UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-10593

MORGAN STANLEY INSTITUTIONAL FUND OF HEDGE FUNDS LP

(Exact name of Registrant as specified in Charter)

100 Front Street, Suite 400 West Conshohocken, Pennsylvania	19428-2881
(Address of principal executive offices)

Stefanie V. Chang Yu, Esq.

Morgan Stanley Investment Management Inc.

522 Fifth Avenue

New York, NY 10036

(Name and address of agent for service)

COPY TO:

Richard Horowitz, Esq.

DECHERT LLP

1095 Avenue of the Americas

New York, NY 10036-6797

(212) 698-3500

Registrant’s Telephone Number, including Area Code: (610) 260-7600

Date of fiscal year end: December 31

Date of reporting period: June 30, 2009

ITEM 1. REPORTS TO STOCKHOLDERS. The Registrant’s semi-annual report transmitted to limited partners pursuant to Rule 30e-1 under the Investment Company Act of 1940 is as follows:

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

MORGAN STANLEY

INSTITUTIONAL FUND OF HEDGE

FUNDS LP

Financial Statements (Unaudited)

For the Period from January 1, 2009

to June 30, 2009

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Financial Statements (Unaudited)

For the Period from January 1, 2009 to June 30, 2009

Contents

Financial Statements (Unaudited)
Statement of Assets, Liabilities and Partners’ Capital	1
Statement of Operations	2
Statements of Changes in Partners’ Capital	3
Statement of Cash Flows	4
Schedule of Investments	5
Notes to Financial Statements	10
Investment Advisory Agreement Approval	22
Proxy Voting Policies and Procedures and Proxy Voting Record	25
Quarterly Portfolio Schedule	25

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Statement of Assets, Liabilities and Partners’ Capital (Unaudited)

June 30, 2009

Assets
Investments in investment funds, at fair value (cost $1,498,495,837)	$	1,507,955,372
Short-term investments (cost $11,301,417)		11,301,417
Cash		849,388
Prepaid investments in investment funds		40,000,000
Receivable for investments sold		294,634,686
Other assets		60,777
Total assets		1,854,801,640
Liabilities
Payable for capital repurchases		196,505,593
Management fee payable		1,680,220
Accrued expenses and other liabilities		7,287,582
Total liabilities		205,473,395
Net assets	$	1,649,328,245
Partners’ capital
Represented by:
Net capital	$	1,630,182,849
Accumulated net investment income (loss)		(6,085,099	)
Accumulated net realized gain (loss) from investments		15,770,960
Net unrealized appreciation on investments		9,459,535
Total partners’ capital	$	1,649,328,245

The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.

1

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Statement of Operations (Unaudited)

For the Period from January 1, 2009 to June 30, 2009

Investment income
Dividend	$	97,188
Interest		11,729
Other		1,626
Total investment income		110,543
Expenses
Management fees		5,237,504
Accounting and administration fees		413,353
Custody fees		209,289
Professional fees		114,825
Insurance expense		109,463
Directors’ fees		26,121
Interest expense		20,152
Other		64,935
Total expenses		6,195,642
Net investment income (loss)		(6,085,099	)
Realized and unrealized gain (loss) from investments
Net realized gain (loss) from investments in investment funds		15,770,960
Net realized gain (loss) from investments		15,770,960
Net change in unrealized appreciation/depreciation on investments in investment funds		110,230,592
Net change in unrealized appreciation/depreciation on investments		110,230,592
Net realized and unrealized gain (loss) from investments		126,001,552
Net increase (decrease) in partners’ capital resulting from operations	$	119,916,453

The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.

2

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Statements of Changes in Partners’ Capital (Unaudited)

	General Partner			Limited Partners			Total
Partners’ capital at December 31, 2007	$	682,875		$	3,194,392,453		$	3,195,075,328
For the year ended December 31, 2008
Increase (decrease) in partners’ capital:
From operations
Net investment income (loss)		3,192			(17,505,648	)		(17,502,456	)
Net realized gain (loss) from investments		16,117			75,795,653			75,811,770
Net change in unrealized appreciation/depreciation on investments		(159,475	)		(719,925,573	)		(720,085,048	)
Net increase (decrease) in partners’ capital resulting from operations		(140,166	)		(661,635,568	)		(661,775,734	)
From partners’ capital transactions
Capital contributions		—			311,449,140			311,449,140
Capital repurchases		—			(887,938,385	)		(887,938,385	)
Re-allocation of performance incentive		—			—			—
Net increase (decrease) in partners’ capital from capital transactions		—			(576,489,245	)		(576,489,245	)
Total increase (decrease) in partners’ capital		(140,166	)		(1,238,124,813	)		(1,238,264,979	)
Partners’ capital at December 31, 2008	$	542,709		$	1,956,267,640		$	1,956,810,349
For the period from January 1, 2009 to June 30, 2009
Increase (decrease) in partners’ capital:
From operations
Net investment gain (loss)	$	(1,775	)	$	(6,083,324	)	$	(6,085,099	)
Net realized gain (loss) from investments		5,127			15,765,833			15,770,960
Net change in unrealized appreciation/depreciation on investments		32,228			110,198,364			110,230,592
Net increase (decrease) in partners’ capital resulting from operations		35,580			119,880,873			119,916,453
From partners’ capital transactions
Capital contributions		—			4,560,004			4,560,004
Capital repurchases		—			(431,958,561	)		(431,958,561	)
Re-allocation of performance incentive		—			—			—
Net increase (decrease) in partners’ capital from capital transactions		—			(427,398,557	)		(427,398,557	)
Total increase (decrease) in partners’ capital		35,580			(307,517,684	)		(307,482,104	)
Partners’ capital at June 30, 2009	$	578,289		$	1,648,749,956		$	1,649,328,245

The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.

3

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Statement of Cash Flows (Unaudited)

For the Period from January 1, 2009 to June 30, 2009

Cash flows from operating activities
Net increase (decrease) in partners’ capital resulting from operations	$	119,916,453
Adjustments to reconcile net increase (decrease) in partners’ capital resulting from operations to net cash provided by (used in) operating activities:
Net change in unrealized appreciation/depreciation on investments in investment funds		(110,230,592	)
Net realized (gain) loss from investments in investment funds		(15,770,960	)
Purchase of investments in investment funds		(155,875,273	)
Proceeds from sales of investments in investment funds		720,391,131
(Increase) decrease in short-term investments		143,734,926
(Increase) decrease in prepaid investments in investment funds		(40,000,000	)
(Increase) decrease in receivable for investments sold		(31,389,045	)
(Increase) decrease in other assets		97,552
Increase (decrease) in management fee payable		(526,071	)
Increase (decrease) in accrued expenses and other liabilities		2,126,629
Net cash provided by (used in) operating activities		632,474,750
Cash flows from financing activities
Proceeds from advances on line of credit		40,900,000
Repayments of line of credit		(40,900,000	)
Capital contributions		4,560,004
Capital repurchases		(636,185,366	)
Net cash provided by (used in) financing activities		(631,625,362	)
Net change in cash		849,388
Cash at beginning of period		—
Cash at end of period	$	849,388
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	20,152

The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.

4

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Schedule of Investments (Unaudited)

June 30, 2009

Description	First Acquisition Date	Cost		Fair Value		Percent of Partners’ Capital		First Available Redemption Date*	Liquidity**
Investment Funds
Convertible Arbitrage
KBC Convertible Opportunities Fund L.P.	7/1/2002	$	499,022	$	489,287	0.03	%	(a) (b)	(a) (b)
Lydian Partners II L.P.	7/1/2002		1,213,209		1,213	0.00		(b)	(b)
Total Convertible Arbitrage			1,712,231		490,500	0.03
Distressed
Avenue Asia Investments, L.P.	7/1/2002		9,534,559		12,260,313	0.74		(b)	(b)
Avenue Europe Investments, L.P.	8/1/2004		17,528,657		16,880,663	1.02		(b)	(b)
Cerberus International, Ltd.	12/1/2007		125,310,372		103,374,055	6.27		12/31/2009 (c)	Quarterly
Total Distressed			152,373,588		132,515,031	8.03
Equity Long/Short - High Hedge
Prism Partners III Leveraged, L.P.	6/1/2008		41,976,715		42,094,749	2.55		8/31/2009	Monthly
Total Equity Long/Short - High Hedge			41,976,715		42,094,749	2.55
Equity Long/Short - Opportunistic
Highbridge Long/Short Equity Fund, L.P.	1/1/2005		24,703,681		34,451,145	2.09		9/30/2009	Quarterly
Karsch Capital II, LP	5/1/2004		42,233,294		51,360,686	3.12		9/30/2009	Quarterly
Lansdowne Global Financials Fund, L.P.	10/1/2004		25,819,428		51,812,903	3.14		9/30/2009	Monthly
Lansdowne UK Equity Fund, L.P.	5/1/2009		20,000,000		21,166,868	1.28		9/30/2009	Monthly
Visium Balanced Fund, LP	12/1/2005		23,370,360		26,676,226	1.62		9/30/2009	Quarterly
Total Equity Long/Short - Opportunistic			136,126,763		185,467,828	11.25
Event Driven Credit
Plainfield 2008 Liquidating LLC	1/1/2009		32,643,263		32,037,407	1.94		(b)	(b)
Plainfield 2009 Liquidating LLC	6/1/2009		75,320,499		60,910,726	3.69		(b)	(b)
Q Funding III, L.P.	7/1/2002		26,032,003		14,006,650	0.85		12/31/2012	3 Years (d)
Silver Point Capital Fund, L.P.	6/1/2007		60,000,000		42,007,976	2.55		9/30/2009	Annually (a)
Total Event Driven Credit			193,995,765		148,962,759	9.03

The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.

5

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Schedule of Investments (Unaudited) (continued)

June 30, 2009

Description	First Acquisition Date	Cost		Fair Value		Percent of Partners’ Capital		First Available Redemption Date*	Liquidity**
Investment Funds (continued)
Macro
Brevan Howard L.P.	8/1/2004	$	75,407,892	$	112,181,360	6.80	%	9/30/2009	Monthly
D.E. Shaw Oculus Fund, L.L.C.	11/1/2004		78,901,514		94,969,844	5.76		7/31/2009 (e)	Quarterly
GSA Composite Alpha Partners L.P.	9/1/2008		631,446		443,404	0.03		(a)	(a)
Moore Emerging Markets Fund Ltd.	6/1/2009		20,000,000		19,254,000	1.16		10/31/2009	Quarterly
Total Macro			174,940,852		226,848,608	13.75
Mortgage Arbitrage
Ellington Mortgage Partners, L.P.	7/1/2002		7,848,871		7,240,504	0.44		(b)	(b)
New Ellington Credit Partners, LP	2/1/2006		9,321,682		6,939,105	0.42		(b)	(b)
Total Mortgage Arbitrage			17,170,553		14,179,609	0.86
Multi-Strategy
Amaranth Partners L.L.C.	11/1/2004		8,629,059		3,047,440	0.18		(b)	(b)
Citadel Wellington LLC	7/1/2002		86,848,035		95,663,751	5.80		9/30/2009 (c)	2 Years & Quarterly
D.E. Shaw Composite Fund, L.L.C.	9/1/2005		49,382,344		59,769,905	3.62		9/30/2009 (e)	Quarterly (a)
HBK Fund L.P.	7/1/2002		36,625,610		46,492,377	2.82		9/30/2009 (e)	Quarterly
Magnetar Capital Fund, LP	1/1/2008		60,000,000		46,373,435	2.82		12/31/2009	Semi-Annually (a)
Millenium USA, L.P.	8/1/2008		98,614,362		100,423,447	6.09		9/30/2009 (e)	Quarterly
OZ Domestic Partners, L.P.	7/1/2002		25,836,353		25,836,353	1.57		(a)	(a)
Perry Partners, L.P.	12/1/2006		2,099,932		1,096,260	0.07		(a)	(a)
Polygon Global Opportunities Fund LP	7/1/2005		71,683,625		42,811,925	2.60		(b)	(b)
QVT Associates LP	9/1/2006		100,860,055		98,342,994	5.96		9/30/2009 (e)	Quarterly (a)
Sandelman Partners Multi-Strategy Fund, LP	5/1/2007		17,933,025		7,481,822	0.45		(a) (b)	(a) (b)
TPG-Axon Partners, LP	10/1/2007		146,000,000		115,181,027	6.98		12/31/2009	Quarterly (a)
Total Multi-Strategy			704,512,400		642,520,736	38.96

The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.

6

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Schedule of Investments (Unaudited) (continued)

June 30, 2009

Description	First Acquisition Date	Cost		Fair Value		Percent of Partners’ Capital		First Available Redemption Date*	Liquidity**
Investment Funds (continued)
Restructurings and Value
Amber Fund LP	4/1/2007	$	4,341,095	$	3,298,784	0.20	%	(b)	(b)
Castlerigg Partners L.P.	5/1/2007		16,458,416		15,680,548	0.95		(a) (b)	(a) (b)
Empyrean Capital Fund, LP	7/1/2004		407,519		61,128	0.01		(a)	(a)
Oceanwood Global Opportunities Fund L.P.	7/1/2007		1,007,877		865,784	0.05		(a)	(a)
One East Partners, LP	8/1/2006		12,580,763		7,600,840	0.46		(a)	(a)
Western Investment Activism Partners LLC	1/1/2006		12,391,300		11,897,596	0.72		9/30/2009	Monthly
Total Restructurings and Value			47,186,970		39,404,680	2.39
Statistical Arbitrage
Citadel Derivatives Group Investors LLC	7/1/2007		20,250,000		66,589,443	4.04		9/30/2009	Quarterly
GSA Capital International Partners, L.P.	9/1/2008		8,250,000		8,881,429	0.54		9/30/2009	Quarterly
Total Statistical Arbitrage			28,500,000		75,470,872	4.58
Total Investments in Investment Funds		$	1,498,495,837	$	1,507,955,372	91.43	%

The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.

7

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Schedule of Investments (Unaudited) (continued)

June 30, 2009

Description	Cost		Fair Value		Percent of Partners’ Capital
Short-Term Investments
State Street Institutional Liquid Reserves Fund
- Institutional Class 0.45%		11,301,417		11,301,417	0.68
Total Short-Term Investments		11,301,417		11,301,417	0.68
Total Investments in Investment Funds and Short-Term Investments	$	1,509,797,254		1,519,256,789	92.11
Other Assets, less Liabilities				130,071,456	7.89
Total Partners’ Capital			$	1,649,328,245	100.00	%

Detailed information about all of the Investment Funds’ portfolios is not available.

* Investments in Investment Funds may be composed of multiple tranches. The First Available Redemption Date relates to the earliest date after June 30, 2009 that redemption from a tranche is available. Other tranches may have an available redemption date that is after the First Available Redemption Date. Redemptions from Investment Funds may be subject to fees.

** Available frequency of redemptions after initial lock-up period, if any. Different tranches may have different liquidity terms.

(a) A portion or all of the Partnership’s interest in this Investment Fund are held in side pockets, which have restricted liquidity. See discussion in Note 2 to the financial statements.

(b) The Investment Fund is in liquidation. In addition to any redemption proceeds that may have already been received, the Partnership will continue to receive proceeds periodically as the Investment Fund is able to liquidate underlying investments.

(c) The Investment Fund has suspended redemptions as of June 30, 2009. The suspension may be lifted at any time, subject to the discretion of the Investment Fund.

(d) Based on agreement with the underlying Investment Fund’s investment manager, if the Investment Fund becomes greater than 8% of the Partnership’s capital, the Partnership may elect to redeem as of the next available month end date in an amount sufficient to bring the Investment Fund’s value to below 8% of the Partnership’s capital.

(e) As of June 30, 2009, the Investment Fund has limited the amount of redemption requests paid to the Partnership.

The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.

8

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Schedule of Investments (Unaudited) (continued)

June 30, 2009

Strategy Allocation	Percent of Partners’ Capital
Multi-Strategy	38.96	%
Macro	13.75
Equity Long/Short - Opportunistic	11.25
Event Driven Credit	9.03
Distressed	8.03
Statistical Arbitrage	4.58
Equity Long/Short - High Hedge	2.55
Restructurings and Value	2.39
Mortgage Arbitrage	0.86
Short-Term Investments	0.68
Convertible Arbitrage	0.03
Total Investments in Investment Funds and Short-Term Investments	92.11	%

The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.

9

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited)

June 30, 2009

1. Organization

Morgan Stanley Institutional Fund of Hedge Funds LP (the “Partnership”) was organized under the laws of the State of Delaware as a limited partnership on November 6, 2001 pursuant to an Amended and Restated Agreement of Limited Partnership (as it may be amended, modified or otherwise supplemented from time to time, the “Agreement”) and commenced operations on July 1, 2002. The Partnership is registered under the U.S. Investment Company Act of 1940, as amended (the “1940 Act”), as a closed-end, non-diversified, management investment company. The Partnership’s investment objective is to seek capital appreciation principally through investing in investment funds (“Investment Funds”) managed by third party investment managers who employ a variety of alternative investment strategies. Investments of the Partnership are selected opportunistically from a wide range of Investment Funds in order to create a broad-based portfolio of such Investment Funds while seeking to invest in compelling investment strategies and with promising third party investment managers at optimal times. The Partnership may seek to gain investment exposure to certain Investment Funds or to adjust market or risk exposure by entering into derivative transactions, such as total return swaps, options and futures.

Morgan Stanley Alternative Investment Partners LP serves as the Partnership’s general partner (the “General Partner”) subject to the ultimate supervision of, and subject to any policies established by, the Partnership’s Board of Directors (the “Board”). Morgan Stanley AIP GP LP, the general partner of the General Partner, serves as the Partnership’s investment adviser (the “Adviser”) and is responsible for providing day-to-day investment management services to the Partnership, subject to the supervision of the Board. The Adviser is registered as an investment adviser under the U.S. Investment Advisers Act of 1940, as amended. The General Partner and the Adviser are affiliates of Morgan Stanley. The Partnership’s term is perpetual unless the Partnership is otherwise terminated under the terms of the Agreement or unless and until required by law.

The Partnership is a “Master” fund in a “Master-Feeder” structure whereby each feeder fund invests substantially all of its assets in the Partnership. As of June 30, 2009, Morgan Stanley Institutional Cayman Fund LP, Morgan Stanley Institutional Cayman Fund SPC – Euro Segregated Portfolio, Morgan Stanley Institutional Cayman Fund SPC – Morgan Stanley Alpha AdvantageTM U.S. Large Cap Core Equity Segregated Portfolio, and Morgan Stanley Institutional Cayman Fund SPC – Morgan Stanley Alpha AdvantageTM U.S. Core Bond Segregated Portfolio, each a feeder fund to the Partnership, represented 26.99%, 1.21%, 1.74%, and 11.85%, respectively, of the Partnership’s net assets. As of June 30, 2009, Morgan Stanley Institutional Unit Trust (For Qualified Institutional Investors) and Morgan Stanley Institutional Unit Trust II (For Qualified Institutional Investors), each an indirect feeder fund to the Partnership, represented 0.99% and 0.46%, respectively, of the Partnership’s net assets.

The Board has overall responsibility for monitoring and overseeing the Partnership’s investment program and its management and operations. A majority of the members of the Board are not “interested persons” (as defined by the 1940 Act) of the Partnership or the Adviser.

10

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited) (continued)

1. Organization (continued)

Limited partnership interests of the Partnership (the “Interests”) are generally issued at the beginning of each calendar month. Additional contributions for Interests by eligible investors are accepted into the Partnership at net asset value.

The Partnership may from time to time offer to repurchase Interests (or portions of them) at net asset value pursuant to written tenders made by a limited partner of the Partnership (a “Limited Partner”), and each such repurchase offer will generally apply to 5-25% of the net assets of the Partnership. Repurchases are made at such times, in such amounts and on such terms as may be determined by the Board in its sole discretion. In determining whether the Partnership should offer to repurchase Interests (or portions of them) from Limited Partners, the Board will consider the recommendations of the Adviser and the General Partner as to the timing of such an offer, as well as a variety of operational, business and economic factors. The Adviser and the General Partner expect that they will recommend to the Board that the Partnership offer to repurchase Interests (or portions of them) from Limited Partners quarterly, on each March 31, June 30, September 30 and December 31 (or, if any such date is not a business day, on the immediately preceding business day). In general, the Partnership will initially pay at least 90% of the estimated value of the repurchased Interests to Limited Partners as of the later of: (1) a period of within 30 days after the value of the Interests to be repurchased is determined, or (2) if the Partnership has requested withdrawals of its capital from any Investment Funds in order to fund the repurchase of Interests, within ten business days after the Partnership has received at least 90% of the aggregate amount withdrawn by the Partnership from such Investment Funds. The remaining amount will be paid promptly after completion of the annual audit of the Partnership and preparation of the Partnership’s audited financial statements.

2. Significant Accounting Policies

The following significant accounting policies are in conformity with U.S. generally accepted accounting principles. Such policies are consistently followed by the Partnership in preparation of its financial statements. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the General Partner and Adviser to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements, including the estimated fair value of investments. Actual results could differ from those estimates.

Portfolio Valuation

The net asset value of the Partnership is determined as of the close of business at the end of any fiscal period, generally monthly, in accordance with the valuation principles set forth below or as may be determined from time to time pursuant to policies established by the Board.

13

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited) (continued)

2. Significant Accounting Policies (continued)

Portfolio Valuation (continued)

As of June 30, 2009, 99.26% of the Partnership’s portfolio was comprised of investments in Investment Funds. The remainder of the portfolio was invested in short-term investments. The Board has approved procedures pursuant to which the Partnership values its investments in Investment Funds at fair value, which ordinarily will be the amount equal to the Partnership’s pro rata interest in the net assets of each such Investment Fund, as such value is supplied by, or on behalf of, the Investment Fund’s investment manager from time to time, usually monthly. Valuations received from, or on behalf of, the Investment Funds’ respective investment managers are typically estimates only, subject to subsequent revision by such investment managers. Such valuations are generally net of management and performance incentive fees or allocations payable to the Investment Funds’ managers or general partners pursuant to the Investment Funds’ operating agreements. The Investment Funds value their underlying investments in accordance with policies established by each Investment Fund, as described in each of their financial statements and offering memoranda. The Partnership’s investments in Investment Funds are subject to the terms and conditions of the respective operating agreements and offering memoranda, as appropriate.

Some of the Investment Funds may hold a portion of their assets in “side pockets,” which are sub-funds within the Investment Funds that have restricted liquidity, potentially extending over a much longer period than the typical liquidity an investment in the Investment Funds may provide. Should the Partnership seek to liquidate its investment in an Investment Fund that maintains these side pockets, the Partnership might not be able to fully liquidate its investment without delay, which could be considerable. In such cases, until the Partnership is permitted to fully liquidate its interest in the Investment Fund, the value of its investment could fluctuate based on adjustments to the fair value of the side pocket as determined by the Investment Fund’s investment manager.

The Adviser has designed ongoing due diligence processes with respect to Investment Funds and their investment managers, which assist the Adviser in assessing the quality of information provided by, or on behalf of, each Investment Fund and in determining whether such information continues to be reliable or whether further investigation is necessary. Such investigation, as applicable, may or may not require the Adviser to forego its normal reliance on the valuation supplied by, or on behalf of, such Investment Fund and to determine independently the value of the Partnership’s interest in such Investment Fund, consistent with the Partnership’s fair valuation procedures.

Where no fair value is readily available from an Investment Fund or where a value supplied by an Investment Fund is deemed by the Adviser not to be indicative of its value, the Adviser will determine, in good faith, the fair value of the Investment Fund under procedures adopted by the Board and subject to Board supervision. In accordance with the Agreement, the Adviser values the Partnership’s assets based on such reasonably available relevant information as it considers material. Because of the inherent uncertainty of valuation, the values of the Partnership’s investments may differ significantly from the values that would have been used had a ready market for the investments held by the Partnership been available.

14

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited) (continued)

2. Significant Accounting Policies (continued)

Fair Value of Financial Instruments

The fair value of the Partnership’s assets and liabilities which qualify as financial instruments under Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Values of Financial Instruments,” approximates the carrying amounts presented in the Statement of Assets, Liabilities and Partners’ Capital.

In accordance with Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”), fair value is defined as the price that the Partnership would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market the most advantageous market for the investment or liability. FAS 157 establishes a three-tier hierarchy to distinguish between (a) inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (b) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value of the Partnership’s investments. The inputs are summarized in the three broad levels listed below:

• Level 1 – quoted prices in active markets for identical investments

• Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

• Level 3 – significant unobservable inputs (including the Partnership’s own assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The units of account that are valued by the Partnership are its interests in the Investment Funds or other financial instruments and not the underlying holdings of such Investment Funds or other financial instruments. Thus, the inputs used by the Partnership to value its investments in each of the Investment Funds or other financial instruments may differ from the inputs used to value the underlying holdings of such Investment Funds or other financial instruments.

15

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited) (continued)

2. Significant Accounting Policies (continued)

Fair Value of Financial Instruments (continued)

The following is a summary of the inputs used as of June 30, 2009 in valuing the Partnership’s investments carried at fair value:

Valuation Inputs	Investments in Investment Funds		Other Financial Instruments*
Level 1 - Quoted Prices	$	—	$	11,301,417
Level 2 - Other Significant Observable Inputs		—		—
Level 3 - Significant Unobservable Inputs		1,507,955,372		—
Total	$	1,507,955,372	$	11,301,417

* Other financial instruments include short-term investments.

The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:

	Investments in Investment Funds
Balance as of December 31, 2008	$	1,946,469,678
Net realized gain (loss)		15,770,960
Net change in unrealized appreciation/depreciation		110,230,592
Net purchases (sales)		(564,515,858	)
Net transfers in or out of Level 3		—
Balance as of June 30, 2009	$	1,507,955,372
Net change in unrealized appreciation/depreciation from investments still held as of June 30, 2009		97,366,696

Income Recognition and Expenses

The Partnership recognizes income and records expenses on an accrual basis. Income, expenses and realized and unrealized gains and losses are recorded monthly. The change in Investment Funds’ net asset value is included in net change in unrealized appreciation/depreciation on investments in Investment Funds in the Statement of Operations. Redemption proceeds received, whether in the form of cash or securities, are applied as a reduction of the Investment Fund’s cost, and realized gain (loss) from investments in Investment Funds is calculated using specific identification.

16

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited) (continued)

2. Significant Accounting Policies (continued)

Income Recognition and Expenses (continued)

Net profits or net losses of the Partnership for each of its fiscal periods are allocated among and credited to or debited against the capital accounts of all Limited Partners and the General Partner (collectively, the “Partners”) as of the last day of each month in accordance with the Partners’ investment percentages as of the first day of each month. Net profits or net losses are measured as the net change in the value of the net assets of the Partnership, including any net change in unrealized appreciation or depreciation on investments, income (net of accrued expenses) and realized gains or losses, before giving effect to any repurchases by the Partnership of Interests or portions of Interests.

Short-Term Investments

Short-term investments are invested in a money market fund or overnight in a short-term time deposit with the Partnership’s custodian, State Street Bank and Trust Company (“State Street”). Investments in money market funds are valued at net asset value. Investments in short-term time deposits are valued at amortized cost, which approximates fair value.

Income and Withholding Taxes

No provision for federal, state, or local income taxes is required in the financial statements. In accordance with the U.S. Internal Revenue Code of 1986, as amended, each of the Partners is to include its respective share of the Partnership’s realized profits or losses in its individual tax returns. The Partnership files tax returns with the U.S. Internal Revenue Service and various states.

The Partnership is required to withhold up to 30% U.S. tax from U.S. source dividends and 35% effectively connected income allocable to its non-U.S. investors and to remit those amounts to the U.S. Internal Revenue Service on behalf of the non-U.S. investors. The rate of withholding is generally the rate at which the particular non-U.S. investor is subject to U.S. federal income tax. The non-U.S. investors are obligated to indemnify the Partnership for any taxes that the Partnership is required to withhold as well as any interest or penalties.

If the Partnership incurs a withholding tax or other obligation with respect to the share of Partnership income allocable to any Partner, then the General Partner, without limitation of any other rights of the Partnership or the General Partner, will cause the amount of the obligation to be debited against the capital account of the Partner when the Partnership pays the obligation, and any amounts then or in the future distributable to the Partner will be reduced by the amount of the taxes. If the amount of the taxes is greater than any distributable amounts, then the Partner and any successor to the Partner’s Interest or portion of an Interest will pay to the Partnership as a capital contribution, upon demand by the General Partner, the amount of the excess.

17

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited) (continued)

2. Significant Accounting Policies (continued)

Income and Withholding Taxes (continued)

For the period from January 1, 2009 to June 30, 2009, the Partnership recorded an estimated tax withholding amount of $2,255,679 which is included in repurchases in the Statement of Changes in Partners’ Capital.

Financial Accounting Standards Board (“FASB”) Interpretation 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109” (“FIN 48”) clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements and applies to all open tax years as of the effective date. Generally, the tax authorities can examine all the tax returns filed for the last three years. As of June 30, 2009, there was no impact to the Partnership’s financial statements as a result of the adoption of FIN 48.

If applicable, the Partnership recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statement of Operations.

Limitation of Limited Partner Liability

Generally, except as provided under applicable law or under the Agreement, a Limited Partner shall not be liable for the Partnership’s debts, obligations and liabilities in any amount in excess of the capital account balance of such Limited Partner. Subject to applicable law, a Limited Partner may be obligated to return to the Partnership certain amounts distributed to the Limited Partner.

3. Management Fee, Performance Incentive, Related Party Transactions and Other

The Partnership bears all expenses related to its investment program including, but not limited to, expenses borne indirectly through the Partnership’s investments in the underlying Investment Funds.

Under the terms of the Investment Advisory Agreement (the “Advisory Agreement”), as amended, between the Adviser and the Partnership, the Adviser receives a management fee for services provided to the Partnership, calculated and generally paid monthly at a rate of 0.046% (0.55% on an annualized basis) of the Partnership’s capital as of the end of business on the last business day of each month, before adjustment for any repurchases effective on that day. For the period from January 1, 2009 to June 30, 2009, the Partnership incurred management fees of $5,237,504, of which $1,680,220 was payable to the Adviser at June 30, 2009.

Under the terms of the Agreement, as amended, the General Partner’s “Performance Incentive” for each Incentive Period, as defined below, is equal to 10% of the amount, if any, of: (1) the net profits allocated to each Limited Partner’s capital account for the Incentive Period in excess of any net losses so allocated for such Incentive Period; above (2) (a) the Limited Partner’s Hurdle Rate Amount, as defined below, for the Incentive Period and (b) any loss carry forward amounts applicable to the Limited Partner’s capital account. With respect to each Limited Partner for each Incentive Period, the Performance Incentive allocated to the General Partner will not exceed 1.75% of the Limited Partner’s ending capital account balance for that Incentive Period, as determined prior to the deduction of the Performance Incentive.

18

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited) (continued)

3. Management Fee, Performance Incentive, Related Party Transactions and Other (continued)

An “Incentive Period” generally corresponds to a fiscal year, but may vary with respect to Limited Partners. An Incentive Period may be composed of one or more consecutive “Sub-Periods.” The initial Sub-Period began upon the commencement of investment operations of the Partnership. Each subsequent Sub-Period begins immediately after the end of the previous Sub-Period, which occurs at the close of business on the earliest occurrence of: (i) the last day of the fiscal year; (ii) the date immediately prior to the effective date of additional purchases of Interests; (iii) the date immediately prior to the effective date of partial transfers of Interests; or (iv) the date on which the Partnership dissolves. Both the Incentive Period and the last Sub-Period within the Incentive Period terminate at the close of business on the earliest occurrence of: (i) the last day of the fiscal year; (ii) the date immediately prior to the effective date of a full transfer of Interests; or (iii) the date on which the Partnership dissolves.

The Partnership’s “Hurdle Rate” for a given Incentive Period is equal to 5% per annum plus the rate of return achieved by the Citi Three-Month U.S. Treasury Bill Index over the same Incentive Period. A Limited Partner’s “Hurdle Rate Amount” for a given Incentive Period is equal to the Hurdle Rate calculated for a given Incentive Period multiplied by the Limited Partner’s capital account balance as of the beginning of that Incentive Period. The Hurdle Rate is not cumulative and resets for each Incentive Period at the beginning of each such Incentive Period. The Performance Incentive is debited from each Limited Partner’s capital account and credited to the General Partner’s capital account at the end of each such Incentive Period. For the period from January 1, 2009 to June 30, 2009 and for the year ended December 31, 2008, there was no Performance Incentive earned.

Had the most recent Incentive Period ended on June 30, 2009, the additional Performance Incentive earned by the General Partner for the period from January 1, 2009 to June 30, 2009 would have been $4,036. This amount has not yet been reallocated to the General Partner. This amount may be reallocated to the General Partner in the future and is based on the net profits allocated to each Limited Partner’s capital account for the period from January 1, 2009 to June 30, 2009, and does not take into account any future changes in the net profits of the Limited Partners during the remainder of the Incentive Period. The net profits for the full Incentive Period may be different from these profits reflected in the accompanying financial statements and such differences could be material.

State Street provides accounting and administrative services to the Partnership. Under an administrative services agreement, State Street is paid an administrative fee, computed and payable monthly at an annual rate ranging from 0.030% to 0.045%, based on the aggregate monthly net assets of certain Morgan Stanley products, including the Partnership, for which State Street serves as the administrator. The administrative services fee is subject to an annual aggregate minimum based on $125,000 per Morgan Stanley product.

19

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited) (continued)

3. Management Fee, Performance Incentive, Related Party Transactions and Other (continued)

State Street also serves as the Partnership’s custodian. Under a custody services agreement, State Street is paid a custody fee monthly at an annual rate ranging from 0.015% to 0.020%, based on (i) the aggregate monthly net assets of certain Morgan Stanley products, including the Partnership, for which State Street serves as the custodian, and (ii) investment purchases and sales activity related to the Partnership.

The Partnership is charged directly for certain reasonable out-of-pocket expenses related to the accounting, administrative and custodial services provided by State Street to the Partnership.

The Partnership has a deferred compensation plan (the “DC Plan”) that allows each member of the Board that is not an affiliate of Morgan Stanley to defer payment of all, or a portion, of the fees he or she receives for serving on the Board throughout the year. Each eligible member of the Board generally may elect to have the deferred amounts invested in the DC Plan in order to earn a return equal to the total return on one or more of the Morgan Stanley products that are offered as investment options under the DC Plan. Investments in the DC Plan, unrealized appreciation/depreciation on such investments and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Partnership. At June 30, 2009, the Partnership’s proportionate share of assets attributable to the DC Plan was $9,553, which is included in the Statement of Assets, Liabilities and Partners’ Capital under other assets and accrued expenses and other liabilities.

As of June 30, 2009, there was one Limited Partner, unaffiliated with Morgan Stanley, with a capital balance that represented approximately 44% of the Partnership’s capital and another Limited Partner, unaffiliated with Morgan Stanley, that invested in the Partnership indirectly through a feeder fund, which had a capital balance that represented approximately 15% of the Partnership’s capital.

4. Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, the Investment Funds in which the Partnership invests trade various financial instruments and enter into various investment activities with off-balance sheet risk. These include, but are not limited to, short selling activities, written option contracts, and swaps. The Partnership’s risk of loss in these Investment Funds is limited to the value of these Investment Funds as reported by the Partnership.

20

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited) (continued)

5. Line of Credit

Effective April 28, 2006, the Partnership entered into a credit agreement with State Street for a revolving line of credit (the “Facility”). The maximum availability under the Facility is the lesser of $200,000,000 or 10% of the Partnership’s Net Asset Value, as defined in the credit agreement. The Partnership pays an annual administration fee related to the Facility of $10,000. The interest rate on the borrowings is the current Federal Funds Rate plus 1.00% per annum. Under the terms of the Facility, borrowings are repayable within 120 days of the initial date of advance. At June 30, 2009, there was no amount outstanding against the Facility. For the period from January 1, 2009 to June 30, 2009, the Partnership incurred interest expense of $20,152 in connection with the Facility. Borrowings are secured by the Partnership’s investments in Investment Funds. Detailed below is summary information concerning the borrowings:

# of Days Outstanding	Weighted Average Balance		Annualized Weighted Average Rate
16	$	35,681,250	1.27	%

6. Receivable for Investments Sold

As of June 30, 2009, $294,634,686 was due to the Partnership from sixteen Investment Funds. The receivable amount represents the fair value of each investment in Investment Funds net of management fees and incentive fees/allocations. Substantially all of these amounts were collected subsequent to the balance sheet date.

7. Contractual Obligations

The Partnership enters into contracts that contain a variety of indemnifications. The Partnership’s maximum exposure under these arrangements is unknown. However, the Partnership has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

8. Investments in Investment Funds

As of June 30, 2009, the Partnership invested primarily in Investment Funds.

As of June 30, 2009, 5.04% of the Partnership’s capital was invested in side pockets maintained by the Investment Funds.

As of June 30, 2009, 3.51% (excluding side pockets) of the Partnership’s capital was invested in Investment Funds with the next available redemption date extending beyond one year from June 30, 2009.

As of June 30, 2009, 9.50% (excluding tranches with the next available redemption date extending beyond one year from June 30, 2009 and side pockets) of the Partnership’s capital was invested in Investment Funds that have suspended redemptions and 12.27% (excluding side pockets) of the Partnership’s capital was invested in Investment Funds that are in liquidation.

21

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited) (continued)

8. Investments in Investment Funds (continued)

Prepaid investments in Investment Funds represents amounts transferred to Investment Funds prior to period-end relating to investments to be made effective July 1, 2009, pursuant to each Investment Fund’s operating agreements.

For the period from January 1, 2009 to June 30, 2009, aggregate purchases and proceeds from sales of investments in Investment Funds were $155,875,273 and $720,391,131 respectively.

The cost of investments for federal income tax purposes is adjusted for items of taxable income or loss allocated to the Partnership from the Investment Funds. The allocated taxable income or loss is reported to the Partnership by the Investment Funds on Schedules K-1. Such tax adjustments for the year ending December 31, 2009 will be made once the Partnership has received all 2009 Schedules K-1 from the Investment Funds.

9. Financial Highlights

The following represents ratios to average Limited Partners’ capital and other financial highlights information for Limited Partners. The calculations below are not annualized for periods less than one year.

	For the Period from January 1, 2009 to June 30, 2009			For the Year Ended December 31, 2008			For the Year Ended December 31, 2007			For the Year Ended December 31, 2006			For the Year Ended December 31, 2005			For the Year Ended December 31, 2004 (a)
Total return - prior to Performance Incentive		6.63	%		(21.52	)%		9.31	%		9.96	%		6.11	%		5.58	%
Performance Incentive		0.00	(f)		0.00	(f)		0.00	(g)		(0.02	)		0.00	(g)		0.00	(g)
Total return - net of Performance Incentive (b)		6.63	% (h)		(21.52	)%		9.31	%		9.94	%		6.11	%		5.58	%
Ratio of total expenses to average Limited Partners’ capital (c)		0.33	%		0.65	%		0.69	%		0.69	%		0.67	%		0.92	%
Performance Incentive to average Limited Partners’ capital		0.00	(f)		0.00	(f)		0.00	(g)		0.02			0.01			0.00	(g)
Ratio of total expenses and Performance Incentive to average Limited Partners’ capital (c)		0.33	%		0.65	%		0.69	%		0.71	%		0.68	%		0.92	%
Ratio of net investment income (loss) to average Limited Partners’ capital (d) (e)		(0.32	)%		(0.60	)%		(0.67	)%		(0.63	)%		(0.56	)%		(0.87	)%
Portfolio turnover		9	%		17	%		25	%		27	%		34	%		13	%
Partners’ capital at end of the period (000s)	$	1,649,328		$	1,956,810		$	3,195,075		$	2,764,840		$	2,001,070		$	1,717,415

22

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (Unaudited) (continued)

9. Financial Highlights (continued)

(a) As of January 1, 2004, the Partnership adopted the method of accounting for interim payments on swap contracts in accordance with clarification provided by the SEC to registered investment companies. The Partnership has reclassified interim payments made under total return swap agreements. These interim payments are reflected within net realized gain (loss) and net change in unrealized appreciation/depreciation on swap contracts in the Statement of Operations; however, prior to January 1, 2004, these interim payments were reflected within interest expense in the Statement of Operations. The effect of this change for the year ended December 31, 2004 was to decrease the ratio of net investment income (loss) to average Limited Partners’ capital and to decrease the ratio of total expenses to average Limited Partners’ capital by 0.05% and 0.05%, respectively.

(b) Total return - net of Performance Incentive is calculated as the change in Limited Partners’ capital, adjusted for contributions and repurchases during the period, after Performance Incentive, if any, allocated to the General Partner.

(c) Ratios do not reflect the Partnership’s proportionate share of the expenses of the Investment Funds.

(d) Ratios do not reflect the Partnership’s proportionate share of the income and expenses of the Investment Funds.

(e) Excludes impact of Performance Incentive.

(f) There was no Performance Incentive for the period.

(g) Impact of Performance Incentive represented less than 0.005%.

(h) Had the most recent Incentive Period ended on June 30, 2009, total return – net of Performance Incentive would have been 6.63%.

The above ratios and total return have been calculated for the Limited Partners taken as a whole. An individual Limited Partner’s return and ratios may vary from these returns and ratios due to the timing of capital transactions and withholding tax allocation, as applicable.

10. Subsequent Events

In accordance with the provisions set forth in FASB Statement of Financial Accounting Standards No. 165, “Subsequent Events,” the Partnership has evaluated the possibility of subsequent events that may require disclosure in the Partnership’s financial statements through August 26, 2009, the date that the financial statements were issued.

From July 1, 2009 through August 26, 2009, the Partnership accepted and received approximately $14.0 million in additional contributions. The Partnership has also received tenders to repurchase Interests of $74 million in respect of the quarterly tender offer for September 30, 2009.

23

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Investment Advisory Agreement Approval (Unaudited)

Nature, Extent and Quality of Services

The Board reviewed and considered the nature and extent of the investment advisory services provided by the Adviser under the advisory agreement (the “Advisory Agreement”), including selection of Investment Funds for investment of the Partnership’s assets, allocation of the Partnership’s assets among, and monitoring performance of, Investment Funds, evaluation of risk exposure of Investment Funds and reputation, experience and training of investment managers, management of short-term cash and operations of the Partnership, day-to-day portfolio management, and general due diligence examination of Investment Funds before and after committing assets of the Partnership for investment. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services that the Adviser provides, or arranges at its expense, under the Advisory Agreement, including among other things, providing to the Partnership office facilities, equipment and personnel.

The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and advisory services to the Partnership. The Board determined that the Adviser’s portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Partnership and supported its decision to approve the Advisory Agreement.

Performance, Fees and Expenses of the Partnership

The Board reviewed the performance, fees and expenses of the Partnership compared to an appropriate benchmark selected by the Adviser. The Board discussed with the Adviser the performance goals and the actual results achieved in managing the Partnership. When considering a fund’s performance, the Board and the Adviser place emphasis on trends and longer-term returns (focusing on one-year, three-year and five-year performance, as of December 31, 2008, as applicable). When a fund underperforms its benchmark and/or its peer group average, the Board and the Adviser discuss the causes of such underperformance and, where necessary, they discuss specific changes to investment strategy or investment personnel. The Board noted that the Partnership underperformed a benchmark selected by the Adviser and consisting of other comparable funds of hedge funds for the one-, three- and five-year periods ended December 31, 2008, but it outperformed that benchmark for the quarter ended March 31, 2009. The Board discussed with the Adviser the level of the advisory fee for the Partnership relative to comparable funds advised by the Adviser and compared to its peers as determined by Lipper Inc. In addition to the advisory fee, the Board also reviewed the Partnership’s total expense ratio. The Board noted that the advisory fee and total expense ratio were lower than the peer group average, and that there was no performance fee earned for the year ended December 31, 2008. After discussion, the Board concluded that the Partnership’s advisory fee and total expense ratio were competitive with the peer group average, and the performance was acceptable.

22

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Investment Advisory Agreement Approval (Unaudited) (continued)

Economies of Scale

The Board considered the size and growth prospects of the Partnership and how that relates to the Partnership’s total expense ratio and particularly the Partnership’s advisory fee rate, which does not include breakpoints. In conjunction with its review of the Adviser’s profitability, the Board discussed with the Adviser how a change in assets can affect the efficiency or effectiveness of managing the Partnership and whether the advisory fee level is appropriate relative to current and projected asset levels and/or whether the advisory fee structure reflects economies of scale as asset levels change. The Board concluded that economies of scale for the Partnership were not a factor that needed to be considered at the present time.

Profitability of the Adviser and Affiliates

The Board considered information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last year from their relationship with the Partnership and during the last two years from their relationship with the Morgan Stanley Fund Complex, and reviewed with the Adviser the cost allocation methodology used to determine the profitability of the Adviser and affiliates. The Board has determined that its review of the analysis of the Adviser’s expenses and profitability supports its decision to approve the Advisory Agreement.

Other Benefits of the Relationship

The Board considered other benefits to the Adviser and its affiliates derived from their relationship with the Partnership and other funds advised by the Adviser. These benefits may include, among other things, fees for distribution. The Board reviewed with the Adviser these arrangements and the reasonableness of its costs relative to the services performed. The Board has determined that its review of the other benefits received by the Adviser or its affiliates supports its decision to approve the Advisory Agreement.

Resources of the Adviser and Historical Relationship Between the Partnership and the Adviser

The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Advisory Agreement. The Board also reviewed and considered the historical relationship between the Partnership and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Partnership’s operations and the Board’s confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Advisory Agreement and that it is beneficial for the Partnership to continue its relationship with the Adviser.

25

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Investment Advisory Agreement Approval (Unaudited) (continued)

Other Factors and Current Trends

The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Partnership’s Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Partnership’s business.

General Conclusion

After considering and weighing all of the above factors, the Board concluded that it would be in the best interest of the Partnership and its Limited Partners to approve renewal of the Advisory Agreement for another year. In reaching this conclusion, the Board did not give particular weight to any single factor referenced above. The Board considered these factors over the course of numerous meetings, some of which were in executive session with only the Independent Board members and their counsel present. It is possible that individual Board members may have weighed these factors differently in reaching their individual decisions to approve the Advisory Agreement.

26

MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

Proxy Voting Policies and Procedures and Proxy Voting Record (Unaudited)

A copy of (1) the Partnership’s policies and procedures with respect to the voting of proxies relating to the Partnership’s Investment Funds; and (2) how the Partnership voted proxies relating to Investment Funds during the most recent 12-month period ended June 30 is available without charge, upon request, by calling the Partnership at 1-888-322-4675. This information is also available on the Securities and Exchange Commission’s website at http://www.sec.gov.

Quarterly Portfolio Schedule (Unaudited)

The Partnership also files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the Partnership’s first and third fiscal quarters on Form N-Q. The Partnership’s Forms N-Q are available on the Securities and Exchange Commission’s website at http://www.sec.gov. The Partnership’s Form N-Q may be reviewed and copied at the Securities and Exchange Commission’s Public Reference Room in Washington, D.C. and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Once filed, the most recent Form N-Q will be available without charge, upon request, by calling the Partnership at 1-888-322-4675.

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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP

Morgan Stanley Institutional Fund of Hedge Funds LP

100 Front Street, Suite 400

West Conshohocken, Pennsylvania 19428

Directors

Michael Nugent, Chairperson of the Board and Director

Frank L. Bowman

Michael Bozic

Kathleen A. Dennis

James F. Higgins

Dr. Manuel H. Johnson

Joseph J. Kearns

Michael F. Klein

W. Allen Reed

Fergus Reid

Officers

Randy Takian, President and Principal Executive Officer

Stefanie V. Chang Yu, Vice President

Cory Pulfrey, Vice President

Mustafa Jama, Vice President

Matthew Graver, Vice President

Carsten Otto, Chief Compliance Officer

James W. Garrett, Treasurer and Chief Financial Officer

Mary E. Mullin, Secretary

Investment Adviser

Morgan Stanley AIP GP LP

100 Front Street, Suite 400

West Conshohocken, Pennsylvania 19428

Administrator, Custodian, Fund Accounting Agent and Escrow Agent

State Street Bank and Trust Company

One Lincoln Street

Boston, Massachusetts 02111

Independent Registered Public Accounting Firm

Ernst & Young LLP

Two Commerce Square

2001 Market Street, Suite 4000

Philadelphia, Pennsylvania 19103

Legal Counsel

Clifford Chance US LLP

31 West 52^nd Street

New York, New York 10019

Kramer Levin Naftalis & Frankel LLP

1177 Avenue of the Americas

New York, New York 10036

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ITEM 2. CODE OF ETHICS. Not applicable to a semi-annual report.

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable to a semi-annual report.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable to a semi-annual report.

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to the Registrant.

ITEM 6. SCHEDULE OF INVESTMENTS. Refer to Item 1.

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to a semi-annual report.

ITEM 8. PORTFOLIO MANAGERS. Not applicable.

ITEM 9. PURCHASES OF EQUITY SECURITIES. Not applicable to the Registrant.

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

ITEM 11. CONTROLS AND PROCEDURES.

(a) The Registrant’s principal executive officer and principal financial officer have concluded that the Registrant’s disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Registrant in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, based upon such officers’ evaluation of these controls and procedures as of a date within 90 days of the filing date of the report.

(b) There were no changes in the Registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

ITEM 12. EXHIBITS.

(a)

(1) Code of Ethics is not applicable to a semi-annual report.

(2) Certifications of Principal Executive Officer and Principal Financial Officer attached to this report as part of EX-99.CERT.

SIGNATURES

Pursuant to the requirements of the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MORGAN STANLEY INSTITUTIONAL FUND OF HEDGE FUNDS LP
By:	/s/ Randy Takian
Name:	Randy Takian
Title:	President
Date:	September 3, 2009

Pursuant to the requirements of the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By:	/s/ Randy Takian
Name:	Randy Takian
Title:	Principal Executive Officer
Date:	September 3, 2009
By:	/s/ James W. Garrett
Name:	James W. Garrett
Title:	Principal Financial Officer
Date:	September 3, 2009