the date of filing: $109,293,415 at January 31,
2000.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)
DEAN WITTER PORTFOLIO STRATEGY FUND L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1999
Page No.
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . .
.. . . . .1
Part I .
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . .
.2-4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . .
. . 4
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . .
. 4-6
Item 4. Submission of Matters to a Vote of Security Holders . .
. . 6
Part II.
Item 5. Market for the Registrant's Partnership
Units and Related Security Holder Matters . . . . . . . .
. .7
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . .
. . 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . .
.9-21
Item 7A.Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . . .
21-33
Item 8. Financial Statements and Supplementary Data. . . . . . .
. . 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . .
. . 33
Part III.
Item10. Directors and Executive Officers of the Registrant . . .
. 34-37
Item11. Executive Compensation . . . . . . . . . . . . . . . . . .
. 38
Item12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . .
. . 38
Item13. Certain Relationships and Related Transactions . . . . .
. 38
Part IV.
Item14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . .
. .39
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
12, 1997 I
Annual Report to Dean Witter
Portfolio Strategy Fund L.P.
Limited Partners for the year ended
December 31, 1999 II, III and IV
PART I
Item 1. BUSINESS
(a) General Development of Business. Dean Witter Portfolio
Strategy Fund L.P. (formerly, Dean Witter Principal Secured Fund
L.P.) (the "Partnership") is a Delaware limited partnership
organized to engage primarily in the speculative trading of
futures and forward contracts on physical commodities and other
commodity interests (collectively, "futures interests").
The general partner for the Partnership is Demeter Management
Corporation ("Demeter"). The non-clearing commodity broker is
Dean Witter Reynolds Inc. ("DWR") and an unaffiliated clearing
commodity broker, Carr Futures Inc. ("Carr"), provides clearing
and execution services. Both Demeter and DWR are wholly-owned
subsidiaries of Morgan Stanley Dean Witter & Co. ("MSDW"). John
W. Henry & Company, Inc. (the "Trading Advisor") is the trading
advisor to the Partnership.
The Partnership's Net Asset Value per unit of limited partnership
interest ("Unit(s)") as of December 31, 1999, was $2,419.78,
representing a decrease of 6.9 percent from the Net Asset Value
per Unit of $2,597.84 at December 31, 1998. For a more detailed
description of the Partnership's business see subparagraph (c).
(b) Financial Information about Industry Segments. For financial
information reporting purposes the Partnership is deemed to
engage in one industry segment, the speculative trading of
futures interests. 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 interests, pursuant to
trading instructions provided by its Trading Advisor. For a
detailed description of the different facets of the Partnership's
business, see those portions of the Partnership's Prospectus,
dated May 12, 1997, (the "Prospectus"), incorporated by reference
in this Form 10-K, set forth below:
Facets of Business
1. Summary 1. "Summary of the Prospectus"
(Pages 1-12 of the
Prospectus).
2. Futures, Options and 2. "Futures, Options, and
Forward Markets Forward Markets" (Pages
48-52 of the Prospectus).
3. Partnership's Commodity 3. "Investment Programs,
Trading Arrangements and Use of Proceeds, and
Policies Trading Policies" (Page
66 of the Prospectus)
"The Trading Advisor"
(Pages 55-74 of the
Prospectus).
4. Management of the 4. "The Management
Agreement"
Partnership (Pages 76-77 of the
Prospectus). "The
General Partner" (Pages
45-47 of the Prospectus),
"The Commodity Brokers"
(Page 75 of the
Prospectus) and "The
Limited Partnership
Agreements" (Pages 79-82
of the Prospectus).
5.Taxation of the Partner- 5. "Material Federal Income
ship's Limited
Partners Tax
Considerations" and
"State and
Local Income
Tax
Aspects" (Pages 88-96
of the
Prospectus).
(d) Financial Information About Foreign and Domestic Operations
and Export Sales.
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 in futures interests
on foreign exchanges.
Item 2. PROPERTIES
The executive and administrative offices are located within the
offices of DWR. The DWR offices utilized by the Partnership are
located at Two World Trade Center, 62nd Floor, New York, NY
10048.
Item 3. LEGAL PROCEEDINGS
The class actions first filed in 1996 in California and in New
York State courts were each dismissed in 1999. However, in the
New York State class
action, plaintiffs appealed the trial court's dismissal of their
case on March 3, 2000.
On September 6, 10, and 20, 1996, and on March 13, 1997,
purported class actions were filed in the Superior Court of the
State of California, County of Los Angeles, on behalf of all
purchasers of interests in limited partnership commodity pools
sold by DWR. Named defendants include DWR, Demeter, Dean Witter
Futures & Currency Management Inc. ("DWFCM"), MSDW, the
Partnership, certain limited partnership comodity pools of which
Demeter is the general partner (all such parties referred to
hereafter as the "Morgan Stanley Dean Witter Parties") and
certain trading advisors to those pools. On June 16, 1997, the
plaintiffs in the above actions filed a consolidated amended
complaint, alleging, among other things, that the defendants
committed fraud, deceit, negligent misrepresentation, various
violations of the California Corporations Code, intentional and
negligent breach of fiduciary duty, fraudulent and unfair
business practices, unjust enrichment, and conversion in the sale
and operation of the various limited partnership commodity pools.
The complaints seek unspecified amounts of compensatory and
punitive damages and other relief. The court entered an order
denying class certification on August 24, 1999. On September 24,
1999, the court entered an order dismissing the case without
prejudice on consent. Similar purported class actions were also
filed on September 18 and 20, 1996, in the Supreme Court of the
State of
New York, New York County, and on November 14, 1996 in the
Superior Court of the State of Delaware, New Castle County,
against the Morgan Stanley Dean Witter Parties and certain
trading advisors on behalf of all purchasers of interests in
various limited partnership commodity pools, including the
Partnership, sold by DWR. A consolidated and amended complaint in
the action pending in the Supreme Court of the State of New York
was filed on August 13, 1997, alleging that the defendants
committed fraud, breach of fiduciary duty, and negligent
misrepresentation in the sale and operation of the various
limited partnership commodity pools. The complaints seek
unspecified amounts of compensatory and punitive damages and
other relief. The New York Supreme Court dismissed the New York
action in November 1998, but granted plaintiffs leave to file an
amended complaint, which they did in early December 1998. The
defendants filed a motion to dismiss the amended complaint with
prejudice on February 1, 1999. By decision dated December 21,
1999, the New York Supreme Court dismissed the case with
prejudice.
In addition, on December 16, 1997, upon motion of the plaintiffs,
the action pending in the Superior Court of the State of Delaware
was voluntarily dismissed without prejudice.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND
RELATED SECURITY HOLDER MATTERS
(a) Market Information
There is no established public trading market for the Units in
the Partnership.
(b) Holders
The number of holders of Units at December 31, 1999 was
approximately 6,721.
(c) Distributions
No distributions have been made by the Partnership since it
commenced trading operations on February 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 distribution of Partnership profits.
Item 6. SELECTED FINANCIAL DATA (in dollars)
For the Years Ended December 31,
1999 1998 1997 1996 1995
Total Revenues
(including interest)4,487,760 24,626,159 21,459,210 28,663,110 26,524,038
Net Income (Loss) (8,217,948) 11,471,105 10,733,401 18,393,949 18,457,838
Net Income (Loss)
Per Unit (Limited
& General Partners) (178.06) 224.48 240.57 433.35 343.86
Total Assets 111,847,771 133,033,164135,545,105 91,201,711 82,278,215
Total Limited Partners'
Capital 107,807,427 129,638,096131,363,711 85,273,194 78,914,381
Net Asset Value Per
Unit 2,419.78 2,597.84 2,373.36 2,132.79 1,699.44
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity - The Partnership deposits its assets with DWR as non-
clearing broker and Carr as clearing broker in separate futures
trading accounts established for the Trading Advisor, which
assets are used as margin to engage in trading. The assets are
held in either non-interest-bearing bank accounts or in
securities and instruments permitted by the Commodity Futures
Trading Commission ("CFTC") for investment of customer segregated
or secured funds. The Partnership's assets held by the commodity
brokers may be used as margin solely for the Partnership's
trading. Since the Partnership's sole purpose is to trade in
futures and forwards, it is expected that the Partnership will
continue to own such liquid assets for margin purposes.
The Partnership's investment in futures and forwards, 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 contract has
increased or decreased by an amount equal to the daily limit,
positions in that futures contract can neither be taken nor
liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the
daily limit for several consecutive days with little or no
trading. These market conditions could prevent the Partnership
from promptly liquidating its futures contracts and result in
restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currency. 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 and subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions.
The Partnership has never had illiquidity affect a material
portion of its assets.
Capital Resources. The Partnership does not have, or expect to
have, any capital assets. Redemptions of Units in the future
will affect the amount of funds available for investments in
futures interests in subsequent periods. It is not possible to
estimate the amount and therefore, the impact of future
redemptions of Units.
Results of Operations.
General. The Partnership's results depend on its Trading Advisor
and the ability of the Trading Advisor's trading programs to take
advantage of price movements or other profit opportunities in the
futures, forwards, and options markets. The following presents a
summary of the Partnership's operations for the three years ended
December 31, 1999 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 will be profitable in the future. Consequently, the
results of operations of the Partnership are difficult to discuss
other than in the context of its Trading Advisor's trading
activities on behalf of the Partnership as a whole and how the
Partnership has performed in the past.
At December 31, 1999, the Partnership's total capital was
$109,201,218, a decrease of $21,933,234 from the Partnership's
total capital of $131,134,452 at December 31, 1998. For the year
ended December 31, 1999, the Partnership generated a net loss of
$8,217,948, and total redemptions aggregated $13,715,286.
For the year ended December 31, 1999, the Partnership recorded
total trading revenues, including interest income, of $4,487,760
and posted a decrease in Net Asset Value per Unit. The most
significant losses, approximately 10.36%, were recorded from
global interest rate futures trading as the volatile and choppy
price movement experienced during the year limited the ability to
capitalize on trends. During the fourth quarter, most global
bond markets dropped on a resurgence of inflation and interest
rate fears initiated by consistently strong U.S. economic data,
evidence of rising inflation in Germany, and increases in oil
prices. Additional losses of approximately 8.64% were
recorded in metals, primarily from trading silver and gold
futures as supply and demand concerns resulted in short-term
volatility later in the year. In the global stock index futures
markets, the reversal and whipsaw conditions that prevailed
during the fourth quarter also resulted in losses of
approximately 1.38% for the Partnership. A portion of the
Partnership's overall losses was offset by gains of approximately
8.29% recorded in the energy markets primarily from long crude
oil futures positions as oil prices trended higher throughout a
majority for the year. Additional gains of approximately 6.93%
were recorded in the currency markets due primarily to the re-
emergence of the upward momentum in the U.S. dollar relative to
the euro and Swiss franc, as well as the continued strength of
the Japanese yen versus other major currencies during November.
Total expenses for the year were $12,705,708, resulting in a net
loss of 8,217,948. The value of a Unit decreased from $2,597.84
at December 31, 1998 to $2,419.78 at December 31, 1999.
At December 31, 1998, the Partnership's total capital was
$131,134,452, a decrease of $2,498,192 from the Partnership's
total capital of $133,632,644 at December 31, 1997. For the year
ended December 31, 1998, the Partnership generated net income of
$11,471,105, and total redemptions aggregated $13,969,297.
For the year ended December 31, 1998, the Partnership recorded
total trading revenues, including interest income, of $24,626,159
and posted an increase in Net Asset Value per Unit. The
Partnership profited during 1998, primarily from gains of
approximately 17.55% recorded in the global interest rate futures
markets. Long futures positions in Japanese government bonds
were profitable as prices moved steadily higher during the first
half of the year in reaction to declining interest rates in
Japan. Later in the year, profits were recorded in this same
market from short positions as prices moved lower following sharp
spike higher in Japanese bond yields during December. Additional
gains were recorded from long positions in European interest rate
futures, particularly German bond futures, as prices increased as
investors flocked to the safety of fixed income investments amid
the economic turmoil in Asia and emerging nations. Gains of
approximately 3.33% were recorded in the energy markets,
primarily from short positions in crude oil futures as oil prices
fell throughout a majority of the year, despite tensions in the
Middle East, on reports of a supply surplus. Total expenses for
the year were $13,155,054, resulting in net income of
$11,471,105. The value of a Unit increased from $2,373.36 at
December 31, 1997 to $2,597.84 at December 31, 1998.
At December 31, 1997, the Partnership's total capital was
$133,632,644, an increase of $46,320,501 from the Partnership's
total capital of $87,312,143, at December 31, 1996. For the year
ended December 31, 1997, the Partnership
generated net income of $10,733,401, total subscriptions
aggregated $43,029,509 and total redemptions aggregated
$7,442,409.
For the year ended December 31, 1997, the Partnership recorded
total trading revenues, including interest income, of $21,459,210
and posted an increase in Net Asset Value per Unit. The
Partnership recorded strong gains in 1997. Gains of
approximately 8.53% were recorded in the currency markets
primarily from sustained price movements during January and
February, and then again in the fourth quarter from short
Japanese yen positions as the value of the U.S. dollar increased
versus the yen. Additional gains of approximately 6.66% were
recorded in the global interest rate futures markets primarily
from long positions as prices in these markets trended upward
during June and July. These gains, coupled with the Trading
Advisor's ability to limit losses during periods of short-term
price volatility and sharp trend reversals, contributed to the
overall success of the Partnership during the year. Total
expenses for the year were $10,725,809, resulting in net income
of $10,733,401. The value of a Unit increased from $2,132.79 at
December 31, 1996 to $2,373.36 at December 31, 1997.
The Partnership's overall performance record represents varied
results of trading in different futures interests markets. For a
further description of 1999 trading results, refer to the letter
to the Limited Partners in the accompanying Annual Report to
Limited Partners for the year ended December 31,
1999 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.
Credit Risk.
Financial Instruments. The Partnership is a party to financial
instruments with elements of off-balance sheet market and credit
risk. The Partnership may trade futures, forwards, and options
in a portfolio of agricultural commodities, energy products,
foreign currencies, interest rates, precious and base metals,
soft commodities and stock indices. 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 the markets should move
against all of the positions held by the Partnership at the same
time, and if the Trading Advisor was unable to offset positions
of the Partnership, the Partnership could lose all of its assets
and investors would realize a 100% loss.
In addition to the Trading Advisor's internal controls, the
Trading Advisor must comply with the trading policies of the
Partnership. These trading policies include standards for
liquidity and leverage with which the Partnership must comply.
The Trading Advisor and Demeter monitor the Partnership's trading
activities to ensure compliance with the trading
policies. Demeter may require the Trading Advisor to modify
positions of the Partnership if Demeter believes they violate the
Partnership's trading policies.
In addition to market risk, in entering into futures, forwards,
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 contracts traded in the
United States and the 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 customers, which should
significantly reduce this credit risk. For example, a
clearinghouse may cover a default by drawing upon a defaulting
member's mandatory contributions and/or non-defaulting members'
contributions to a clearinghouse guarantee fund, established
lines or letters of credit with banks, and/or the clearinghouse's
surplus capital and other available assets of the exchange and
clearinghouse, or assessing its members. In cases where the
Partnership trades off-exchange forwards contracts with a
counterparty, the sole recourse of the Partnership will be the
forwards contract counterparty.
There is no assurance that a clearinghouse or exchange 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 effected for the broker's customers. Any such obligation
on the part of a broker appears even less clear where the default
occurs in a non-U.S. jurisdiction.
Demeter deals with these credit risks of the Partnership in
several ways. First, it monitors the Partnership's credit
exposure to each exchange on a daily basis, calculating not only
the amount of margin required for it but also the amount of its
unrealized gains at each exchange, if any. The commodity brokers
inform the Partnership, as with all their customers, of its net
margin requirements for all its existing open positions, but do
not break that net figure down, exchange by exchange. Demeter,
however, has installed a system which permits it to monitor the
Partnership's potential margin liability, exchange by exchange.
As a result, Demeter is able to monitor the Partnership's
potential net credit exposure to each exchange by adding the
unrealized trading gains on that exchange, if any, to the
Partnership's margin liability thereon.
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, in addition, a minimum amount of
diversification in the Partnership's trading, usually over
several different products. One of the aims of such trading
policies has been to reduce the credit exposure of the
Partnership to a single exchange and, historically, the
Partnership's exposure has typically amounted to only a small
percentage of its total Net Assets. On those relatively few
occasions where the Partnership's credit exposure may climb above
that 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, Demeter has secured, with respect to Carr acting as the
clearing broker for the Partnership, a guarantee by Credit
Agricole Indosuez, Carr's parent, of the payment of the "net
liquidating value" of the transactions (futures and forward
contracts) in the Partnership's account.
With respect to forward contract trading, the Partnership trades
with only those counterparties which Demeter, together with DWR,
have determined to be creditworthy. At the date of this filing,
the Partnership deals only with
Carr as its counterparty on forward contracts. The guarantee by
Carr's parent, discussed above, covers these forward contracts.
See "Financial Instruments" under Notes to Financial Statements
in the Partnership's Annual Report to Limited Partners for the
year ended December 31, 1999, which is incorporated by reference
to Exhibit 13.01 of in this Form 10-K.
Year 2000. Commodity pools, like financial and business
organizations and individuals around the world, depend on the
smooth functioning of computer systems. The Year 2000 issue
arose since many of the world's computer systems (including those
in non-information technology systems) traditionally recorded
years in a two-digit format. If not addressed, such computer
systems may have been unable to properly interpret dates beyond
the year 1999, which may have led to business disruptions in the
U.S. and internationally. Such disruptions could have adversely
affected the handling or determination of futures trades and
prices and other services for the Partnership. Accordingly,
Demeter has fully participated in a firmwide initiative
established by MSDW to address issues associated with the Year
2000. As part of this initiative, MSDW reviewed its global
software and hardware infrastructure for mainframe, server and
desktop computing environments and engaged in extensive
remediation and testing. The Year 2000 initiative also
encompassed the review of agencies, vendors and facilities for
Year 2000 compliance.
Since 1995, MSDW prepared actively for the Year 2000 issue to
ensure that it would have the ability to respond to any critical
business process failure, to prevent the loss of workspace and
technology, and to mitigate any potential financial loss or
damage to its global franchise. Where necessary, contingency
plans were expanded or developed to address specific Year 2000
risk scenarios, supplementing existing business policies and
practices. In conjunction with MSDW's Year 2000 preparations,
Demeter monitored the progress of Carr and the Trading Advisor
throughout 1999 in their Year 2000 compliance and, where
applicable, tested its external interfaces, with Carr and the
Trading Advisor. In addition, Demeter, the commodity brokers,
the Trading Advisor and all U.S. futures exchanges were subjected
to monitoring by the CFTC of their Year 2000 preparedness, and
the major foreign futures exchanges engaged in market-wide
testing of their Year 2000 compliance during 1999.
MSDW and Demeter consider the transition into the Year 2000
successful from the perspective of their internal systems and
global external interactions.
Over the millennial changeover period, no material issues were
encountered, and MSDW, Demeter and the Partnership conducted
business as usual.
Risks Associated With the Euro. On January 1, 1999, eleven
countries in the European Union established fixed conversion
rates on their existing sovereign currencies and converted to a
common single currency (the euro). During a
three-year transition period, the sovereign currencies will
continue to exist but only as a fixed denomination of the euro.
Conversion to the euro prevents the Trading Advisor from trading
those sovereign currencies and thereby limits its ability to take
advantage of potential market opportunities that might otherwise
have existed had separate currencies been available to trade.
This could adversely affect the performance results of the
Partnership.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool involved in the speculative
trading of futures interests. 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
central, not incidental, to the Partnership's main business
activities.
The futures interests traded by the Partnership involve varying
degrees of 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.
Fluctuations in market risk based upon these factors result in
frequent changes in the fair value of the Partnership's open
positions, and, consequently, in its earnings and cash flow.
The Partnership's total market risk is influenced by a wide
variety of factors, including the diversification among the
Partnership's open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the market
risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
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 may
cause future losses and volatility (i.e. "risk of ruin") that far
exceed the Partnership's experiences to date or any reasonable
expectations based upon historical changes in market value.
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 using 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, whether realized or unrealized, and cash
flow. Profits and losses on open positions of exchange- traded
futures interests are settled daily through variation margin.
The Partnership's risk exposure in the market sectors traded by
the Trading Advisor is estimated below in terms of Value at Risk
("VaR"). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership's
trading portfolio. The Partnership estimates VaR using a model
based upon historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
The VaR model takes into account linear exposures to price and
interest rate risk. Market risks that are incorporated in the
VaR model include 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 historical observation period of the
Partnership's VaR is approximately four years. 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.
VaR models, including the Partnership's, are continuously
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 its daily risk management
activities.
The Partnership's Value at Risk in Different Market Sectors
The following tables indicates the VaR associated with the
Partnership's open positions as a percentage of total Net Assets
by primary market risk category as of December 31, 1999 and 1998.
As of December 31, 1999 and 1998, the Partnership's total
capitalization was approximately $109 million and $131 million,
respectively.
Primary Market December 31, 1999
December 31, 1998
Risk Category Value at Risk Value at
Risk
Currency (1.37)% (1.16)%
Interest Rate (.86) (1.95)
Equity (.40) (.34)
Commodity (.66) (.60)
Aggregate Value at Risk (1.72)%
(2.27)%
Aggregate Value at Risk represents the aggregate VaR of all the
Partnership's open positions and not the sum of the VaR of the
individual Market Categories
listed above. Aggregate VaR will be lower as it takes into
account correlation among different positions and categories.
The table above represents the VaR of the Partnership's open
positions at December 31, 1999 and 1998 only and is not
necessarily representative of either the historic or future risk
of an investment in the Partnership. Because the Partnership's
only business is the speculative trading of futures interests,
the composition of its trading portfolio can change significantly
over any given time period, or even within a single trading day.
Any changes in open positions could positively or negatively
materially impact market risk as measured by VaR.
The table below supplements the year end VaR by presenting the
Partnership's high, low and average VaR, as a percentage of total
net assets for the four quarterly reporting periods from January
1, 1999 through December 31, 1999.
Primary Market Risk Category High Low
Average
Currency (2.88)% (1.37)% (2.24)%
Interest Rate (1.75) (.86)
(1.42)
Equity (.57) (.33) (.43)
Commodity (.99) (.63) (.74)
Aggregate Value at Risk (3.42)% (1.72)% (2.67)%
Limitations on Value at Risk as an Assessment of Market Risk
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 to typically be many times
the total capitalization of the Partnership. The value of the
Partnership's open positions thus creates a "risk of ruin" not
typically found in other investments. The relative size of the
positions held may cause the Partnership to incur losses greatly
in excess of VaR within a short period of time, given the effects
of the leverage employed and market volatility. The VaR tables
above, as well as the past performance of the Partnership, gives
no indication of such "risk of ruin". In addition, VaR risk
measures should be viewed in light of the methodology's
limitations, which include 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 in response to market movements
may differ from those of the VaR model;
VaR results reflect past 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.
The VaR tables above 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, 1999 and for the end of the four
quarterly reporting periods during calendar year 1999. Since VaR
is based on historical data, VaR should not be viewed as
predictive of 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 1 in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. These balances and any market
risk they may represent are immaterial. The Partnership also
maintains a substantial portion (approximately 86%) of its
available assets in cash at DWR. A decline in short-term
interest rates will result in a decline in the Partnership's cash
management income. This cash flow risk is not considered
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.
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 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 as of December 31, 1999, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Currency. The primary market exposure in the Partnership is in
the currency sector. The Partnership's currency exposure is to
exchange rate fluctuations, primarily fluctuations which disrupt
the historical pricing relationships between different currencies
and currency pairs. Interest rate changes as well as political
and general economic conditions influence these fluctuations.
The Partnership trades in a large number of currencies. For the
fourth quarter of 1999, the Partnership's major exposures were in
outright U.S. dollar positions. (Outright positions consist of
the U.S. dollar vs. other currencies. These other currencies
include the major and minor currencies). Demeter does not
anticipate that the risk profile of the Partnership's currency
sector will change significantly in the future. The currency
trading VaR figure includes foreign margin amounts converted into
U.S. dollars with an incremental adjustment to reflect the
exchange rate risk inherent to the dollar-based Partnership in
expressing VaR in a functional currency other than dollars.
Interest Rate. The second largest market exposure was in the
interest rate complex. Exposure was primarily spread across the
Japanese, U.S., German 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 primary interest rate exposure is generally to
interest rate fluctuations in the United States and the other G-7
countries. The G-7 countries consist of France, U.S., Britain,
Germany, Japan, Italy and Canada. However, the Partnership also
takes futures positions in the government debt of smaller nations
- - e.g. Australia. Demeter anticipates that G-7 and Australian
interest rates will remain the primary interest rate exposure of
the Partnership for the foreseeable future. The changes in
interest rates, which have the most effect on the Partnership,
are changes in long-term, as opposed to short-term, rates. Most
of the speculative futures positions held by the Partnership are
in medium to long-term instruments. Consequently, even a
material change in short-term rates would have little effect on
the Partnership, were the medium to long-term rates to remain
steady.
Equity. The primary equity exposure is 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. As of December 31, 1999, the Partnership's primary
exposures were in the All Ordinaries (Australia), S&P 500 (U.S.)
and Nikkei (Japan) stock indices. The Partnership is primarily
exposed to the risk of adverse price trends or static markets in
the U.S. and Japanese indices. (Static markets would not cause
major market changes but would make it difficult for the
Partnership to avoid being "whipsawed" into numerous small
losses).
Commodity.
Energy. On December 31, 1999, the Partnership's energy exposure
was shared by futures contracts in the oil and natural gas
markets. Price movements in these markets result from political
developments in the Middle East, weather patterns, and other
economic fundamentals. As oil prices have increased
approximately 100% this year, and, given that the agreement by
OPEC to cut production is approaching expiration in March 2000,
it is possible that volatility will remain on the high end.
Significant profits and losses have been and are expected to
continue to be experienced in this market. Natural gas, also a
primary energy market exposure, has exhibited more volatility
than the oil markets on an intra-day and daily basis and is
expected to continue in this choppy pattern.
Metals. The Partnership's primary metals market exposure is to
fluctuations in the price of gold and silver. Although the
Trading Advisor will, from time to time, trade base metals such
as copper, the principal market exposures of the Partnership have
consistently been in precious metals, gold and silver. A
reasonable amount of exposure was evident in the gold market as
the price of
gold retreated during the fourth quarter. However, silver prices
have remained volatile over this period, and the Trading Advisor
has, from time to time, taken substantial positions as they have
perceived market opportunities to develop. Demeter anticipates
that gold and silver will remain the primary metals market
exposure for the Partnership.
Soft Commodities and Agriculturals. On December 31, 1999, the
Partnership had a reasonable amount of exposure in the markets
that comprise these sectors. Most of the exposure, however, was
in the coffee, sugar and corn markets. Supply and demand
inequalities, severe weather disruption 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 as of December 31, 1999:
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in Australian dollars and euros. The
Partnership controls the non-trading risk of these balances by
regularly converting these balances back into dollars upon
liquidation of the respective position.
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 and trading approaches, and
monitoring the performance of the Trading Advisor daily. 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 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
(selected quarterly financial data) is not applicable.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are no directors or executive officers of the Partnership.
The Partnership is managed by Demeter.
Directors and Officers of the General Partner
The directors and officers of Demeter are as follows:
Robert E. Murray, age 39, is Chairman of the Board, President and
a Director of Demeter. Mr. Murray is also Chairman of the Board,
President and a Director of DWFCM. Effective as of the close of
business on January 31, 2000, Mr. Murray replaced Mr. Hawley as
Chairman of the Board of Demeter and DWFCM. Mr. Murray is
currently a Senior Vice President of DWR's Managed Futures
Department. Mr. Murray began his career at DWR in 1984 and is
currently the Director of the Managed Futures Department. In this
capacity, Mr. Murray is responsible for overseeing all aspects of
the firm's Managed Futures Department. Mr. Murray currently
serves as Vice Chairman and a Director of the Managed Funds
Association, an industry association for investment professionals
in futures, hedge funds and other alternative investments. Mr.
Murray graduated from Geneseo State University in May 1983 with a
B.A. degree in Finance.
Mitchell M. Merin, age 46, is a Director of Demeter. Mr. Merin
is also a Director of DWFCM. Mr. Merin was appointed the Chief
Operating Officer of
Individual Asset Management for MSDW in December 1998 and the
President and Chief Executive Officer of Morgan Stanley Dean
Witter Advisors in February 1998. He has been an Executive Vice
President of DWR since 1990, during which time he has been
director of DWR's Taxable Fixed Income and Futures divisions,
Managing Director in Corporate Finance and Corporate Treasurer.
Mr. Merin received his Bachelor's degree from Trinity College in
Connecticut and his M.B.A. degree in finance and accounting from
the Kellogg Graduate School of Management of Northwestern
University in 1977.
Joseph G. Siniscalchi, age 54, is a Director of Demeter. Mr.
Siniscalchi joined DWR in July 1984 as a First Vice President,
Director of General Accounting and served as a Senior Vice
President and Controller for DWR's Securities Division through
1997. He is currently Executive Vice President and Director of
the Operations Division of DWR. From February 1980 to July 1984,
Mr. Siniscalchi was Director of Internal Audit at Lehman Brothers
Kuhn Loeb, Inc.
Edward C. Oelsner, III, age 57, is a Director of Demeter. Mr.
Oelsner is currently an Executive Vice President and head of the
Product Development Group at Morgan Stanley Dean Witter Advisors,
an affiliate of DWR. Mr. Oelsner joined DWR in 1981 as a Managing
Director in DWR's Investment Banking Department specializing in
coverage of regulated industries and, subsequently, served as
head of the DWR Retail Products Group. Prior to joining DWR, Mr.
Oelsner held positions at The First Boston Corporation as a
member of the Research and Investment Banking Departments from
1967 to 1981. Mr. Oelsner received his M.B.A. in Finance from
the Columbia University Graduate School of Business in 1966 and
an A.B. in Politics from Princeton University in 1964.
Lewis A. Raibley, III, age 37, is Vice President, Chief Financial
Officer and a Director of Demeter. Mr. Raibley is also a
Director of DWFCM. Mr. Raibley is currently Senior Vice
President and Controller in the Individual Asset Management Group
of MSDW. From July 1997 to May 1998, Mr. Raibley served as
Senior Vice President and Director in the Internal Reporting
Department of MSDW and prior to that, from 1992 to 1997, he
served as Senior Vice President and Director in the Financial
Reporting and Policy Division of Dean Witter Discover & Co. He
has been with MSDW and its affiliates since June 1986.
Richard A. Beech, age 48, is a Director of Demeter. Mr. Beech
has been associated with the futures industry for over 23 years.
He has been at DWR since August 1984, where he is presently
Senior Vice President and head of Branch Futures. Mr. Beech
began his career at the Chicago Mercantile Exchange, where he
became the Chief Agricultural Economist doing market analysis,
marketing and compliance. Prior to joining DWR, Mr. Beech also
had worked at two investment banking firms in operations,
research, managed futures and sales management.
Ray Harris, age 43, is a Director of Demeter. Mr. Harris is
currently Executive Vice President, Planning and Administration
for Morgan Stanley Dean Witter Asset Management and has worked at
DWR or its affiliates since July 1982, serving in both financial
and administrative capacities. From August 1994 to January 1999,
he worked in two separate DWR affiliates, Discover Financial
Services and Novus Financial Corp., culminating as Senior Vice
President. Mr. Harris received his B.A. degree from Boston
College and his M.B.A. in finance from the University of Chicago.
Mark J. Hawley, age 56, served as Chairman of the Board and a
Director of Demeter and DWFCM throughout 1999. Mr. Hawley joined
DWR in February 1989 as Senior Vice President and served as
Executive Vice President and Director of DWR's Product Management
for Individual Asset Management throughout 1999. In this
capacity, Mr. Hawley was responsible for directing the activities
of the firm's Managed Futures, Insurance, and Unit Investment
Trust Business. From 1978 to 1989, Mr. Hawley was a member of
the senior management team at Heinold Asset Management, Inc., a
commodity pool operator, and was responsible for a variety of
projects in public futures funds. From 1972 to 1978, Mr. Hawley
was a Vice President in charge of institutional block trading for
the Mid-West at Kuhn Loeb & Company. Mr. Hawley resigned
effective January 31, 2000.
All of the foregoing directors have indefinite terms.
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
(a) Security Ownership of Certain Beneficial Owners - As of
December 31, 1999, 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, 1999,
Demeter owned 576 Units of General Partnership Interest
representing a 1.28 percent interest in the Partnership.
(c) Changes in Control - None
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 1999, which is
incorporated by reference to Exhibit 13.01 of this Form 10-K. In
its capacity as the Partnership's retail commodity broker, DWR
received commodity brokerage commissions (paid and accrued by the
Partnership) of $5,623,369 for the year ended December 31, 1999.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Listing of Financial Statements
The following financial statements and report of independent
auditors, all appearing in the accompanying Annual Report to
Limited Partners for the year ended December 31, 1999, are
incorporated by reference to Exhibit 13.01 of this Form 10-K:
- - Report of Deloitte & Touche LLP, independent auditors, for
the years ended December 31, 1999, 1998 and 1997.
- - Statements of Financial Condition as of December 31,
1999 and 1998.
- - Statements of Operations, Changes in Partners' Capital, and
Cash Flows for the years ended December 31, 1999, 1998 and 1997.
- - 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, 1999, is not
deemed to be filed with this report.
2. Listing of Financial Statement Schedules
No financial statement schedules are required to be filed with
this report.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Partnership during
the last quarter of the period covered by this report.
(c) Exhibits
Refer to Exhibit Index on Page E-1.
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.
DEAN WITTER PORTFOLIO
STRATEGY FUND L.P.
(Registrant)
BY: Demeter Management
Corporation,
General Partner
March 29, 2000 BY: /s/ Robert E. Murray
Robert E. Murray, Director,
Chairman of the Board and
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/ Robert E. Murray ____ March 29, 2000
Robert E. Murray, Director,
Chairman of the Board and
President
/s/ Joseph G. Siniscalchi ___ March 29, 2000
Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III ___ March 29, 2000
Edward C. Oelsner III, Director
/s/ Mitchell M. Merin _ March 29, 2000
Mitchell M. Merin, Director
/s/ Richard A. Beech _ March 29, 2000
Richard A. Beech, Director
/s/ Ray Harris March 29, 2000
Ray Harris, Director
/s/ Lewis A. Raibley, III __ March 29, 2000
Lewis A. Raibley, III, Director, Chief
Financial Officer and Principal
Accounting Officer
EXHIBIT INDEX
ITEM METHOD
OF FILING
3.01 Limited
Partnership Agreement of
the Partnership, dated as of
August 28, 1990. (1)
10.01 Form of
Amended and Restated
Management Agreement among the
Partnership, Demeter and JWH
dated as of May 12, 1997. (2)
10.02 Form of
Amended and Restated
Customer Agreement Between the
Partnership and DWR Inc. (2)
dated as of September 1, 1996.
13.01 Annual
Report to Limited Partners for the year ended
December 31, 1999. (3)
(1)
Incorporated by reference to Exhibit 3.01 and Exhibit 3.02 of
the
Partnership's Registration Statement on Form S-1 (File No. 33-
36656).
(2)
Incorporated by reference to Exhibit 10.02 of the Partnership's
Registration Statement on Form S-1 (File No. 333-24109).
(3) Filed
herewith.
E-1
Portfolio
Strategy
Fund
December 31, 1999
Annual Report
MORGAN STANLEY DEAN WITTER
Demeter Management Corporation
Two World Trade Center
62nd Floor
New York, NY 10048
Telephone (212) 392-8899
Dean Witter Portfolio Strategy Fund L.P.
(Formerly, Dean Witter Principal Secured Futures Fund L.P.) Annual Report
1999
Dear Limited Partner:
This marks the ninth annual report for the Dean Witter Portfolio Strategy Fund
L.P. (the "Fund"). The Fund began the year trading at a Net Asset Value per
Unit of $2,597.84 and decreased by 6.9% to $2,419.78 on December 31, 1999.
Since its inception in 1991, the Fund has increased by 142.0% (a compound
annualized return of 10.4%).
Overall, the Fund recorded losses during 1999. The most significant losses were
recorded from global interest rate futures trading as the volatile and choppy
markets experienced during the year limited the ability to capitalize on
trends. During the fourth quarter, most global bond markets dropped on a resur-
gence of inflation and interest rate fears initiated by consistently strong
U.S. economic data, evidence of rising inflation in Germany and increases in
oil prices. Additional losses were recorded in metals from trading silver and
gold futures as supply and demand concerns resulted in short-term volatility
later in the year. In the global stock index futures markets, the reversal and
whipsaw conditions that prevailed during the fourth quarter resulted in losses
for the Fund. A portion of the Fund's overall losses was offset by gains re-
corded in the energy markets from long crude oil futures positions as oil
prices trended higher, particularly during November when they reached a nine-
year high. Additional gains were recorded in the currency markets due to the
re-emergence of the upward momentum in the U.S. dollar relative to the euro and
Swiss franc, as well as the continued strength of the Japanese yen versus other
major currencies.
While we are disappointed that the Fund had a difficult year in 1999, we remind
investors that managed futures funds such as Portfolio Strategy Fund are de-
signed to provide diversification and non-correlation, that is the ability to
perform independently, of global equities and bonds. Managed futures have his-
torically performed independently of traditional investments, such as stocks
and bonds. This is referred to as non-correlation, or the potential for managed
futures to perform when traditional markets such as stocks and bonds may expe-
rience difficulty performing. Of course, managed futures funds will not auto-
matically be profitable during unfavorable periods for these traditional in-
vestments and vice versa. The degree of non-correlation of any given managed
futures fund will vary, particularly as a result of market conditions, and some
funds will have significantly lesser degrees of non-correlation (i.e., greater
correlation) with stocks and bonds than others. 1999 proved to be another
strong year for equities, due in large part to continued growth and stability
in most major world economies accompanied by low inflation. This environment,
while strong for equities, provided few major sustained price trends in the
world's futures and currency markets, and as such, a difficult trading environ-
ment for the money manager in this Fund whose trading strategies rely on
the existence of longer-term price trends for trading opportunities. Neverthe-
less, we remain confident in the role that managed futures investments play in
the overall investment portfolio, and we believe this confidence is well-
founded based on the longer-term diversified non-correlated returns of this al-
ternative investment. Demeter Management Corporation, as General Partner to the
Fund, has been and continues to be an active investor with more than $18 mil-
lion invested among the 24 managed futures funds to which we act as General
Partner.
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation at Two World Trade Center, 62nd Floor,
New York, NY 10048, or
your Morgan Stanley Dean Witter 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 not a
guarantee of future results.
Sincerely,
/s/ Robert E. Murray
Robert E. Murray
Chairman
Demeter Management Corporation
General Partner
Dean Witter Portfolio Strategy Fund L.P.
Independent Auditors' Report
The Limited Partners and the General Partner:
We have audited the accompanying statements of financial condition of Dean Wit-
ter Portfolio Strategy Fund L.P. (the "Partnership") as of December 31, 1999
and 1998 and the related statements of operations, changes in partners' capi-
tal, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Partner-
ship's management. Our responsibility is to express an opinion on these finan-
cial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting 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 pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, such financial statements present fairly, in all material re-
spects, the financial position of Dean Witter Portfolio Strategy Fund L.P. at
December 31, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 14, 2000
(March 3, 2000 as to Note 6)
New York, New York
Dean Witter Portfolio Strategy Fund L.P.
Statements of Financial Condition
December 31,
-----------------------
1999 1998
----------- -----------
$ $
ASSETS
Equity in futures interests trading
accounts:
Cash 106,349,715 119,724,918
Net unrealized gain on open contracts 5,114,349 12,941,546
----------- -----------
Total Trading Equity 111,464,064 132,666,464
Interest receivable (DWR) 383,707 366,700
----------- -----------
Total Assets 111,847,771 133,033,164
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 2,177,256 1,065,454
Management fee payable 372,503 443,168
Accrued administrative expenses 96,794 85,003
Incentive fee payable -- 305,087
----------- -----------
Total Liabilities 2,646,553 1,898,712
----------- -----------
PARTNERS' CAPITAL
Limited Partners (44,552.639 and 49,902.250 Units,
respectively) 107,807,427 129,638,096
General Partner (576 Units) 1,393,791 1,496,356
----------- -----------
Total Partners' Capital 109,201,218 131,134,452
----------- -----------
Total Liabilities and Partners' Capital 111,847,771 133,033,164
=========== ===========
NET ASSET VALUE PER UNIT 2,419.78 2,597.84
=========== ===========
The accompanying notes are an integral part of these financial statements.
Dean Witter Portfolio Strategy Fund L.P.
Statements of Operations
For the Years Ended
December 31,
---------------------------------
1999 1998 1997
---------- ---------- ----------
$ $ $
REVENUES
Trading profit (loss):
Realized 7,743,552 16,456,361 10,456,265
Net change in unrealized (7,827,197) 3,170,468 6,717,198
---------- ---------- ----------
Total Trading Results (83,645) 19,626,829 17,173,463
Interest income (DWR) 4,571,405 4,999,330 4,285,747
---------- ---------- ----------
Total Revenues 4,487,760 24,626,159 21,459,210
---------- ---------- ----------
EXPENSES
Brokerage commissions (DWR) 5,623,369 5,432,337 4,200,892
Management fee 5,010,318 5,143,609 4,183,145
Incentive fee 1,548,449 2,075,293 1,927,512
Transaction fees and costs 391,572 388,815 368,260
Administrative expenses 132,000 115,000 46,000
---------- ---------- ----------
Total Expenses 12,705,708 13,155,054 10,725,809
---------- ---------- ----------
NET INCOME (LOSS) (8,217,948) 11,471,105 10,733,401
========== ========== ==========
Net Income (Loss) Allocation:
Limited Partners (8,115,383) 11,269,411 10,503,417
General Partner (102,565) 201,694 229,984
Net Income (Loss) per Unit:
Limited Partners (178.06) 224.48 240.57
General Partner (178.06) 224.48 240.57
Statements of Changes in Partners' Capital
For the Years Ended December 31, 1999, 1998 and 1997
Units of
Partnership Limited General
Interest Partners Partner Total
----------- ----------- --------- -----------
$ $ $
Partners' Capital, December
31, 1996 40,937.953 85,273,194 2,038,949 87,312,143
Offering of Units 18,765.082 43,029,509 -- 43,029,509
Net income -- 10,503,417 229,984 10,733,401
Redemptions (3,397.790) (7,442,409) -- (7,442,409)
---------- ----------- --------- -----------
Partners' Capital,
December 31, 1997 56,305.245 131,363,711 2,268,933 133,632,644
Net income -- 11,269,411 201,694 11,471,105
Redemptions (5,826.995) (12,995,026) (974,271) (13,969,297)
---------- ----------- --------- -----------
Partners' Capital,
December 31, 1998 50,478.250 129,638,096 1,496,356 131,134,452
Net loss -- (8,115,383) (102,565) (8,217,948)
Redemptions (5,349.611) (13,715,286) -- (13,715,286)
---------- ----------- --------- -----------
Partners' Capital, December
31, 1999 45,128.639 107,807,427 1,393,791 109,201,218
========== =========== ========= ===========
The accompanying notes are an integral part of these financial statements.
Dean Witter Portfolio Strategy Fund L.P.
Statements of Cash Flows
For the Years Ended
December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) (8,217,948) 11,471,105 10,733,401
Noncash item included in net income
(loss):
Net change in unrealized 7,827,197 (3,170,468) (6,717,198)
(Increase) decrease in operating
assets:
Interest receivable (DWR) (17,007) 126,917 (193,144)
Increase (decrease) in operating
liabilities:
Management fee payable (70,665) (8,395) 148,435
Accrued administrative expenses 11,791 8,927 (82,434)
Incentive fee payable (305,087) (496,028) (1,786,776)
Accrued brokerage
commissions (DWR) -- -- (141,879)
Accrued transaction fees and costs -- -- (10,045)
----------- ----------- -----------
Net cash provided by (used for)
operating activities (771,719) 7,932,058 1,950,360
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Offering of Units -- -- 43,029,509
Increase (decrease) in redemptions
payable 1,111,802 481,747 (104,408)
Redemptions of Units (13,715,286) (13,969,297) (7,442,409)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (12,603,484) (13,487,550) 35,482,692
----------- ----------- -----------
Net increase (decrease) in cash (13,375,203) (5,555,492) 37,433,052
Balance at beginning of period 119,724,918 125,280,410 87,847,358
----------- ----------- -----------
Balance at end of period 106,349,715 119,724,918 125,280,410
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
Dean Witter Portfolio Strategy Fund L.P.
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Organization--Dean Witter Portfolio Strategy Fund L.P. (formerly, Dean Witter
Principal Secured Futures Fund L.P.) (the "Partnership") is a limited partner-
ship organized to engage primarily in the speculative trading of futures and
forward contracts on physical commodities and other commodity interests (col-
lectively, "futures interests").
The general partner for the Partnership is Demeter Management Corporation ("De-
meter"). The non-clearing commodity broker is Dean Witter Reynolds Inc. ("DWR")
and an unaffiliated clearing commodity broker, Carr Futures Inc. ("Carr"), pro-
vides clearing and execution services. Both Demeter and DWR are wholly-owned
subsidiaries of Morgan Stanley Dean Witter & Co. ("MSDW"). John W. Henry & Com-
pany, Inc. ("JWH") is the trading manager of the Partnership.
On May 31, 1997, Morgan Stanley Group Inc. was merged with and into Dean Wit-
ter, Discover & Co. ("DWD"). At that time DWD changed its corporate name to
Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"). Effective February 19,
1998, MSDWD changed its corporate name to Morgan Stanley Dean Witter & Co.
Demeter is required to maintain a 1% minimum interest in the equity of the
Partnership and income (losses) are shared by Demeter and the Limited Partners
based upon their proportional ownership interests.
Offering of Units--Additional units of limited partnership interest ("Unit(s)")
were offered to the public at a price equal to 100% of the Net Asset Value as
of the close of business on the last day of the month from June 1 through Au-
gust 1, 1997.
Use of Estimates--The financial statements are prepared in accordance with gen-
erally accepted accounting principles, which require management to make esti-
mates and assumptions that affect the reported amounts in the financial state-
ments and related disclosures. Management believes that the estimates utilized
in the preparation of the financial statements are prudent and reasonable. Ac-
tual results could differ from those estimates.
Revenue Recognition--Futures interests are open commitments until settlement
date. 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 profit
(loss) on open contracts from one period
Dean Witter Portfolio Strategy Fund L.P.
Notes to Financial Statements--(Continued)
to the next in the statements of operations. Monthly, DWR pays the Partnership
interest income based upon 80% of the average daily Net Assets for the month at
a prevailing rate for U.S. Treasury bills. For purposes of such interest pay-
ments, Net Assets do not include monies due the Partnership on futures inter-
ests, but not actually received.
Net Income (Loss) per Unit--Net income (loss) per Unit is computed using the
weighted average number of Units outstanding during the period.
Equity in Futures Interests Trading Accounts--The Partnership's asset "Equity
in futures interests trading accounts," reflected in the statements of finan-
cial condition, consists of (A) cash on deposit with DWR and Carr to be used as
margin for trading; and (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.
The Partnership, in the normal course of business, enters into various con-
tracts with Carr acting as its commodity broker. Pursuant to brokerage agree-
ments with Carr, to the extent that such trading results in unrealized gains or
losses, the amounts are offset and reported on a net basis on the Partnership's
statements of financial condition.
The Partnership has offset the fair value amounts recognized for forward con-
tracts executed with the same counterparty as allowable under terms of the mas-
ter netting agreement with Carr, the sole counterparty on such contracts. The
Partnership has consistently applied its right to offset.
Brokerage Commissions and Related Transaction Fees and Costs--The Partnership
accrues brokerage commissions on a half-turn basis at 80% of DWR's published
non-member rates. Transaction fees and costs are accrued on a half-turn basis.
Brokerage commissions and transaction fees are capped at 13/20 of 1% per month
(a 7.8% maximum annual rate) of the Partnership's month-end Net Assets applied
on a per trading program basis.
Operating Expenses--The Partnership bears all operating expenses related to its
trading activities, to a maximum of 1/4 of 1% annually of the Partnership's av-
erage month-end Net Assets. These include filing fees, clerical, administra-
tive, auditing, accounting, mailing, printing and other incidental operating
expenses as permitted by the Limited Partnership Agreement. In addition, the
Partnership incurs a monthly management fee and may
Dean Witter Portfolio Strategy Fund L.P.
Notes to Financial Statements--(Continued)
incur an incentive fee. Demeter and/or DWR bear all other operating expenses,
including expenses which would be incurred if the Partnership were required to
register as an investment company.
Redemptions--Limited Partners may redeem some or all of their Units at 100% of
the Net Asset Value per Unit as of the last day of any month that is six months
after the closing at which a person becomes a Limited Partner, upon five busi-
ness days advance notice by redemption form to Demeter. However, any Units re-
deemed at or prior to the end of the twenty-fourth full month following the
closing at which such person first becomes a Limited Partner, is subject to a
redemption charge equal to 1%, of the Net Asset Value per Unit on the date of
such redemption. Limited Partners who obtained their Units via an exchange from
another DWR-sponsored commodity pool are not subject to the six months holding
period or the redemption 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.
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
and expenses for income tax purposes.
Dissolution of the Partnership--The Partnership will terminate on December 31,
2025 or at an earlier date if certain conditions set forth in the Limited Part-
nership Agreement occur.
2. Related Party Transactions
The Partnership pays brokerage commissions to DWR as described in Note 1. The
Partnership's cash is on deposit with DWR and Carr in futures interests trading
accounts to meet margin requirements as needed. DWR pays interest on these
funds as described in Note 1.
3. Trading Manager
Compensation to JWH consists of a management fee and an incentive fee as fol-
lows:
Management Fee--The Partnership pays a monthly management fee equal to 1/3 of
1% per month (a 4% annual rate) of the Partnership's adjusted Net Assets, as
defined in the Limited Partnership Agreement, as of the last day of each month.
Dean Witter Portfolio Strategy Fund L.P.
Notes to Financial Statements--(Continued)
Incentive Fee--The Partnership pays a quarterly incentive fee equal to 15% of
the Partnership's new appreciation of the Partnership's Net Assets as of the
end of each calendar quarter. New appreciation represents the amount by which
Net Assets are increased by profits, from futures, forwards and options trad-
ing, that exceed losses after brokerage commissions, management fees, transac-
tion fees and costs and administrative expenses are deducted. Such incentive
fee is accrued in each month in which new appreciation occurs. In those months
in which new appreciation is negative, previous accruals, if any, during the
incentive period are reduced. In those instances in which a Limited Partner re-
deems an investment, the incentive fee (if earned through a redemption date) is
paid to JWH on those redemptions in the month of such redemptions.
4. Financial Instruments
The Partnership trades primarily futures and forward contracts on physical com-
modities and other commodity interests. Futures and forwards represent con-
tracts 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 in-
ability 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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued State-
ment of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Deriva-
tive Instruments and Hedging Activities" effective for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of SFAS No. 133," which defers the required implementation of SFAS No. 133
until fiscal years beginning after June 15, 2000. However, the Partnership had
previously elected to adopt the provisions of SFAS No. 133 beginning with the
fiscal year ended December 31, 1998. SFAS No. 133 supersedes SFAS No. 119 and
No. 105, which required the disclosure of average aggregate fair values and
contract/notional values, respectively, of derivative financial instruments for
an entity which carries its assets at fair value. The application of SFAS No.
133 does not have a significant effect on the Partnership's financial state-
ments.
The net unrealized gains on open contracts are reported as a component of "Eq-
uity in futures interests trading accounts" on the statements of financial con-
dition and
Dean Witter Portfolio Strategy Fund L.P.
Notes to Financial Statements--(Continued)
totaled $5,114,349 and $12,941,546 at December 31, 1999 and 1998, respectively.
Of the $5,114,349 net unrealized gain on open contracts at December 31, 1999,
$4,663,628 related to exchange-traded futures contracts and $450,721 related to
off-exchange-traded forward currency contracts.
Of the $12,941,546 net unrealized gain on open contracts at December 31, 1998,
$13,874,856 related to exchange-traded futures contracts and $(933,310) related
to off-exchange-traded forward currency contracts.
Exchange-traded futures contracts held by the Partnership at December 31, 1999
and 1998 mature through December 2000 and December 1999, respectively. Off-ex-
change-traded forward currency contracts held by the Partnership at December
31, 1999 and 1998 mature through March 2000 and March 1999, respectively.
The Partnership has credit risk associated with counterparty nonperformance.
The credit risk associated with the instruments in which the Partnership is in-
volved is limited to the amounts reflected in the Partnership's statements of
financial condition.
The Partnership also has credit risk because DWR and Carr act as the futures
commission merchants or the counterparties, with respect to most of the Part-
nerships' assets. Exchange-traded futures contracts are marked to market on a
daily basis, with variations in value settled on a daily basis. Each of DWR and
Carr, as a futures commission merchant for the Partnership's exchange-traded
futures 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 contracts, including an amount equal to the net
unrealized gains on all open futures contracts, which funds, in the aggregate,
totaled $111,013,343 and $133,599,774 at December 31, 1999 and 1998, respec-
tively. With respect to the Partnership's off-exchange-traded forward currency
contracts, there are no daily settlements of variations in value nor is there
any requirement that an amount equal to the net unrealized gains on open for-
ward contracts be segregated. With respect to those off-exchange-traded forward
currency contracts, the Partnership is at risk to the ability of Carr, the sole
counterparty on all of such contracts, to perform. The Partnership has a net-
ting agreement with Carr. This agreement, which seeks to reduce both the Part-
nership's and Carr's exposure on off-exchange-traded forward currency con-
tracts, should materially
Dean Witter Portfolio Strategy Fund L.P.
Notes to Financial Statements--(Continued)
decrease the Partnership's credit risk in the event of Carr's bankruptcy or in-
solvency. Carr's parent, Credit Agricole Indosuez, has guaranteed to the Part-
nership payment of the net liquidating value of the Partnership's account with
Carr (including foreign currency contracts).
5. Legal Matters
The class actions first filed in 1996 in California and in New York State
courts were each dismissed in 1999. On September 6, 10, and 20, 1996, and on
March 13, 1997, purported class actions were filed in the Superior Court of the
State of California, County of Los Angeles, on behalf of all purchasers of in-
terests in limited partnership commodity pools sold by DWR. Named defendants
include DWR, Demeter, Dean Witter Futures and Currency Management Inc., MSDW,
the Partnership (under its original name), certain limited partnership commod-
ity pools of which Demeter is the general partner (all such parties referred to
hereafter as the "Morgan Stanley Dean Witter Parties") and certain trading ad-
visors to those pools. On June 16, 1997, the plaintiffs in the above actions
filed a consolidated amended complaint, alleging, among other things, that the
defendants committed fraud, deceit, negligent misrepresentation, various viola-
tions of the California Corporations Code, intentional and negligent breach of
fiduciary duty, fraudulent and unfair business practices, unjust enrichment,
and conversion in the sale and operation of the various limited partnership
commodity pools. The complaints seek unspecified amounts of compensatory and
punitive damages and other relief. The court entered an order denying class
certification on August 24, 1999. On September 24, 1999, the court entered an
order dismissing the case without prejudice on consent. Similar purported class
actions were also filed on September 18 and 20, 1996, in the Supreme Court of
the State of New York, New York County, and on November 14, 1996 in the Supe-
rior Court of the State of Delaware, New Castle County, against the Morgan
Stanley Dean Witter Parties and certain trading advisors on behalf of all pur-
chasers of interests in various limited partnership commodity pools, including
the Partnership, sold by DWR. A consolidated and amended complaint in the ac-
tion pending in the Supreme Court of the State of New York was filed on August
13, 1997, alleging that the defendants committed fraud, breach of fiduciary du-
ty, and negligent misrepresentation in the sale and operation of the various
limited partnership commodity pools. The complaints seek unspecified amounts of
compensatory and punitive damages and other relief. The New York Supreme Court
dismissed the New York action in November 1998, but granted
Dean Witter Portfolio Strategy Fund L.P.
Notes to Financial Statements--(Concluded)
plaintiffs leave to file an amended complaint, which they did in early December
1998. The defendants filed a motion to dismiss the amended complaint with prej-
udice on February 1, 1999. By decision dated December 21, 1999, the New York
Supreme Court dismissed the case with prejudice.
In addition, on December 16, 1997, upon motion of the plaintiffs, the action
pending in the Superior Court of the State of Delaware was voluntarily dis-
missed without prejudice.
6. Subsequent Event
On March 3, 2000, the plaintiffs in the New York action referred to in Note 5
filed an appeal of the order dismissing the consolidated complaint.
MORGAN STANLEY DEAN WITTER & CO.
Two World Trade Center
62nd Floor
New York, NY 10048
Presorted
First Class Mail
U.S. Postage Paid
Brooklyn, NY
Permit No. 148