N-CSR 1 d296878dncsr.htm MORGAN STANLEY INSTITUTIONAL FUND OF HEDGE FUNDS LP Morgan Stanley Institutional Fund of Hedge Funds LP

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)

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

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

Date of fiscal year end: December 31

Date of reporting period: December 31, 2011


ITEM 1.

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


MORGAN STANLEY

INSTITUTIONAL FUND OF HEDGE

FUNDS LP

Financial Statements with Report of

Independent Registered Public Accounting Firm

For the Year Ended December 31, 2011


Morgan Stanley Institutional Fund of Hedge Funds LP

Financial Statements with Report of

Independent Registered Public Accounting Firm

For the Year Ended December 31, 2011

Contents

 

Report of Independent Registered Public Accounting Firm

     1   

Audited Financial Statements

  

Statement of Assets, Liabilities and Partners’ Capital

     2   

Statement of Operations

     3   

Statements of Changes in Partners’ Capital

     4   

Statement of Cash Flows

     5   

Schedule of Investments

     6   

Notes to Financial Statements

     11   

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

     28   

Quarterly Portfolio Schedule (Unaudited)

     28   

U.S. Privacy Policy (Unaudited)

     29   

Information Concerning Directors and Officers (Unaudited)

     34   


Report of Independent Registered Public Accounting Firm

To the Partners and Board of Directors of

Morgan Stanley Institutional Fund of Hedge Funds LP

We have audited the accompanying statement of assets, liabilities and partners’ capital of Morgan Stanley Institutional Fund of Hedge Funds LP (the “Partnership”), including the schedule of investments, as of December 31, 2011, and the related statements of operations and cash flows for the year then ended, and the statements of changes in partners’ capital for each of the two years in the period then ended. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of investments owned as of December 31, 2011, by correspondence with the custodian, management of the investment funds and others. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Morgan Stanley Institutional Fund of Hedge Funds LP at December 31, 2011, the results of its operations and its cash flows for the year then ended, and the changes in its partners’ capital for each of the two years in the period then ended, in conformity with U.S. generally accepted accounting principles.

 

LOGO

Philadelphia, Pennsylvania

February 28, 2012

 

1


Morgan Stanley Institutional Fund of Hedge Funds LP

Statement of Assets, Liabilities and Partners’ Capital

December 31, 2011

 

Assets

 

Investments in investment funds, at fair value (cost $420,649,119)

    $    474,523,537    

Short-term investments (cost $26,737,380)

    26,737,380    

Cash

    200,000    

Receivable for investments sold

    164,376,325    

Other assets

    157,437    
 

 

 

 

Total assets

    665,994,679    
 

 

 

 

Liabilities

 

Payable for capital repurchases

    165,881,102    

Withholding tax payable

    1,802,921    

Management fee payable

    304,255    

Accrued expenses and other liabilities

    363,090    
 

 

 

 

Total liabilities

    168,351,368    
 

 

 

 

Net assets

    $    497,643,311    
 

 

 

 

Partners’ capital

 

Represented by:

 

Net capital

    $    443,768,893    

Net unrealized appreciation on investments

    53,874,418    
 

 

 

 

Total partners’ capital

    $    497,643,311    
 

 

 

 

 

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

2


Morgan Stanley Institutional Fund of Hedge Funds LP

Statement of Operations

For the Year Ended December 31, 2011

 

Investment income

  

Dividend

     $    2,508,848    
  

 

 

 

Expenses

  

Management fees

     5,773,957    

Accounting and administration fees

     496,174    

Professional fees

     388,004    

Custody fees

     238,114    

Insurance expense

     117,378    

Directors’ fees

     39,611    

Interest expense

     26,205    

Other

     178,770    
  

 

 

 

Total expenses

     7,258,213    
  

 

 

 

Net investment income (loss)

     (4,749,365)   
  

 

 

 

Realized and unrealized gain (loss) from investments

  

Net realized gain (loss) from investments in investment funds

     97,838,701    
  

 

 

 

Net realized gain (loss) from investments

     97,838,701    
  

 

 

 

Net change in unrealized appreciation/depreciation on investments in investment funds

     (85,116,396)   
  

 

 

 

Net change in unrealized appreciation/depreciation on investments

     (85,116,396)   
  

 

 

 

Net realized and unrealized gain (loss) from investments

     12,722,305    
  

 

 

 

Net increase (decrease) in partners’ capital resulting from operations

     $    7,972,940    
  

 

 

 

 

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

3


Morgan Stanley Institutional Fund of Hedge Funds LP

Statements of Changes in Partners’ Capital

 

     General
Partner
     Limited
Partners
     Total  

Partners’ capital at December 31, 2009

   $     624,115        $ 1,617,137,346        $ 1,617,761,461    
  

 

 

    

 

 

    

 

 

 

For the year ended December 31, 2010

        

Increase (decrease) in partners’ capital:

        

From operations

        

Net investment income (loss)

     (2,158)         (5,616,968)         (5,619,126)   

Net realized gain (loss) from investments

     16,469          40,588,316          40,604,785    

Net change in unrealized appreciation/depreciation on investments

     18,983          43,659,415          43,678,398    
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in partners’ capital resulting from operations

     33,294          78,630,763          78,664,057    
  

 

 

    

 

 

    

 

 

 

From partners’ capital transactions

        

Capital contributions

             121,511,804          121,511,804    

Capital repurchases

             (474,364,592)         (474,364,592)   

Re-allocation of performance incentive

     42,420          (42,420)           
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in partners’ capital from capital transactions

     42,420          (352,895,208)         (352,852,788)   
  

 

 

    

 

 

    

 

 

 

Total increase (decrease) in partners’ capital

     75,714          (274,264,445)         (274,188,731)   
  

 

 

    

 

 

    

 

 

 

Partners’ capital at December 31, 2010

   $ 699,829        $     1,342,872,901        $     1,343,572,730    
  

 

 

    

 

 

    

 

 

 

For the year ended December 31, 2011

        

Increase (decrease) in partners’ capital:

        

From operations

        

Net investment income (loss)

   $ (3,163)       $ (4,746,202)       $ (4,749,365)   

Net realized gain (loss) from investments

     40,486          97,798,215          97,838,701    

Net change in unrealized appreciation/depreciation on investments

     (34,211)         (85,082,185)         (85,116,396)   
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in partners’ capital resulting from operations

     3,112          7,969,828          7,972,940    
  

 

 

    

 

 

    

 

 

 

From partners’ capital transactions

        

Capital contributions

             48,150,596          48,150,596    

Capital repurchases

             (681,545,563)         (681,545,563)   

Capital distribution in-kind

             (220,507,392)         (220,507,392)   

Re-allocation of performance incentive

     82          (82)           
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in partners’ capital from capital transactions

     82          (853,902,441)         (853,902,359)   
  

 

 

    

 

 

    

 

 

 

Total increase (decrease) in partners’ capital

     3,194          (845,932,613)         (845,929,419)   
  

 

 

    

 

 

    

 

 

 

Partners’ capital at December 31, 2011

   $ 703,023        $ 496,940,288        $ 497,643,311    
  

 

 

    

 

 

    

 

 

 

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

 

4


Morgan Stanley Institutional Fund of Hedge Funds LP

Statement of Cash Flows

For the Year Ended December 31, 2011

 

Cash flows from operating activities

  

Net increase (decrease) in partners’ capital resulting from operations

   $ 7,972,940    

Adjustments to reconcile net increase (decrease) in partner’s capital resulting from operations to net cash provided by (used in) operating activities:

  

Net change in unrealized appreciation/depreciation on investments in investment funds

     85,116,396    

Net realized (gain) loss from investments in investment funds

     (97,838,701)   

Purchase of investments in investment funds

     (195,315,494)   

Proceeds from sales of investments in investment funds

     826,752,266    

Net (purchases) sales/maturities of short-term investments

     43,451,155    

(Increase) decrease in prepaid investments in investment funds

     9,000,000    

(Increase) decrease in receivable for investments sold

     (52,231,794)   

(Increase) decrease in other assets

     19,485    

Increase (decrease) in withholding tax payable

     (1,340,285)   

Increase (decrease) in management fee payable

     (384,202)   

Increase (decrease) in accrued expenses and other liabilities

     (147,434)   
  

 

 

 

Net cash provided by (used in) operating activities

     625,054,332    
  

 

 

 

Cash flows from financing activities

  

Proceeds from advances on line of credit

     75,000,000    

Repayments of advances on line of credit

     (75,000,000)   

Capital contributions

     48,150,596    

Capital repurchases

     (674,826,502)   
  

 

 

 

Net cash provided by (used in) financing activities

     (626,675,906)   
  

 

 

 

Net change in cash

     (1,621,574)   

Cash at beginning of year

     1,821,574    
  

 

 

 

Cash at end of year

   $ 200,000    
  

 

 

 

Supplemental disclosure of cash flow information:

  

Cash paid during the year for interest

   $ 26,205    
  

 

 

 

In-kind distribution to partners of interest in Morgan Stanley IFHF SPV LP

   $ 220,507,392    
  

 

 

 

Purchase of interests in Morgan Stanley IFHF SPV LP using in-kind contributions of investment funds

   $     220,507,392    
  

 

 

 

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

 

5


Morgan Stanley Institutional Fund of Hedge Funds LP

Statement of Investments

December 31, 2011

 

Description    First
Acquisition
Date
     Cost     

Fair

Value

    

Percent of
Investment

Fund Held*

     Percent of
Partners’
Capital
   

Next

Available
Redemption
Date**

  Liquidity***
               

Investment Funds

                  

Commodity Trading Advisors - Managed

                  

Futures BlueTrend Fund L.P.

     9/1/2011       $ 10,000,000       $ 9,665,587         0.75         1.94   2/29/2012   Monthly

GSA Quantitative Futures Partners, L.P.

     6/1/2011         10,019,173         9,220,467         18.78         1.86      1/31/2012   Monthly
     

 

 

     

Total Commodity Trading Advisors - Managed Futures

        20,019,173         18,886,054            3.80       
     

 

 

     

Distressed

                  

Avenue Asia Investments Delaware Statutory Trust

     11/1/2007         58,167         9,097         0.82         0.00      (a)   (a)
     

 

 

     

Total Distressed

        58,167         9,097            0.00       
     

 

 

     

Equity Long/Short - High Hedge

                  

Diamondback Partners, LP

     3/1/2010         352,487         352,512         0.00         0.07      (b)   (b)

HealthCor, L.P.

     7/1/2011         14,750,000         13,701,256         1.96         2.75      3/31/2012   Quarterly

Magnetar Equity Opportunities Fund LLC

     2/1/2011         1,965,308         2,421,029         3.70         0.49      1/31/2012   Monthly

Millennium USA, L.P.

     8/1/2008         23,101,850         31,785,193         0.74         6.39      3/31/2012   Quarterly

Prism Partners III Leveraged, L.P.

     6/1/2008         11,696,377         13,400,434         4.48         2.69      2/29/2012   Monthly
     

 

 

     

Total Equity Long/Short - High Hedge

        51,866,022         61,660,424            12.39       
     

 

 

     

Equity Long/Short - Opportunistic

                  

Amiya Global Emerging Opportunities Fund, L.P.

     7/1/2011         12,500,000         13,162,865         3.07         2.64      3/31/2012   Quarterly

GEM Realty Securities, L.P.

     6/1/2011         10,000,000         9,781,316         1.50         1.96      3/31/2012   Quarterly

Lansdowne Global Financials Fund, L.P.

     10/1/2004         5,269,386         8,453,584         2.10         1.70      2/29/2012   Monthly

Lansdowne UK Equity Fund, L.P.

     5/1/2009         8,370,066         8,094,153         0.79         1.63      2/29/2012   Monthly

Pelham Long/Short Fund LP

     11/1/2009         12,071,390         12,791,802         3.95         2.57      3/31/2012   Monthly

Seligman Tech Spectrum Fund LLC

     9/1/2009         10,922,951         11,884,532         2.74         2.39      1/31/2012   Monthly

 

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

6


Morgan Stanley Institutional Fund of Hedge Funds LP

Statement of Investments (continued)

December 31, 2011

 

Description    First
Acquisition
Date
     Cost     

Fair

Value

     Percent of
Investment
Fund Held*
    

Percent of
Partners’

Capital

    Next
Available
Redemption
Date**
  Liquidity***

Investment Funds (continued)

                  

Equity Long/Short - Opportunistic (continued)

                  

SR Global Fund L.P. - Emerging Markets Portfolio

     1/1/2010       $ 11,287,064       $ 9,601,508         0.80         1.93   3/31/2012   Monthly
     

 

 

     

Total Equity Long/Short - Opportunistic

        70,420,857         73,769,760            14.82       
     

 

 

     

Event Driven Credit

                  

Chatham Asset Partners Special Situations Fund, L.P.

     8/1/2010         11,754,378         11,721,273         19.51         2.36      3/31/2012   Quarterly

Q Funding III, L.P.

     7/1/2002         22,167,469         21,267,167         21.26         4.27      12/31/2012(c)   3 Years
     

 

 

     

Total Event Driven Credit

        33,921,847         32,988,440            6.63       
     

 

 

     

Macro

                  

Avantium Liquid EM Macro Fund LP

     12/1/2011         7,000,000         6,974,800         12.74         1.40      2/29/2012   Monthly

BlueCrest Capital L.P.

     7/1/2011         13,500,000         13,955,232         2.26         2.80      3/31/2012   Quarterly

Brevan Howard L.P.

     8/1/2004         10,266,590         25,417,063         0.86         5.11      3/31/2012   Monthly

D.E. Shaw Oculus Fund, L.L.C.

     11/1/2004         9,044,796         13,575,643         0.87         2.73      3/31/2012   Quarterly

Discovery Global Opportunity Partners, L.P.

     9/1/2009         8,491,658         11,577,494         0.75         2.33      6/30/2012   Semi-annually

Global Ascent Ltd.

     4/1/2011         9,962,262         9,149,181         0.11         1.84      1/31/2012   Monthly

Graham Global Investment Fund Ltd.

     4/1/2011         15,009,635         15,265,435         4.94         3.07      3/31/2012   Quarterly

GSA Composite Alpha Partners L.P.

     9/1/2008         361,588         346,745         29.23         0.07      (b)   (b)

Meru US HFF, LP

     12/1/2009         13,518,752         14,600,779         6.36         2.93      3/31/2012   Quarterly

QFR Victoria Fund, Ltd.

     10/1/2009         11,897,483         14,194,456         0.62         2.85      3/31/2012   Quarterly

Tudor BVI Global Fund L.P. (The)

     7/1/2010         13,632,663         15,118,403         0.22         3.04      3/31/2012   Quarterly
     

 

 

     

Total Macro

        112,685,427         140,175,231            28.17       
     

 

 

     

 

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

7


Morgan Stanley Institutional Fund of Hedge Funds LP

Statement of Investments (continued)

December 31, 2011

 

Description    First
Acquisition
Date
     Cost     

Fair

Value

     Percent of
Investment
Fund Held*
    

Percent of
Partners’

Capital

    Next
Available
Redemption
Date**
  Liquidity***

Investment Funds (continued)

                  

Mortgage Arbitrage

                  

DoubleLine Opportunistic Income Fund II LP

     2/1/2011       $ 12,298,104       $ 14,588,401         22.15         2.93   2/29/2012   Monthly

SPM Core Fund, L.P.

     4/1/2011         15,000,000         17,416,578         4.69         3.50      3/31/2012   Quarterly
     

 

 

     

Total Mortgage Arbitrage

        27,298,104         32,004,979            6.43       
     

 

 

     

Multi-Strategy

                  

Citadel Wellington LLC

     7/1/2002         11,618,537         12,076,927         0.52         2.42      3/31/2012   Quarterly

HBK Fund II L.P.

     11/1/2009         9,871,888         15,469,620         1.91         3.11      3/31/2012   Quarterly

KLS Diversified Fund LP

     7/1/2010         12,868,098         13,819,882         7.03         2.78      3/31/2012   Quarterly

Magnetar Capital Fund II LP

     1/1/2010         23,064,679         22,634,619         8.45         4.55      3/31/2012   Quarterly

QVT Associates II LP

     7/1/2009         12,280,268         16,388,346         2.54         3.29      3/31/2012   Quarterly
     

 

 

     

Total Multi-Strategy

        69,703,470         80,389,394            16.15       
     

 

 

     

Relative Value Credit

                  

Bell Point Credit Opportunities Fund, LP

     5/1/2011         10,000,000         8,383,374         4.03         1.69      6/30/2012   Quarterly
     

 

 

     

Total Relative Value Credit

        10,000,000         8,383,374            1.69       
     

 

 

     

Restructurings and Value

                  

Castlerigg Partners L.P.

     5/1/2007         45,819         36,547         0.13         0.01      (b)   (b)

Owl Creek Overseas Fund, Ltd.

     10/1/2009         1,404,117         1,180,259         0.04         0.24      (b)   (b)
     

 

 

     

Total Restructurings and Value

        1,449,936         1,216,806            0.25       
     

 

 

     

 

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

8


Morgan Stanley Institutional Fund of Hedge Funds LP

Statement of Investments (continued)

December 31, 2011

 

Description   

First

Acquisition
Date

     Cost     

Fair

Value

   

Percent of

Investment
Fund Held*

    

Percent of

Partners’
Capital

   

Next

Available

Redemption
Date**

   Liquidity***

Investment Funds (continued)

                  

Statistical Arbitrage

                  

GSA Alpha Capture, L.P.

     3/1/2011       $ 10,015,295       $ 10,229,939        12.73         2.06   1/31/2012    Monthly

Two Sigma Spectrum U.S. Fund, LP

     4/1/2010         13,210,821         14,810,039        2.11         2.97      3/31/2012    Quarterly
     

 

 

      

Total Statistical Arbitrage

        23,226,116         25,039,978           5.03        
     

 

 

      

Total Investments in Investment Funds

        420,649,119         474,523,537           95.36        
     

 

 

      

Short-Term Investments

                  

State Street Institutional Liquid Reserves Fund - Institutional Class 0.34%

     

 

26,737,380

  

  

 

26,737,380

  

    

 

5.37

  

    
                  
     

 

 

      

Total Short-Term Investments

        26,737,380         26,737,380           5.37        
     

 

 

      

Total Investments in Investment Fundsand Short-Term Investments

      $ 447,386,499         501,260,917           100.73        
     

 

 

              

Liabilities in excess of Other Assets

           (3,617,606        (0.73     
        

 

 

      

Total Partners’ Capital

         $ 497,643,311           100.00     
        

 

 

      

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

 

* May represent percentage ownership of a feeder investment fund, which in turn invest in a master Investment Fund. May not reflect year end redemptions at investment Funds.
** Investments in Investment Funds may be composed of multiple tranches. The Next Available Redemption Date relates to the earliest date after December 31, 2011 that redemption from a tranche is available. Other tranches may have an available redemption date that is after the Next 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.

 

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

9


Morgan Stanley Institutional Fund of Hedge Funds LP

Statement of Investments (continued)

December 31, 2011

 

(a) 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.
(b) 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.
(c) 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.

 

Strategy Allocation

  

Percent of

Partners’
Capital

 

Macro

     28.17

Multi-Strategy

     16.15   

Equity Long/Short - Opportunistic

     14.82   

Equity Long/Short - High Hedge

     12.39   

Event Driven Credit

     6.63   

Mortgage Arbitrage

     6.43   

Short-Term Investments

     5.37   

Statistical Arbitrage

     5.03   

Commodity Trading Advisors - Managed Futures

     3.80   

Relative Value Credit

     1.69   

Restructurings and Value

     0.25   

Distressed

     0.00   

Total Investments in Investment Funds

     100.73
  

 

 

 

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

 

10


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements

December 31, 2011

 

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. The Partnership commenced operations on July 1, 2002 and operates 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”). 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 the feeder fund invests substantially all of its assets in the Partnership. As of December 31, 2011, Morgan Stanley Institutional Cayman Fund LP, Morgan Stanley Institutional Cayman Fund SPC – Euro 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 55.52%, 2.21%, and 4.42%, 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.

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.

 

11


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

1. Organization (continued)

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 limited partners of the Partnership (each 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, generally, 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 (the “Holdback Amount”) will be paid promptly after completion of the annual audit of the Partnership and preparation of the Partnership’s audited financial statements. As of December 31, 2011, there were no Holdback Amounts outstanding.

On March 29, 2011, the Partnership’s Board of Directors approved the General Partner’s plan to establish Morgan Stanley IFHF SPV LP (“IFHF SPV”), a Delaware limited partnership. IFHF SPV was created to facilitate the one-time in-kind transfer by the Partnership of, and liquidation of interests in, certain Investment Funds that are subject to withdrawal restrictions (including without limitation lock-up or non-redemption restrictions) (the “Restricted Investments”), in order to improve the liquidity profile of the Partnership. The General Partner of the Partnership serves as the general partner of IFHF SPV.

Effective June 30, 2011, the Partnership acquired an interest in IFHF SPV with a value of approximately $220.5 million, which was equal to the fair value as of June 30, 2011 of the Restricted Investments transferred to IFHF SPV (the cost of such Restricted Investments was approximately $240.7 million). The Partnership immediately distributed in-kind such interest in IFHF SPV to all partners of the Partnership on a pro rata basis based on the value of their respective capital accounts in the Partnership at the time of the transfer. As a result, each partner of the Partnership also became a partner of IFHF SPV. The combined value of each limited partner’s interest in IFHF SPV and its remaining interest in the Partnership immediately after the transfer was equal to the value of its interest in the Partnership immediately before the transfer. The Partnership expects such transfers to be recognized as tax free transactions.

 

12


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

1. Organization (continued)

A partner of IFHF SPV will not be able to withdraw any portion of its partnership interest in IFHF SPV. The general partner of IFHF SPV intends to cause IFHF SPV to make distributions of IFHF SPV capital to IFHF SPV’s partners on a quarterly basis in proportion to their respective pro rata partnership interests in IFHF SPV, to the extent that IFHF SPV capital is available for distribution. The general partner of IFHF SPV currently expects that IFHF SPV will have a life of approximately three to five years. The general partner of IFHF SPV will not receive a management fee, a performance incentive allocation or any other fee in respect of its services to IFHF SPV.

 

2. Significant Accounting Policies

The following significant accounting policies are in conformity with U.S. generally accepted accounting principles (“US GAAP”). Such policies are consistently followed by the Partnership in preparation of its financial statements. The preparation of financial statements in conformity with US GAAP requires the management 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.

As of December 31, 2011, 94.67% 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. Values 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 values 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 or 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.

 

13


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

2. Significant Accounting Policies (continued)

Portfolio Valuation (continued)

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 fair value of its investment could fluctuate based on adjustments to the 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 value supplied by, or on behalf of, such Investment Fund and to determine independently the fair value of the Partnership’s interest in such Investment Fund, consistent with the Partnership’s fair valuation procedures.

Where no 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 fair 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. The Adviser values the Partnership’s investments based on such reasonably available relevant information as it considers material. Because of the inherent uncertainty of valuation, the fair 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.

Short-Term Investments

Short-term investments are invested in a money market fund. Investments in money market funds are valued at net asset value.

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 changes in Investment Funds’ net asset values are included in net change in unrealized appreciation/depreciation on investments in Investment Funds in the Statement of Operations. Realized gain (loss) from investments in Investment Funds is calculated using specific identification.

 

14


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (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.

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.

For the year ended December 31, 2011, in accordance with the accounting guidance provided in the AICPA Audit and Accounting Guide, “Audits of Investment Companies,” the Partnership reclassified ($4,749,365) and $97,838,701 from accumulated net investment income (loss) and accumulated net realized gain (loss), respectively, to net capital. This reclassification was to reflect, as an adjustment to net capital, the amounts of taxable income or loss that have been allocated to the Partners and had no effect on net assets.

The Partnership is required to withhold up to 30% U.S. tax from U.S. source dividends and 35% U.S. tax from 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, and any amounts distributed to the Partner thereafter 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.

 

15


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

2. Significant Accounting Policies (continued)

Income and Withholding Taxes (continued)

For the year ended December 31, 2011, the Partnership recorded an estimated tax withholding amount of $1,678,924 which is included in capital repurchases in the Statement of Changes in Partners’ Capital.

The Partnership has concluded there are no significant uncertain tax positions that would require recognition in the financial statements as of December 31, 2011. 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. Generally, tax authorities can examine all tax returns filed for the last three years.

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 or 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. Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, the Investment Funds in which the Partnership invests may 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 equity swaps. The Partnership’s risk of loss in each Investment Fund is limited to the value of each Investment Fund as reported by the Partnership.

 

4. Fair Value of Financial Instruments

The fair value of the Partnership’s assets and liabilities that qualify as financial instruments approximates the carrying amounts presented in the Statement of Assets, Liabilities and Partners’ Capital. 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. The Partnership uses 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 fair value of the Partnership’s investments.

 

16


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

4. Fair Value of Financial Instruments (continued)

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, fair value of investments for which the Partnership has the ability to fully redeem tranches at net asset value as of the measurement date or within the near term, short-term investments that are valued at amortized cost)

   

Level 3 – significant unobservable inputs (including the Partnership’s own assumptions in determining the fair value of investments, fair value of investments for which the Partnership does not have the ability to fully redeem tranches at net asset value as of the measurement date or within the near term)

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

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.

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards” (“ASU 2011-04”). ASU 2011-04 results in common requirements for measurement of, and disclosure about, fair value between US GAAP and International Financial Reporting Standards. ASU 2011-04 expands the qualitative and quantitative disclosure requirements for fair value measurements categorized within Level 3 of the fair value hierarchy, and requires a description of the valuation processes in place and the sensitivity of the fair value to changes in unobservable inputs. ASU 2011-04 is effective for annual and interim reporting periods beginning after December 15, 2011. Management is currently evaluating the implications of ASU 2011-04 and its impact to the financial statements.

The Partnership’s policy is to recognize transfers between Levels 1, 2 or 3 and transfers due to strategy reclassification, if any, as if they occurred as of the beginning of the reporting period. For the year ended December 31, 2011, the Partnership did not have any transfers between Levels 1 and 2.

 

17


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

4. Fair Value of Financial Instruments (continued)

The following is a summary of the inputs used for investment tranches as of December 31, 2011 in valuing the Partnership’s investments carried at fair value:

 

     Level 1      Level 2      Level 3      Total  

Investment Funds

           

Commodity Trading Advisors -Managed Futures

   $ -       $ 18,886,054       $ -       $ 18,886,054   

Distressed

     -         -         9,097         9,097   

Equity Long/Short - High Hedge

     -         15,821,463         45,838,961         61,660,424   

Equity Long/Short - Opportunistic

     -         73,769,760         -         73,769,760   

Event Driven Credit

     -         11,721,273         21,267,167         32,988,440   

Macro

     -         139,828,486         346,745         140,175,231   

Mortgage Arbitrage

     -         32,004,979         -         32,004,979   

Multi-Strategy

     -         25,896,809         54,492,585         80,389,394   

Relative Value Credit

     -         -         8,383,374         8,383,374   

Restructurings and Value

     -         -         1,216,806         1,216,806   

Statistical Arbitrage

     -         25,039,978         -         25,039,978   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investment Funds

   $ -       $     342,968,802       $     131,554,735       $     474,523,537   
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-Term Investments

   $ -       $ 26,737,380       $ -       $ 26,737,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

4. Fair Value of Financial Instruments (continued)

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

 

Investment Funds   

Balance as of

December 31,

2010

    

Transfers

into

Level 3*

     Transfers
out of
Level 3
    

Net realized

gain (loss)

    Net change in
unrealized
appreciation/
depreciation
    Purchases      Sales**    

Balance as of
December 31,

2011

 

Convertible Arbitrage

   $ 1,213       $ -       $             -       $ (1,211,996)      $     1,211,996      $ -       $ (1,213)      $   

Distressed

     105,212,702         -         -         1,423,847        3,165,587        -         (109,793,039     9,097    

Equity Long/Short - High Hedge

     81,551,029         352,487         -         14,021,161        (8,455,049     14,750,000         (56,380,667     45,838,961    

Equity Long/Short - Opportunistic

     19,134,033         969,933         -         3,851,437        (5,375,669     -         (18,579,734       

Event Driven Credit

     63,889,122         -         -         (33,410,247     30,816,901        -         (40,028,609     21,267,167    

Macro

     347,819         -         -         -        (1,074     -         -        346,745    

Multi-Strategy

     252,377,105         -         -         28,695,630        (20,832,729     1,241,335         (206,988,756     54,492,585    

Relative Value Credit

     -         -         -         -        (1,616,626     10,000,000         -        8,383,374    

Restructurings and Value

     10,141,936         1,404,119         -         (1,467,125     1,534,142        -         (10,396,266     1,216,806    

Statistical Arbitrage

     84,037         -         -         (7,966     7,955        -         (84,026       
  

 

 

 

Total Investment Funds

   $     532,738,996       $     2,726,539       $ -       $     11,894,741      $ 455,434      $     25,991,335         $    (442,252,310     $    131,554,735    
  

 

 

 

 

 

19


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

4. Fair Value of Financial Instruments (continued)

 

Investment Funds    Net change in unrealized appreciation/
depreciation on Level 3 investment tranches
still held as of December 31, 2011
 

Distressed

   $ (5,010

Equity Long/Short - High Hedge

     (2,203,637

Event Driven Credit

     (157,841

Macro

     (1,074

Multi-Strategy

     (2,508,261

Relative Value Credit

     (1,616,626

Restructurings and Value

     (756
  

 

 

 

Total Investment Funds

   $ (6,493,205
  

 

 

 

 

* 

Transfers into Level 3 of $2,726,539 are due to transfers of Investment Fund interests into other Investment Fund interests managed by the same Investment Fund manager, and that do not have the ability to fully redeem tranches at net assets value as of measurement date or within the near term.

**

Includes the transfer of Investment Fund interests to Morgan Stanley IFHF SPV LP with an aggregate fair value of $220,507,392 as of June 30, 2011. See discussion in Note 1 to the financial statements.

 

20


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

5. Investments in Investment Funds

The following table summarizes the fair value and liquidity terms of the Investment Funds as of December 31, 2011, aggregated by investment strategy:

 

Investment Funds    Fair Value     

Redemption

Frequency

(if applicable)

  

Redemption

Notice Period

(if applicable)

Commodity Trading Advisors - Managed Futures (a)

   $ 18,886,054       Monthly    18-60 days

Distressed (b)

     9,097       Not Applicable    Not Applicable

Equity Long/Short - High Hedge (c)

     61,660,424       Monthly to Quarterly    30-90 days

Equity Long/Short - Opportunistic (d)

     73,769,760       Monthly to Quarterly    30-90 days

Event Driven Credit (e)

     32,988,440       Quarterly to 3 Years    45-60 days

Macro (f)

     140,175,231       Monthly to Semi-annually    15-90 days

Mortgage Arbitrage (g)

     32,004,979       Monthly to Quarterly    45-60 days

Multi-Strategy (h)

     80,389,394       Quarterly    45-90 days

Relative Value Credit (i)

     8,383,374       Quarterly    90 days

Restructurings and Value (j)

     1,216,806       Not Applicable    Not Applicable

Statistical Arbitrage (k)

     25,039,978       Monthly to Quarterly    30-55 days
  

 

 

       

Total Investment Funds

   $     474,523,537         
  

 

 

       

 

(a) Investment Funds in this strategy invest in a variety of futures contracts, including currencies, interest rates, stocks, stock market indexes, derivatives, and commodities. These Investment Funds build quantitative models to price futures and then take long and short positions in the futures.

 

(b) Investment Funds in this strategy invest in, and may sell short, the securities of companies where the security’s price has been, or is expected to be, affected by a distressed situation such as a bankruptcy or corporate restructuring. An Investment Fund tranche representing less than 0.005% of the Partnership’s net assets has restricted liquidity because such Investment Fund tranche is in liquidation. The Partnership estimates the remaining restriction period for such Investment Fund tranche to be less than a year.

 

(c) Investment Funds in this strategy seek to profit by exploiting pricing inefficiencies between related equity securities, neutralizing exposure to market risk by combining long and short positions. An Investment Fund tranche representing 0.07% of the Partnership’s net assets has restricted liquidity because such Investment Fund tranche is held in a side pocket. The Fund estimates the remaining restriction period for such Investment Fund tranche to be less than a year.

 

(d) Investment Funds in this strategy consist of a core holding of long equities hedged at all times with short sales of stocks or stock index options. Some of the Investment Funds’ respective investment managers maintain a substantial portion of assets within a hedged structure and commonly employ leverage.

 

21


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

5. Investments in Investment Funds (continued)

 

(e)

Investment Funds in this strategy invest in debt securities created by significant transactional events, such as spin-offs, mergers and acquisitions, bankruptcy reorganizations and recapitalizations.

 

(f)

Investment Funds in this strategy invest by making leveraged bets on anticipated price movements of stock markets, interest rates, foreign exchange and physical commodities. An Investment Fund tranche representing 0.07% of the Partnership’s net assets has restricted liquidity because such Investment Fund tranche is held in a side pocket. The Partnership estimates the remaining restriction period for such Investment Fund tranche to be up to 1 year.

 

(g)

Investment Funds in this strategy seek to exploit pricing differentials between various issues of mortgage-related bonds.

 

(h)

Investment Funds in this strategy tactically allocate capital to various hedge fund strategies based on their perceived risk and return profiles.

 

(i)

Investment funds in this strategy invest in, and may sell short, fixed income securities focused on corporate debt, emerging markets sovereign debt and structured credit products.

 

(j)

Investment Funds in this strategy invest in restructuring companies that are undergoing significant corporate events such as spin-offs, recapitalizations, litigation events, strategic realignment, and other major changes. It also includes “value” investments in securities that are believed to be underpriced relative to their intrinsic or fundamental value or which are expected to appreciate in value if circumstances change or an anticipated event occurs. Investment Fund tranches representing 0.25% of the Partnership’s net assets have restricted liquidity because such Investment Fund tranches are held in side pockets. The Partnership estimates the remaining restriction period for such Investment Fund tranches to range from up to 2 years to up to 3 years.

 

(k)

Investment Funds in this strategy profit from temporary pricing discrepancies between related securities. This irregularity offers an opportunity to go long the cheaper security and to short the more expensive one in an attempt to profit as the prices of the two revert to their norm, or mean.

As of December 31, 2011, 0.39% of the Partnership’s capital was invested in side pockets maintained by the Investment Funds. As of December 31, 2011, less than 0.005% of the Partnership’s capital was invested in Investment Funds that are in liquidation.

For the year ended December 31, 2011, aggregate purchases and proceeds from sales of investments in Investment Funds were $195,315,494 and $826,752,266, respectively. In addition, as of June 30, 2011, the Partnership transferred Restricted Investments with a fair value of $220.5 million to IFHF SPV. See note 1 for further discussion.

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 ended December 31, 2011 will be made once the Partnership has received all 2011 Schedules K-1 from the Investment Funds.

 

22


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

6. Investment Receivables and Payables

As of December 31, 2011, $164,376,325 was due to the Partnership from Investment Funds. The receivable amount represents the fair value of certain Investments Fund tranches, net of management fees and incentive fees/allocations, that were redeemed by the Partnership at year-end or holdback amounts that will be received from certain Investment Funds after completion of their annual audits. Substantially all of the receivable balance was collected subsequent to the balance sheet date.

 

7.

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”), 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 year ended December 31, 2011, the Partnership incurred management fees of $5,773,957, of which $304,255 was payable to the Adviser at December 31, 2011.

In connection with the establishment of IFHF SPV, effective July 1, 2011, the General Partner has determined to waive irrevocably, in respect of the Partnership, all Performance Incentives that it might otherwise receive, for all future fiscal years.

Prior to July 1, 2011, under the terms of the Agreement, as amended, the General Partner’s “Performance Incentive” for each Incentive Period, as defined below, was 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 did 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.

An “Incentive Period” generally corresponded to a fiscal year, but may have varied with respect to Limited Partners. An Incentive Period may have been 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 began immediately after the end of the previous Sub-Period, which occurred 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

 

23


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

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

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 terminated 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 was 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 was not cumulative and reset for each Incentive Period at the beginning of each such Incentive Period. The Performance Incentive was debited from each Limited Partner’s capital account and credited to the General Partner’s capital account was at the end of each such Incentive Period. For the period from January 1, 2011 to June 30, 2011, the Performance Incentive re-allocated to the General Partner was $82 and is included in the Statement of Changes in Partners’ Capital.

State Street Bank and Trust Company (“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.

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

 

24


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

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

deferred compensation obligation and do not affect the net asset value of the Partnership. At December 31, 2011, the Partnership’s proportionate share of assets attributable to the DC Plan was $22,169, which is included in the Statement of Assets, Liabilities and Partners’ Capital under other assets and accrued expenses and other liabilities.

As of December 31, 2011, there was one Limited Partner, unaffiliated with Morgan Stanley, with a capital balance that represented approximately 21% of the Partnership’s capital.

 

8. Line of Credit

Effective April 28, 2006, the Partnership entered into a secured credit agreement with State Street for a revolving line of credit (the “Facility”). Prior to September 29, 2011, the maximum availability under the Facility was the lesser of $125,000,000 or 10% of the Partnership’s adjusted net assets. The Partnership paid an annual administration fee related to the Facility of $75,000 and the annual interest rate on borrowings was the greater of the Federal Fund Rate plus 1.50% or the overnight USD LIBOR plus 1.50%. Effective September 29, 2011, the maximum availability under the Facility was reduced to the lesser of $75,000,000 or 10% of the Partnership’s adjusted net assets, as defined in the credit agreement, subject to specific asset-based covenants. The Partnership pays an annual administration fee related to the Facility of $60,000 and the annual interest rate on borrowings is the greater of the Federal Fund Rate plus 1.50% or the overnight USD LIBOR plus 1.50%. Under the terms of the Facility, borrowings are repayable within 120 days of the initial date of advance. At December 31, 2011, there was no amount outstanding against the Facility. For the year ended December 31, 2011, the Partnership incurred interest expense of $26,205 in connection with the Facility. Borrowings are secured by the Partnership’s investment in Investment Funds. Detailed below is summary information concerning the borrowings:

 

# of Days Outstanding

  Average Daily Balance   Annualized Weighted Average Rate
26   $21,115,385   1.72%

 

9. 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.

 

25


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

10. Financial Highlights

The following represents ratios to average Limited Partners’ capital and other financial highlights information for Limited Partners.

 

   

For the Year

Ended
December 31,

2011

   

For the Year
Ended
December 31,

2010

   

For the Year

Ended
December 31,

2009

   

For the Year

Ended
December 31,

2008

   

For the Year

Ended
December 31,

2007

 

Total return - prior to Performance Incentive

    0.11     5.33     14.31     (21.52 %)      9.31

Performance Incentive

    0.00 (e) (f)      0.00 (e)      0.00 (e)      0.00 (g)      0.00 (e) 
 

 

 

 

Total return - net of Performance Incentive (a)

    0.11 % (f)      5.33     14.31     (21.52 %)      9.31
 

 

 

 

Ratio of total expenses to average Limited Partners’ capital (b)

    0.73     0.65     0.65     0.65     0.69

Performance Incentive to average Limited Partners’ capital

    0.00  (e) (f)      0.00 (e)      0.00 (e)      0.00 (g)      0.00 (e) 
 

 

 

 

Ratio of total expenses and Performance Incentive to average Limited Partners’ capital (b)

    0.73 % (f)      0.65     0.65     0.65     0.69
 

 

 

 

Ratio of net investment income (loss) to average Limited Partners’ capital (c) (d)

    (0.48 %)      (0.35 %)      (0.64 %)      (0.60 %)      (0.67 %) 

Portfolio turnover

    19     17     22     17     25

Limited Partners’ capital at end of the year (000s)

    $496,940        $1,342,873        $1,617,137        $1,956,267        $3,194,392   

 

(a) Total return - net of Performance Incentive is calculated as the change in Limited Partners’ capital, adjusted for contributions and repurchases during the year, after Performance Incentive, if any, allocated to the General Partner.
(b) Ratio does not reflect the Partnership’s proportionate share of the expenses of the Investment Funds.
(c) Ratio does not reflect the Partnership’s proportionate share of the income and expenses of the Investment Funds.
(d) Excludes impact of Performance Incentive.
(e) Impact of Performance Incentive represented less than 0.005%.
(f) Relates to performance incentive re-allocations for the period from January 1, 2011 to June 30, 2011. Re-allocations for future periods have been irrevocably waived by the General Partner in connection with the establishment of Morgan Stanley IFHF SPV LP. See Note 7 for further discussion.
(g) There was no Performance Incentive for the year.

 

26


Morgan Stanley Institutional Fund of Hedge Funds LP

Notes to Financial Statements (continued)

 

10. Financial Highlights (continued)

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.

 

11. Subsequent Events

Unless otherwise stated throughout the Notes to the financial statements, the Partnership noted no subsequent events that require disclosure in the financial statements.

 

27


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 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 Forms 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.

 

28


Morgan Stanley Institutional Fund of Hedge Funds LP

An Important Notice Concerning Our U.S. Privacy Policy (Unaudited)

This privacy notice describes the U.S. privacy policy of Morgan Stanley Alternative Investment Partners (“us”, “our”, “we”).

We are required by federal law to provide you with notice of our U.S. privacy policy (“Policy”). This Policy applies to both our current and former clients unless we state otherwise and is intended for individual clients who purchase products or receive services from us for personal, family or household purposes. This Policy is not applicable to partnerships, corporations, trusts or other non-individual clients or account holders, nor is this Policy applicable to individuals who are either beneficiaries of a trust for which we serve as trustee or participants in an employee benefit plan administered or advised by us.

This notice sets out our business practices to protect your privacy; how we collect and share personal information about you; and how you can limit our sharing or certain uses by others of this information. We may amend this Policy at any time, and will inform you of any changes to our Policy as required by law.

We Respect Your Privacy

We appreciate that you have provided us with your personal financial information and understand your concerns about your information. We strive to safeguard the information our clients entrust to us. Protecting the confidentiality and security of client information is an important part of how we conduct our business.

This notice describes what personal information we collect about you, how we collect it, when we may share it with others, and how certain others may use it. It discusses the steps you may take to limit our sharing of certain information about you with our affiliated companies, including, but not limited to, our affiliated banking businesses, brokerage firms and credit service affiliates. It also discloses how you may limit our affiliates’ use of shared information for marketing purposes.

Throughout this Policy, we refer to the nonpublic information that personally identifies you as “personal information.” We also use the term “affiliated company” in this notice. An affiliated company is a company in our family of companies and includes companies with the Morgan Stanley name. These affiliated companies are financial institutions such as broker-dealers, banks, investment advisers and credit card issuers. We refer to any company that is not an affiliated company as a nonaffiliated third party. For purposes of Section 5 of this notice, and your ability to limit certain uses of personal information by our affiliates, this notice applies to the use of personal information by our affiliated companies.

 

29


An Important Notice Concerning Our U.S. Privacy Policy (Unaudited)

(continued)

1. What Personal Information Do We Collect From You?

We may collect the following types of information about you: (i) information provided by you, including information from applications and other forms we receive from you, (ii) information about your transactions with us or our affiliates, (iii) information about your transactions with nonaffiliated third parties, (iv) information from consumer reporting agencies, (v) information obtained from our websites, and (vi) information obtained from other sources. For example:

• We collect information such as your name, address, e-mail address, telephone/fax numbers, assets, income and investment objectives through applications and other forms you submit to us.

• We may obtain information about account balances, your use of account(s) and the types of products and services you prefer to receive from us through your dealings and transactions with us and other sources.

• We may obtain information about your creditworthiness and credit history from consumer reporting agencies.

• We may collect background information from and through third-party vendors to verify representations you have made and to comply with various regulatory requirements.

2. When Do We Disclose Personal Information We Collect About You?

We may disclose personal information we collect about you in each of the categories listed above to affiliated and nonaffiliated third parties.

a. Information We Disclose to Affiliated Companies. We may disclose personal information that we collect about you to our affiliated companies to manage your account(s) effectively, to service and process your transactions, and to let you know about products and services offered by us and affiliated companies, to manage our business, and as otherwise required or permitted by law. Offers for products and services from affiliated companies are developed under conditions designed to safeguard your personal information.

b. Information We Disclose to Third Parties. We may disclose personal information that we collect about you to nonaffiliated third parties to provide marketing services on our behalf or to other financial institutions with whom we have joint marketing agreements. We may also disclose all of the information we collect to other nonaffiliated third parties for our everyday business purposes, such as to process transactions, maintain account(s), respond to court orders and legal investigations, report to credit bureaus, offer our own products and services, protect against fraud, for institutional risk control, to perform services on our behalf, and as otherwise required or permitted by law.

 

30


An Important Notice Concerning Our U.S. Privacy Policy (Unaudited)

(continued)

When we share personal information about you with a nonaffiliated third party, they are required to limit their use of personal information about you to the particular purpose for which it was shared and they are not allowed to share personal information about you with others except to fulfill that limited purpose or as may be permitted or required by law.

3. How Do We Protect The Security and Confidentiality Of Personal Information We Collect About You?

We maintain physical, electronic and procedural security measures that comply with applicable law and regulations to help safeguard the personal information we collect about you. We have internal policies governing the proper handling of client information by employees. Third parties that provide support or marketing services on our behalf may also receive personal information about you, and we require them to adhere to appropriate security standards with respect to such information.

4. How Can You Limit Our Sharing Certain Personal Information About You With Our Affiliated Companies For Eligibility Determination?

By following the opt-out procedures in Section 6, below, you may limit the extent to which we share with our affiliated companies, personal information that was collected to determine your eligibility for products and services such as your credit reports and other information that you have provided to us or that we may obtain from third parties (“eligibility information”). Eligibility information does not include your identification information or personal information pertaining to our transactions or experiences with you. Please note that, even if you direct us not to share eligibility information with our affiliated companies, we may still share your personal information, including eligibility information, with our affiliated companies under circumstances that are permitted under applicable law, such as to process transactions or to service your account.

5. How Can You Limit the Use of Certain Personal Information About You by Our Affiliated Companies for Marketing?

By following the opt-out instructions in Section 6, below, you may limit our affiliated companies from marketing their products or services to you based on personal information we disclose to them. This information may include, for example, your income and account history with us. Please note that, even if you choose to limit our affiliated companies from using personal information about you that we may share with them for marketing their products and services to you, our affiliated companies may use your personal information that they obtain from us to market to you in circumstances permitted by law, such as if the affiliated party has its own relationship with you.

 

31


An Important Notice Concerning Our U.S. Privacy Policy (Unaudited)

(continued)

 

6. How Can You Send Us an Opt-Out Instruction?

If you wish to limit our sharing of eligibility information about you with our affiliated companies, or our affiliated companies’ use of personal information for marketing purposes, as described in this notice, you may do so by:

• Calling us at: 610.260.7600

   Monday–Friday between 8a.m. and 5p.m. (EST)

• Writing to us at the following address:

Morgan Stanley Alternative Investment Partners LP

Attention: AIP Investor Services

100 Front Street, Suite 400

West Conshohocken, PA 19428

If you choose to write to us, your request should include: your name, address, telephone number and account number(s) to which the opt-out applies and whether you are opting out with respect to sharing of eligibility information (Section 4 above), or information used for marketing (Section 5 above), or both. Written opt-out requests should not be sent with any other correspondence. In order to process your request, we require that the request be provided by you directly and not through a third party. Once you have informed us about your privacy preferences, your opt-out preference will remain in effect with respect to this Policy (as it may be amended) until you notify us otherwise. If you are a joint account owner, we will accept instructions from any one of you and apply those instructions to the entire account.

Please understand that if you limit our sharing or our affiliated companies’ use of personal information, you and any joint account holder(s) may not receive information about our affiliated companies’ products and services, including products or services that could help you manage your financial resources and achieve your investment objectives.

If you have more than one account or relationship with us, please specify the accounts to which you would like us to apply your privacy choices. If you have accounts or relationships with our affiliates, you may receive multiple privacy policies from them, and will need to separately notify those companies of your privacy choices for those accounts or relationships.

7. What if an affiliated company becomes a nonaffiliated third party?

If, at any time in the future, an affiliated company becomes a nonaffiliated third party, further disclosures of personal information made to the former affiliated company will be limited to those described in Section 2(b) above relating to nonaffiliated third parties. If you elected under Section 6 to limit disclosures we make to affiliated companies, or use of personal information by affiliated companies, your

 

32


An Important Notice Concerning Our U.S. Privacy Policy (Unaudited)

(continued)

 

election will not apply to use by any former affiliated company of your personal information in their possession once it becomes a nonaffiliated third party.

 

SPECIAL NOTICE TO RESIDENTS OF VERMONT

The following section supplements our Policy with respect to our individual clients who have a Vermont address and supersedes anything to the contrary in the above Policy with respect to those clients only.

 

The State of Vermont requires financial institutions to obtain your consent prior to sharing personal information that they collect about you with nonaffiliated third parties, or eligibility information with affiliated companies, other than in certain limited circumstances. Except as permitted by law, we will not share personal information we collect about you with nonaffiliated third parties or eligibility information with affiliated companies, unless you provide us with your written consent to share such information.

 

 

SPECIAL NOTICE TO RESIDENTS OF CALIFORNIA

The following section supplements our Policy with respect to our individual clients who have a California address and supersedes anything to the contrary in the above Policy with respect to those clients only.

 

In response to a California law, if your account has a California home address, your personal information will not be disclosed to nonaffiliated third parties except as permitted by applicable California law, and we will limit sharing such personal information with our affiliates to comply with California privacy laws that apply to us.

 

33


Information Concerning Directors and Officers (Unaudited)

 

Name, Age and Address

  

Position(s)

Held with

Registrant

  

Length of

Time

Served*

  

Principal

Occupation(s)

During Past 5 Years

  

Number of

Portfolios

Overseen

In Fund

Complex

  

Other Trusteeships/

Directorships

Held Outside the

Fund Complex **

Independent Directors

              

Frank L. Bowman (67)

c/o Kramer Levin

Naftalis & Frankel LLP

Counsel to the Independent

Directors

1177 Avenue of the Americas

New York, NY 10036

   Director   

Since August

2006

   President, Strategic Decisions, LLC (consulting) (since February 2009); Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); Chairperson of the Insurance Sub-Committee of the Compliance and Insurance Committee (since February 2007); served as President and Chief Executive Officer of the Nuclear Energy Institute (policy organization) (February 2005 through November 2008), retired as Admiral U.S. Navy after serving 38 years on active duty including 8 years as Director of the Naval Nuclear Propulsion Program in the Department of the Navy and the U.S. Department of Energy (1996-2004); Served as Chief of Naval Personnel (July 1994- September 1996); and on the Joint Staff as Director of Political-Military Affairs (June 1992-July 1994); Knighted as Honorary Knight Commander of the Most Excellent Order of the British Empire; Awarded the Officer de l’Orde National du Merite by the French Government; elected to the National Academy of Engineering (2009).    102    Director of BP p.l.c.; Director of Naval and Nuclear Technologies LLP; Director of the Armed Services YMCA of the USA and the Naval Submarine League. Director of the American Shipbuilding Suppliers Association; Member of the National Security Advisory Council of the Center for U.S. Global Engagement and a member of the CNA Military Advisory Board; Member of the American Lung Association’s President’s Council.

Michael Bozic (71)

c/o Kramer Levin

Naftalis & Frankel LLP

Counsel to the Independent

Directors

1177 Avenue of the Americas

New York, NY 10036

   Director   

Since April

1994

   Private Investor; Chairperson of the Compliance and Insurance Committee (since October 2006); Director or Trustee of various Morgan Stanley Funds (since April 1994); formerly, Chairperson of the Insurance Committee (July 2006-September 2006); Vice Chairman of Kmart Corporation (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co.    104   

Director of various

business organizations.

Kathleen A. Dennis (58)

c/o Kramer Levin

Naftalis & Frankel LLP

Counsel to the Independent

Directors

1177 Avenue of the Americas

New York, NY 10036

   Director   

Since August

2006

   President, Cedarwood Associates (mutual fund and investment management consulting) (since July 2006); Chairperson of the Money Market and Alternatives Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Morgan Stanley Funds (since August 2006); formerly, Senior Managing Director of Victory Capital Management (1993-2006).    102   

Director of various non-

profit organizations.

 

34


Information Concerning Directors and Officers (Unaudited) (continued)

 

Name, Age and Address

  

Position(s)

Held with

Registrant

  

Length of

Time

Served*

  

Principal

Occupation(s)

During Past 5 Years

  

Number of

Portfolios

Overseen

In Fund

Complex

  

Other Trusteeships/

Directorships

Held Outside the

Fund Complex **

Independent Directors (continued)

           

Dr. Manuel H. Johnson (62)

c/o Johnson Smick Group, Inc.

888 16th Street, N.W.

Suite 740

Washington, D.C. 20006

   Director   

Since July

1991

   Senior Partner, Johnson Smick International, Inc. (consulting firm); Chairperson of the Investment Committee (since October 2006) and Director or Trustee of the Retail Funds (since July 1991) and Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C) (international economic commission); formerly, Chairperson of the Audit Committee (July 1991-September 2006); Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury.    104   

Director of NVR, Inc.

(home construction).

Joseph J. Kearns (69)

c/o Kearns & Associates LLC

PMB754

23852 Pacific Coast Highway

Malibu, CA 90265

   Director   

Since August

1994

   President, Kearns & Associates LLC (investment consulting); Chairperson of the Audit Committee (since October 2006) and Director or Trustee of the various Morgan Stanley Funds (since August 1994); formerly, Deputy Chairperson of the Audit Committee (July 2003-September 2006) and Chairperson of the Audit Committee of various Morgan Stanley Funds (since August 1994); CFO of the J.Paul Getty Trust.    105    Director of Electro Rent Corporation (equipment leasing) and The Ford Family Foundation.

Michael F. Klein (53)

c/o Kramer Levin

Naftalis & Frankel LLP

Counsel to the Independent

Directors

1177 Avenue of the Americas

New York, NY 10036

   Director   

Since August

2006

   Managing Director, Aetos Capital, LLC (since March 2000) and Co-President, Aetos Alternatives Management, LLC (since January 2004); Chairperson of the Fixed- Income Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Morgan Stanley Funds (since August 2006); formerly, Managing Director, Morgan Stanley & Co. Inc., and Morgan Stanley Dean Witter Investment Management, President, various Morgan Stanley Funds (June 1998-March 2000) and Principal, Morgan Stanley & Co. Inc. and Morgan Stanley Dean Witter Investment Management (August 1997-December 1999).    102    Director of certain investment funds managed or sponsored by Aetos Capital, LLC. Director of Sanitized AG and Sanitized Marketing AG (specialty chemicals).

 

35


Information Concerning Directors and Officers (Unaudited) (continued)

 

Name, Age and Address

  

Position(s)

Held with

Registrant

  

Length of

Time

Served*

  

Principal

Occupation(s)

During Past 5 Years

  

Number of

Portfolios

Overseen

In Fund

Complex

  

Other Trusteeships/

Directorships

Held Outside the

Fund Complex **

Independent Directors (continued)

           

Michael E. Nugent (75)

c/o Triumph Capital, L.P.

445 Park Avenue

New York, NY 10022

   Chairperson of the Board and Director    Chairperson of the Boards since July 2006 and Director since July 1991    General Partner, Triumph Capital, L.P. (private investment partnership); Chairperson of the Boards of the various Morgan Stanley Funds (since July 2006); Director or Trustee of various Morgan Stanley Funds (since July 1991); formerly, Chairperson of the Insurance Committee (until July 2006).    104    None.

W. Allen Reed (64)

c/o Kramer Levin

Naftalis &Frankel LLP

Counsel to the Independent

Directors

1177 Avenue of the Americas

New York, NY 10036

   Director   

Since August

2006

   Chairperson of the Equity Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Morgan Stanley Funds and Institutional Funds (since August 2006); formerly, President and CEO of General Motors Asset Management; Chairman and Chief Executive Officer of the GM Trust Bank and Corporate Vice President of General Motors Corporation (August 1994-December 2005).    102    Director of Temple-Inland Industries (packaging and forest products), Director of Legg Mason, Inc. and Director of the Auburn University Foundation; formerly, Director of iShares, Inc. (2001-2006).

Fergus Reid (79)

c/o Joe Pietryka, Inc.

85 Charles Colman Blvd.

Pawling, NY 12564

   Director   

Since July

1992

   Chairman, Joe Pietryka, Inc.; Chairperson of the Governance Committee and Director or Trustee of various Morgan Stanley Funds (since June 1992).    105    Trustee and Director of certain investment companies in the JPMorgan Funds complex managed by JP Morgan Investment Management Inc.

Interested Director

              

James F. Higgins (63)

c/o Morgan Stanley Trust

Harborside Financial Center

201 Plaza Two

Jersey City, NJ 07311

   Director   

Since June

2000

   Director or Trustee of various Morgan Stanley Funds (since June 2000); Senior Advisor of Morgan Stanley (since August 2000).    103    Director of AXA Financial, Inc. and The Equitable Life Assurance Society of the United States (financial services).

 

* Each Director serves an indefinite term, until his or her successor is elected.
** This includes any directorships at public companies and registered investment companies held by the Director at any time during the past five years.

 

36


Information Concerning Directors and Officers (Unaudited) (continued)

 

Name, Age and Address

  

Position(s)

Held with

Registrant

  

Length of

Time

Served*

  

Principal Occupation(s)

During Past 5 Years

Officers **

        

Jacques Chappuis (42)

522 Fifth Avenue

New York , NY 10036

  

President and

Principal

Executive

Officer

  

Since September

2010

   President and Principal Executive Officer (since September 2010) of the Morgan Stanley AIP Funds in the Fund Complex; Head of Morgan Stanley AIP; Managing Director of Morgan Stanley AIP (since July 2009). Previously, Head of Alternative Investments for the Morgan Stanley Global Wealth Management Group (August 2006-June 2009); Global Head of Alternative Investments for Citigroup Global Wealth Management (July 2002- August 2006).

Mary Ann Picciotto (38)

c/o Morgan Stanley

Services Company Inc.

Harborside Financial Center

201 Plaza Two

Jersey City, NJ 07311

  

Chief

Compliance

Officer

  

Since May

2010

   Executive Director of Morgan Stanley Investment Management Inc. and various entities affiliated with the Morgan Stanley Investment Management Inc.; Chief Compliance Officer of the Retail Funds and Institutional Funds (since May 2010); Chief Compliance Officer of Morgan Stanley Investment Management Inc. and Morgan Stanley Advisors Inc. (since April 2007).

Stefanie V. Chang Yu (45)

522 Fifth Avenue

New York, NY 10036

  

Vice

President

  

Since December

1997

   Managing Director of Morgan Stanley Investment Management Inc. and various entities affiliated with Morgan Stanley Investment Management Inc.; Vice President of various Morgan Stanley Funds (since December 1997).

Mustafa Jama (51)

100 Front Street, Suite 400

West Conshohocken, PA

19428-2881

  

Vice

President

  

Since June

2008

   Head and Chief Investment Officer of Morgan Stanley AIP Fund of Hedge Funds team; Managing Director of Morgan Stanley AIP (since January 2004). Formerly, Managing Director of Glenwood Capital Investments.

Matthew Graver (44)

100 Front Street, Suite 400

West Conshohocken, PA

19428-2881

  

Vice

President

  

Since June

2008

   Chief Operating Officer and Managing Director of Morgan Stanley AIP. Formerly, Senior Manager at PricewaterhouseCoopers LLP.

Mary E. Mullin (44)

522 Fifth Avenue

New York, NY 10036

   Secretary   

Since June

1999

   Executive Director of Morgan Stanley Investment Management Inc. and various entities affiliated with Morgan Stanley Investment Management Inc.; Secretary of various Morgan Stanley Funds (since June 1999).

Noel Langlois (42)

100 Front Street, Suite 400

West Conshohocken, PA

19428-2881

  

Treasurer and

Chief Financial

Officer

  

Since

March 2010

   Head of Alternative Investment Services of Morgan Stanley Investment management and Managing Director of Morgan Stanley AIP; Director of Morgan Stanley Funds plc, Morgan Stanley Multi-Strategy Fund plc, Morgan Stanley Alpha Plus Funds plc, and Morgan Stanley Select Investment Strategies Limited.

 

* Each Officer serves an indefinite term, until his or her successor is elected.
** In addition, the following individuals who are officers of the Adviser or its affiliates serve as assistant secretaries of the Partnership: Joanne Antico, Joseph C. Benedetti, Daniel E. Burton, John F. Cacchione, Tara A. Farrelly and Edward J. Meehan. The following individuals who are officers of the Adviser or its affiliates also serve as assistant treasurers of the Fund: Robin Coroniti, Robert Creaney, Philip Murphy, Bud Rein, Lee Spector and Francie Tai.

 

37


Morgan Stanley Institutional Fund of Hedge Funds LP

100 Front Street, Suite 400

West Conshohocken, PA 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

Jacques Chappuis, President and Principal Executive Officer

Stefanie V. Chang Yu, Vice President

Mustafa Jama, Vice President

Matthew Graver, Vice President

Mary Ann Picciotto, Chief Compliance Officer

Noel Langlois, Treasurer and Chief Financial Officer

Mary E. Mullin, Secretary

Investment Adviser

Morgan Stanley AIP GP LP

100 Front Street, Suite 400

West Conshohocken, PA 19428

Administrator, Custodian, Fund Accounting Agent and Escrow Agent

State Street Bank and Trust Company

One Lincoln Street

Boston, MA 02111

Independent Registered Public Accounting Firm

Ernst & Young LLP

One Commerce Square

2005 Market Street, Suite 700 Philadelphia, PA 19103

Legal Counsel

Dechert LLP

1095 Avenue of the Americas

New York, NY 10036

Kramer Levin Naftalis & Frankel LLP

1177 Avenue of the Americas

New York, NY 10036

 

38


ITEM 2. CODE OF ETHICS.

 

(a)

The Registrant has adopted a code of ethics (the “Code of Ethics”) that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party.

 

(b) No information need be disclosed pursuant to this paragraph.

 

(c) Not applicable.

 

(d) Not applicable.

 

(e) Not applicable.

 

(f)

 

  (1) The Registrant’s Code of Ethics is attached hereto as Exhibit (a)(1) pursuant to Item 12(a)(1).

 

  (2) Not applicable.

 

  (3) Not applicable.

 

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

The Registrant’s Board of Directors has determined that it has one “audit committee financial expert” serving on its audit committee, who is an “independent” Director: Joseph J. Kearns. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Directors in the absence of such designation or identification.


ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:

 

2011

    
   Registrant   Covered Entities(1)

Audit Fees

   $57,500   N/A

Non-Audit Fees

    

Audit-Related Fees

   $0   $0(2)

Tax Fees

   $66,500(3)(6)   $89,626(4)

All Other Fees

   $0   $1,133,094(5)

Total Non-Audit Fees

   $66,500   $1,222,720

Total

   $124,000   $1,222,720

2010

    
   Registrant   Covered Entities(1)

Audit Fees

   $65,075   N/A

Non-Audit Fees

    

Audit-Related Fees

   $0   $0(2)

Tax Fees

   $74,500(3)   $199,783(4)

All Other Fees

   $0   $90,520(5)

Total Non-Audit Fees

   $74,500   $290,303

Total

   $139,575   $290,303

N/A- Not applicable, as not required by Item 4.

 

  (1)

Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant.

  (2)

Audit-Related Fees represent assurance and related services provided that are reasonably related to the performance of the audit of the financial statements of the Covered Entities and funds advised by the Adviser or its affiliates, specifically attestation services provided in connection with a SAS 70 Report and advisory consulting work.

  (3)

Tax Fees represent tax advice and compliance services provided in connection with the review of the Registrant’s tax returns.

  (4)

Tax Fees represent tax advice services provided to Covered Entities, including research and identification of PFIC entities.

  (5)

All Other Fees represent attestation services provided in connection with performance presentation standards and a compliance review project performed.

  (6) Figure reflects inclusion of estimated amounts which may vary from actual amounts ultimately incurred.


(e)(1) The audit committee’s pre-approval policies and procedures are as follows:

AUDIT COMMITTEE

AUDIT AND NON-AUDIT SERVICES

PRE-APPROVAL POLICY AND PROCEDURES

OF THE

MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS

AS ADOPTED AND AMENDED JULY 23, 20041

 

  1. Statement of Principles

The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor’s independence from the Fund.

The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee’s administration of the engagement of the independent auditor. The SEC’s rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee (“general pre-approval”); or require the specific pre-approval of the Audit Committee or its delegate (“specific pre-approval”). The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee.

The appendices to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations.

The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not delegate the Audit Committee’s responsibilities to pre-approve services performed by the Independent Auditors to management.

 

 

1 

This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the “Policy”), adopted as of the date above, supersedes and replaces all prior versions that may have been adopted from time to time.


The Fund’s Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors’ independence.

 

  2. Delegation

As provided in the Act and the SEC’s rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.

 

  3.

Audit Services

The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund’s financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items.

In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.

The Audit Committee has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).

 

  4. Audit-related Services

Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund’s financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC’s rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters not classified as “Audit services”; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR.

The Audit Committee has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).


  5. Tax Services

The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor’s independence, and the SEC has stated that the Independent Auditors may provide such services.

Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).

 

  6. All Other Services

The Audit Committee believes, based on the SEC’s rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC’s rules on auditor independence.

The Audit Committee has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).

 

  7. Pre-Approval Fee Levels or Budgeted Amounts

Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services.

 

  8. Procedures

All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund’s Chief Financial Officer and must include a detailed description of the services to be rendered. The Fund’s Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund’s Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.

The Audit Committee has designated the Fund’s Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy. The Fund’s Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund’s Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund’s Chief Financial Officer or any member of management.


  9. Additional Requirements

The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor’s independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence.

 

  10. Covered Entities

Covered Entities include the Fund’s investment adviser(s) and any entity controlling, controlled by or under common control with the Fund’s investment adviser(s) that provides ongoing services to the Fund(s). Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund’s audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund. This list of Covered Entities would include:

Morgan Stanley Retail Funds

Morgan Stanley Investment Advisors Inc.

Morgan Stanley & Co. Incorporated

Morgan Stanley DW Inc.

Morgan Stanley Investment Management Inc.

Morgan Stanley Investment Management Limited

Morgan Stanley Investment Management Private Limited

Morgan Stanley Asset & Investment Trust Management Co., Limited

Morgan Stanley Investment Management Company

Morgan Stanley Services Company, Inc.

Morgan Stanley Distributors Inc.

Morgan Stanley Trust FSB

Morgan Stanley Institutional Funds

Morgan Stanley Investment Management Inc.

Morgan Stanley Investment Advisors Inc.

Morgan Stanley Investment Management Limited

Morgan Stanley Investment Management Private Limited

Morgan Stanley Asset & Investment Trust Management Co., Limited

Morgan Stanley Investment Management Company

Morgan Stanley & Co. Incorporated

Morgan Stanley Distribution, Inc.

Morgan Stanley AIP GP LP

Morgan Stanley Alternative Investment Partners LP

 

(e)(2)  

Beginning with non-audit service contracts entered into on or after May 6, 2003, the audit committee also is required to pre-approve services to Covered Entities to the extent that the services are determined to have a direct impact on the operations or financial reporting of the Registrant. 100% of such services were pre-approved by the audit committee pursuant to the Audit Committee’s pre-approval policies and procedures (attached hereto).

(f)   Not applicable.

 


(g)    See table above.

(h)    

  

The audit committee of the Board of Directors has considered whether the provision of services other than audit services performed by the auditors to the Registrant and Covered Entities is compatible with maintaining the auditors’ independence in performing audit services.

 

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. The Proxy Voting Policies and Procedures of the Fund and its investment adviser are as follows:

Morgan Stanley Investment Management Proxy Voting Policy and Procedures

 

I. POLICY STATEMENT

Morgan Stanley Investment Management’s (“MSIM”) policy and procedures for voting proxies (“Policy”) with respect to securities held in the accounts of clients applies to those MSIM entities that provide discretionary investment management services and for which an MSIM entity has authority to vote proxies. This Policy is reviewed and updated as necessary to address new and evolving proxy voting issues and standards.

The MSIM entities covered by this Policy currently include the following: Morgan Stanley AIP GP LP, Morgan Stanley Investment Management Inc., Morgan Stanley Investment Management Limited, Morgan Stanley Investment Management Company, Morgan Stanley Asset & Investment Trust Management Co., Limited, Morgan Stanley Investment Management Private Limited and Private Investment Partners Inc. (each an “MSIM Affiliate” and collectively referred to as the “MSIM Affiliates” or as “we” below).

Each MSIM Affiliate will use its best efforts to vote proxies as part of its authority to manage, acquire and dispose of account assets. With respect to the MSIM registered management investment companies (the “MSIM Funds”), each MSIM Affiliate will vote proxies under this Policy pursuant to authority granted under its applicable investment advisory agreement or, in the absence of such authority, as authorized by the Board of Directors/Trustees of the MSIM Funds. A MSIM Affiliate will not vote proxies unless the investment management or investment advisory agreement explicitly authorizes the MSIM Affiliate to vote proxies. MSIM Affiliates will vote proxies in a prudent and diligent manner and in the best interests of clients, including beneficiaries of and participants in a client’s benefit plan(s) for which the MSIM Affiliates manage assets, consistent with the objective of maximizing long-term investment returns (“Client Proxy Standard”). In certain situations, a client or its fiduciary may provide an MSIM Affiliate with a proxy voting policy. In these situations, the MSIM Affiliate will comply with the client’s policy.

Proxy Research Services - ISS Governance Services (“ISS”) and Glass Lewis (together with other proxy research providers as we may retain from time to time, the “Research Providers”) are independent advisers that specialize in providing a variety of fiduciary-level proxy-related services to institutional investment managers, plan sponsors, custodians, consultants, and other institutional investors. The services provided include in-depth research, global issuer analysis, and voting recommendations. While we may review and utilize the recommendations of one or more Research Providers in making proxy voting decisions, we are in no way obligated to follow such recommendations. In addition to research, ISS provides vote execution, reporting, and recordkeeping services.


Voting Proxies for Certain Non-U.S. Companies - Voting proxies of companies located in some jurisdictions may involve several problems that can restrict or prevent the ability to vote such proxies or entail significant costs. These problems include, but are not limited to: (i) proxy statements and ballots being written in a language other than English; (ii) untimely and/or inadequate notice of shareholder meetings; (iii) restrictions on the ability of holders outside the issuer’s jurisdiction of organization to exercise votes; (iv) requirements to vote proxies in person; (v) the imposition of restrictions on the sale of the securities for a period of time in proximity to the shareholder meeting; and (vi) requirements to provide local agents with power of attorney to facilitate our voting instructions. As a result, we vote clients’ non-U.S. proxies on a best efforts basis only, after weighing the costs and benefits of voting such proxies, consistent with the Client Proxy Standard. ISS has been retained to provide assistance in connection with voting non-U.S. proxies.

 

II. GENERAL PROXY VOTING GUIDELINES

To promotes consistency in voting proxies on behalf of its clients, we follow this Policy (subject to any exception set forth herein). The Policy addresses a broad range of issues, and provides general voting parameters on proposals that arise most frequently. However, details of specific proposals vary, and those details affect particular voting decisions, as do factors specific to a given company. Pursuant to the procedures set forth herein, we may vote in a manner that is not in accordance with the following general guidelines, provided the vote is approved by the Proxy Review Committee (see Section III for description) and is consistent with the Client Proxy Standard. Morgan Stanley AIP GP LP will follow the procedures as described in Appendix A.

We endeavor to integrate governance and proxy voting policy with investment goals, using the vote to encourage portfolio companies to enhance long-term shareholder value and to provide a high standard of transparency such that equity markets can value corporate assets appropriately.

We seek to follow the Client Proxy Standard for each client. At times, this may result in split votes, for example when different clients have varying economic interests in the outcome of a particular voting matter (such as a case in which varied ownership interests in two companies involved in a merger result in different stakes in the outcome). We also may split votes at times based on differing views of portfolio managers.

We may abstain on matters for which disclosure is inadequate.

 

  A. Routine Matters. We generally support routine management proposals. The following are examples of routine management proposals:

 

   

Approval of financial statements and auditor reports if delivered with an unqualified auditor’s opinion.

 

   

General updating/corrective amendments to the charter, articles of association or bylaws, unless we believe that such amendments would diminish shareholder rights.

 

   

Most proposals related to the conduct of the annual meeting, with the following exceptions. We generally oppose proposals that relate to “the transaction of such other business which may come before the meeting,” and open-ended requests for adjournment. However, where management specifically states the reason for requesting an adjournment and the requested adjournment would facilitate passage of a proposal that would otherwise be supported under this Policy (i.e. an uncontested corporate transaction), the adjournment request will be supported.


We generally support shareholder proposals advocating confidential voting procedures and independent tabulation of voting results.

 

  B. Board of Directors.

 

  1. Election of directors: Votes on board nominees can involve balancing a variety of considerations. In vote decisions, we may take into consideration whether the company has a majority voting policy in place that we believe makes the director vote more meaningful. In the absence of a proxy contest, we generally support the board’s nominees for director except as follows:

 

  a. We consider withholding support from or voting against a nominee if we believe a direct conflict exists between the interests of the nominee and the public shareholders, inlcuding failure to meet fiduciary standards of care and/or loyalty. We may oppose directors where we conclude that actions of directors are unlawful, unethical or negligent. We consider opposing individual board members or an entire slate if we believe the board is entrenched and/or dealing inadequately with performance problems; if we believe the board is acting with insufficient independence between the board and management; or if we believe the board has not been sufficiently forthcoming with information on key governance or other material matters.

 

  b. We consider witholding support from or voting against interested directors directors if the company’s board does not meet market standards for director independence, or if otherwise we believe board independence is insufficient. We refer to prevalent market standards as promulgated by a stock exchange or other authority within a given market (e.g., New York Stock Exchange or Nasdaq rules for most U.S. companies, and The Combined Code on Corporate Governance in the United Kingdom). Thus, for an NYSE company with no controlling shareholder, we would expect that at a minimum a majority of directors should be independent as defined by NYSE. Where we view market standards as inadequate, we may withhold votes based on stronger independence standards. Market standards notwithstanding, we generally do not view long board tenure alone as a basis to classify a director as non-independent.

 

  i. At a company with a shareholder or group that controls the company by virtue of a majority economic interest in the company, we have a reduced expectation for board independence, although we believe the presence of independent directors can be helpful, particularly in staffing the audit committee, and at times we may withhold support from or vote against a nominee on the view the board or its committees are not sufficiently independent. In markets where board independence is not the norm (e.g. Japan), however, we consider factors including whether a board of a controlled company inlcudes independent members who can be expected to look out for interests of minority holders.


  ii. We consider withholding support from or voting against a nominee if he or she is affiliated with a major shareholder that has representation on a board disproportionate to its economic interest.

 

  c. Depending on market standards, we consider withholding support from or voting against a nominee who is interested and who is standing for election as a member of the company’s compensation/renumeration, nominating/governance or audit committee.

 

  d. We consider witholding support or voting against nominees if the term for which tey are nominated is excessive. We consider this issue on a market-specific basis.

 

  e. We consider witholding support from or voting against nominees if, in our view, there has been insufficient board renewal (turnover0, particularly in the context of extended poor company performance.

 

  f. We consider withholding support from or voting against a nominee standing for election if the board has not taken action to implement generally accepted governance practices for which there is a “bright line” test. For example, in the context of the U.S. market, failure to eliminate a dead hand or slow hand poison pill would be seen as a basis for opposing one or more incumbent nominees.

 

  g. In markets that encourage designated audit committee financial experts, we consider voting against members of an audit committee if no members are designated as such. We also may not support the audit committee members if the company has faced financial reporting issues and/or does not put the auditor up for ratification by shareholders.

 

  h. We believe investors should have the ability to vote on individual nominees, and may abstain or vote against a slate of nominees where we are not given the opportunity to vote on individual nominees.

 

  i. We consider withholding support from or voting against a nominee who has failed to attend at least 75% of the nominee’s board and board committee meetings within a given year without a reasonable excuse. We also consider opposing nominees if the company does not meet market standards for disclosure on attendance.

 

  j. We consider withholding support from or voting against a nominee who appears overcommitted, particularly through service on an excessive number of boards. Market expectations are incorporated into this analysis; for U.S. boards, we generally oppose election of a nominee who serves on more than six public company boards (excluding investment companies), althought we may reference National Association of Corporate Directors guidance suggesting that public company CEOs, for example, should serve no more than two outside boards given the level of time commitment required in their primary job.

 

  2. Discharge of directors’ duties: In markets where an annual discharge of directors’ responsibility is a routine agenda item, we generally support such discharge.


However, we may vote against discharge or abstain from voting where there are serious findings of fraud or other unethical behavior for which the individual bears responsibility. The annual discharge of responsibility represents shareholder approval of disclosed actions taken by the board during the year and may make future shareholder action against the board difficult to pursue.

 

  3. Board independence: We generally support U.S. shareholder proposals requiring that a certain percentage (up to 66 2/3%) of the company’s board members be independent directors, and promoting all-independent audit, compensation and nominating/governance committees.

 

  4. Board diversity: We consider on a case-by-case basis shareholder proposals urging diversity of board membership with respect to social, religious or ethnic group.

 

  5. Majority voting: We generally support proposals requesting or requiring majority voting policies in election of directors, so long as there is a carve-out for plurality voting in the case of contested elections.

 

  6. Proxy access: We consider on a case-by-case basis shareholder proposals on particular procedures for inclusion of shareholder nominees in company proxy statements.

 

  7. Reimbursement for dissident nominees: We generally support well-crafted U.S. shareholder proposals that would provide for reimbursement of dissident nominees elected to a board, as the cost to shareholders in electing such nominees can be factored into the voting decision on those nominees.

 

  8. Proposals to elect directors more frequently: In the U.S. public company context, we usually support shareholder and management proposals to elect all directors annually (to “declassify” the board), although we make an exception ot this policy where we believe that long-term shareholder value may be harmed by this change given particular circumstances at the company at the time of the vote on such proposal. As indicated above, outside the U.S., we generally support greater accountability to shareholders that comes through more frequent director elections, but recognize that many markets embrace longer term lengths, sometimes for valid reasons given other aspects of the legal context in electing boards.

 

  9. Cumulative voting: We generally support proposals to eliminate cumulative voting in the U.S. market context. (Cumulative voting provides that shareholders may concentrate their votes for one or a handful of candidates, a system that can enable a minority bloc to place representation on a board.) U.S. proposals to establish cumulative voting in the election of directors generally will not be supported.

 

  10.

Separation of Chairman and CEO positions: We vote on shareholder proposals to separate the Chairman and CEO positions and/or to appoint an independent Chairman based in part on prevailing practice in particular markets, since the context for such a practice varies. In many non-U.S. markets, we view separation of the roles as a market standard practice, and support division of the roles in that context. In the U.S., we consider such proposals on a case-by-case


 

basis, considering, among other things, the existing board leadership structure, company performance, and any other evidence of entrenchment or perceived risk that power is overly concentrated in a single individual.

 

  11. Director retirement age and term limits: Proposals setting or recommending director retirement ages or director term limits are voted on a case-by-case basis that includes consideration of company performance, the rate of board renewal, evidence of effective individual director evaluation processes, and any indications of entrenchment.

 

  12. Proposals to limit directors’ liability and/or broaden indemnification of officers and directors. Generally, we will support such proposals provided that an individual is eligible only if he or she has not acted in bad faith, with gross negligence or with reckless disregard of their duties.

 

  C. Statutory auditor boards. The statutory auditor board, which is separate from the main board of directors, plays a role in corporate governance in several markets. These boards are elected by shareholders to provide assurance on compliance with legal and accounting standards and the company’s articles of association. We generally vote for statutory auditor nominees if they meet independence standards. In markets that require disclosure on attendance by internal statutory auditors, however, we consider voting against nominees for these positions who failed to attend at least 75% of meetings in the previous year. We also consider opposing nominees if the company does not meet market standards for disclosure on attendance.

 

  D. Corporate transactions and proxy fights. We examine proposals relating to mergers, acquisitions and other special corporate transactions (i.e., takeovers, spin-offs, sales of assets, reorganizations, restructurings and recapitalizations) on a case-by-case basis in the interests of each fund or other account. Proposals for mergers or other significant transactions that are friendly and approved by the Research Providers usually are supported if there is no portfolio manager objection. We also analyze proxy contests on a case-by-case basis.

 

  E. Changes in capital structure.

 

  1. We generally support the following:

 

   

Management and shareholder proposals aimed at eliminating unequal voting rights, assuming fair economic treatment of classes of shares we hold.

 

   

U.S. management proposals to increase the authorization of existing classes of common stock (or securities convertible into common stock) if: (i) a clear business purpose is stated that we can support and the number of shares requested is reasonable in relation to the purpose for which authorization is requested; and/or (ii) the authorization does not exceed 100% of shares currently authorized and at least 30% of the total new authorization will be outstanding. (We consider proposals that do not meet these criteria on a case-by-case basis.)


   

U.S. management proposals to create a new class of preferred stock or for issuances of preferred stock up to 50% of issued capital, unless we have concerns about use of the authority for anti-takeover purposes.

 

   

Proposals in non-U.S. markets that in our view appropriately limit potential dilution of existing shareholders. A major consideration is whether existing shareholders would have preemptive rights for any issuance under a proposal for standing share issuance authority. We generally consider market-specific guidance in making these decisions; for example, in the U.K. market, we usually follow Association of British Insurers’ (“ABI”) gidance, although company-specific factors may be considered and for example, may sometimes lead us to voting against share authorization proposals even if they meet ABI guidance.

 

   

Management proposals to authorize share repurchase plans, except in some cases in which we believe there are insufficient protections against use of an authorization for anti-takeover purposes.

 

   

Management proposals to reduce the number of authorized shares of common or preferred stock, or to eliminate classes of preferred stock.

 

   

Management proposals to effect stock splits.

 

   

Management proposals to effect reverse stock splits if management proportionately reduces the authorized share amount set forth in the corporate charter. Reverse stock splits that do not adjust proportionately to the authorized share amount generally will be approved if the resulting increase in authorized shares coincides with the proxy guidelines set forth above for common stock increases.

 

   

Management dividend payout proposals, except where we perceive company payouts to shareholders as inadequate.

 

  2. We generally oppose the following (notwithstanding management support):

 

   

Proposals to add classes of stock that would substantially dilute the voting interests of existing shareholders.

 

   

Proposals to increase the authorized or issued number of shares of existing classes of stock that are unreasonably dilutive, particularly if there are no preemptive rights for existing shareholders. However, depending on market practices, we consider voting for proposals giving general authorization for issuance of shares not subject to pre-emptive rights if the authority is limited.

 

   

Proposals that authorize share issuance at a discount to market rates, except where authority for such issuance is de minimis, or if there is a special situation that we believe justifies such authorization (as may be the case, for example, at a company under severe stress and risk of bankruptcy).

 

   

Proposals relating to changes in capitalization by 100% or more.


We consider on a case-by-case basis shareholder proposals to increase dividend payout ratios, in light of market practice and perceived market weaknesses, as well as individual company payout history and current circumstances. For example, currently we perceive low payouts to shareholders as a concern at some Japanese companies, but may deem a low payout ratio as appropriate for a growth company making good use of its cash, notwithstanding the broader market concern.

 

  F. Takeover Defenses and Shareholder Rights.

 

  1. Shareholder rights plans: We generally support proposals to require shareholder approval or ratification of shareholder rights plans (poison pills). In voting on rights plans or similar takeover defenses, we consider on a case-by-case basis whether the company has demonstrated a need for the defense in the context of promoting long-term share value; whether provisions of the defense are in line with generally accepted governance principles in the market (and specifically the presence of an adequate qualified offer provision that would exempt offers meeting certain conditions from the pill); and the specific context if the proposal is made in the midst of a takeover bid or contest for control.

 

  2. Supermajority voting requirements: We generally oppose requirements for supermajority votes to amend the charter or bylaws, unless the provisions protect minority shareholders where there is a large shareholder. In line with this view, in the absence of a large shareholder we support reasonable shareholder proposals to limit such supermajority voting requirements.

 

  3. Shareholder rights to call meetings: We consider proposals to enhance shareholder rights to call meetings on a case-by-case basis. At large-cap U.S. companies, we generally support efforts to establish the rights of holders of 10% or more of shares to call special meetings, unless the board or state law has a set policy or law establishing such rights at a threshold that we believe to be acceptable.

 

  4. Written consent rights: In the U.S. context, we examine proposals for shareholder written consent rights on a case-by-case basis.

 

  5. Reincorporation: We consider management and shareholder proposals to reincorporate to a different jurisdiction on a case-by-case basis. We oppose such proposals if we believe the main purpose is to take advantage of laws or judicial precedents that reduce shareholder rights.

 

  6. Anti-greenmail provisions: Proposals relating to the adoption of anti-greenmail provisions will be supported, provided that the proposal: (i) defines greenmail; (ii) prohibits buyback offers to large block holders (holders of at least 1% of the outstanding shares and in certain cases, a greater amount) not made to all shareholders or not approved by disinterested shareholders; and (iii) contains no anti-takeover measures or other provisions restricting the rights of shareholders.

 

  7. Bundled proposals: We may consider opposing or abstaining on proposals if disparate issues are “bundled” and presented for a single vote.

 

  G.

Auditors. We generally support management proposals for selection or ratification of independent auditors. However, we may consider opposing such proposals with reference to incumbent audit firms if the company has suffered from serious accounting irregularities and we believe rotation of the audit firm is appropriate, or if fees paid to the auditor for non-audit-related


 

services are excessive. Generally, to determine if non-audit fees are excessive, a 50% test will be applied (i.e., non-audit-related fees should be less than 50% of the total fees paid to the auditor). We generally vote against proposals to indemnify auditors.

 

  H. Executive and Director Remuneration.

 

  1. We generally support the following:

 

   

Proposals for employee equity compensation plans and other employee ownership plans, provided that our research does not indicate that approval of the plan would be against shareholder interest. Such approval may be against shareholder interest if it authorizes excessive dilution and shareholder cost, particularly in the context of high usage (“run rate”) of equity compensation in the recent past; or if there are objectionable plan design and provision.

 

   

Proposals relating to fees to outside directors, provided the amounts are not excessive relative to other companies in the country or industry, and provided that the structure is appropriate within the market context. While stock-based compensation to outside directors is positive if moderate and appropriately structured, we are wary of significant stock option awards or other performance-based awards for outside directors, as well as provisions that could result in significant forfeiture of value on a director’s decision to resign from a board (such forfeiture can undercut director independence).

 

   

Proposals for employee stock purchase plans that permit discounts, but only for grants that are part of a broad-based employee plan, including all non-executive employees, and only if the discounts are limited to a reasonable market standard or less.

 

   

Proposals for the establishment of employee retirement and severance plans, provided that our research does not indicate that approval of the plan would be against shareholder interest.

 

  2. We generally oppose retirement plans and bonuses for non-executive directors and independent statutory auditors.

 

  3. In the U.S. context, shareholder proposals requiring shareholder approval of all severance agreements will not be supported, but proposals that require shareholder approval for agreements in excess of three times the annual compensation (salary and bonus) generally will be supported. We generally oppose shareholder proposals that would establish arbitrary caps on pay. We consider on a case-by-case basis shareholder proposals that seek to limit Supplemental Executive Retirement Plans (SERPs), but support such proposals where we consider SERPs to be excessive.

 

  4.

Shareholder proposals advocating stronger and/or particular pay-for-performance models will be evaluated on a case-by-case basis, with consideration of the merits of the individual proposal within the context of the particular company and its labor markets, and the company’s current and past practices. While we generally support emphasis on long-term components of senior executive pay and strong linkage of pay to performance, we consider factors including whether a


 

proposal may be overly prescriptive, and the impact of the proposal, if implemented as written, on recruitment and retention.

 

  5. We generally support proposals advocating reasonable senior executive and director stock ownership guidelines and holding requirements for shares gained in executive equity compensation programs

 

  6. We generally support shareholder proposals for reasonable “claw-back” provisions that provide for company recovery of senior executive bonuses to the extent they were based on achieving financial benchmarks that were not actually met in light of subsequent restatements.

 

  7. Management proposals effectively to re-price stock options are considered on a case-by-case basis. Considerations include the company’s reasons and justifications for a re-pricing, the company’s competitive position, whether senior executives and outside directors are excluded, potential cost to shareholders, whether the re-pricing or share exchange is on a value-for-value basis, and whether vesting requirements are extended.

 

  8. Say-on-Pay: We consider proposals relating to an advisory vote on remuneration on a case-by-case basis. Considerations include a review of the relationship between executive remuneration and performance based on operating trends and total shareholder return over multiple performance periods. In addition, we review remuneration structures and potential poor pay practices, including relative magnitude of pay, discretionary bonus awards, tax gross ups, change-in-control features, internal pay equity and peer group construction. As long-term investors, we support remuneration policies that align with long-term shareholder returns.

 

  I. Social, Political and Environmental Issues. Shareholders in the U.S. and certain other markets submit proposals encouraging changes in company disclosure and practices relatedto particular corporate, social, political and environmental matters. We consider how to vote on the proposals on a case-by-case basis to determine likely impacts on shareholder value. we seek to balance concerns on reputational and other risks that lie behind a proposal against costs of implementation, while considering appropriate shareholder and management perogatives. We may abstain from voting on proposals that do not have a readily determinable financial impact on shareholder value. We support proposals that, if implemented, would enhance useful disclosure, but we generally vote against proposals requesting reports that we believe are duplicative, related to matters not material to the business, or that would impose unnecessary or excessive costs. We believe that certain social and environmental shareholder proposals may intrude excessively on management prerogatives, which can lead us to oppose them.

 

  J. Fund of Funds. Certain Funds advised by an MSIM Affiliate invest only in other MSIM Funds. If an underlying fund has a shareholder meeting, in order to avoid any potential conflict of interest, such proposals will be voted in the same proportion as the votes of the other shareholders of the underlying fund, unless otherwise determined by the Proxy Review Committee.

 

III. ADMINISTRATION OF POLICY

The MSIM Proxy Review Committee (the “Committee”) has overall responsibility for the Policy. The Committee, which is appointed by MSIM’s Long-Only Executive Commitee, consists of investment professionals who represent the different investment disciplines and geographic locations of the firm, and


is chaired by the director of the Corporate Governance Team (“CGT”). Because proxy voting is an investment responsibility and impacts shareholder value, and because of their knowledge of companies and markets, portfolio managers and other members of investment staff play a key role in proxy voting, although the Committee has final authority over proxy votes.

The CGT Director is responsible for identifying issues that require Committee deliberation or ratification. The CGT, working with advice of investment teams and the Committee, is responsible for voting on routine items and on matters that can be addressed in line with these Policy guidelines. The CGT has responsibility for voting case-by-case where guidelines and precedent provide adequate guidance.

The Committee will periodically review and have the authority to amend, as necessary, the Policy and establish and direct voting positions consistent with the Client Proxy Standard.

CGT and members of the Committee may take into account Research Providers’ recommendations and research as well as any other relevant information they may request or receive, including portfolio manager and/or analyst comments and research, as applicable. Generally, proxies related to securities held in accounts that are managed pursuant to quantitative, index or index-like strategies (“Index Strategies”) will be voted in the same manner as those held in actively managed accounts, unless economic interests of the accounts differ. Because accounts managed using Index Strategies are passively managed accounts, research from portfolio managers and/or analysts related to securities held in these accounts may not be available. If the affected securities are held only in accounts that are managed pursuant to Index Strategies, and the proxy relates to a matter that is not described in this Policy, the CGT will consider all available information from the Research Providers, and to the extent that the holdings are significant, from the portfolio managers and/or analysts.

 

  A. Committee Procedures

The Committee meets at least quarterly and reviews and considers changes to the Policy at least annually. Through meetings and/or written communications, the Committee is responsible for monitoring and ratifying “split votes” (i.e., allowing certain shares of the same issuer that are the subject of the same proxy solicitation and held by one or more MSIM portfolios to be voted differently than other shares) and/or “override voting” (i.e., voting all MSIM portfolio shares in a manner contrary to the Policy). The Committee will review developing issues and approve upcoming votes, as appropriate, for matters as requested by CGT.

The Committee reserves the right to review voting decisions at any time and to make voting decisions as necessary to ensure the independence and integrity of the votes.

 

  B. Material Conflicts of Interest

In addition to the procedures discussed above, if the CGT Director determines that an issue raises a material conflict of interest, the CGT Director may request a special committee to review, and recommend a course of action with respect to, the conflict(s) in question (“Special Committee”).

A potential material conflict of interest could exist in the following situations, among others:

 

  1. The issuer soliciting the vote is a client of MSIM or an affiliate of MSIM and the vote is on a matter that materially affects the issuer.

 

  2. The proxy relates to Morgan Stanley common stock or any other security issued by Morgan Stanley or its affiliates except if echo voting is used, as with MSIM Funds, as described herein.


  3. Morgan Stanley has a material pecuniary interest in the matter submitted for a vote (e.g., acting as a financial advisor to a party to a merger or acquisition for which Morgan Stanley will be paid a success fee if completed).

If the CGT Director determines that an issue raises a potential material conflict of interest, depending on the facts and circumstances, the issue will be addressed as follows:

 

  1. If the matter relates to a topic that is discussed in this Policy, the proposal will be voted as per the Policy.

 

  2. If the matter is not discussed in this Policy or the Policy indicates that the issue is to be decided case-by-case, the proposal will be voted in a manner consistent with the Research Providers, provided that all the Research Providers consulted have the same recommendation, no portfolio manager objects to that vote, and the vote is consistent with MSIM’s Client Proxy Standard.

 

  3. If the Research Providers’ recommendations differ, the CGT Director will refer the matter to a Special Committee to vote on the proposal, as appropriate.

Any Special Committee shall be comprised of the CGT Director and at least two portfolio managers (preferably members of the Committee) as approved by the Committee. The CGT Director may request non-voting participation by MSIM’s General Counsel or his/her designee and the Chief Compliance Officer or his/her designee. In addition to the research provided by Research Providers, the Special Committee may request analysis from MSIM Affiliate investment professionals and outside sources to the extent it deems appropriate.

 

  C. Proxy Voting Reporting

The CGT will document in writing all Committee and Special Committee decisions and actions, which documentation will be maintained by the CGT for a period of at least six years. To the extent these decisions relate to a security held by an MSIM Fund, the CGT will report the decisions to each applicable Board of Trustees/Directors of those Funds at each Board’s next regularly scheduled Board meeting. The report will contain information concerning decisions made during the most recently ended calendar quarter immediately preceding the Board meeting.

MSIM will promptly provide a copy of this Policy to any client requesting it. MSIM will also, upon client request, promptly provide a report indicating how each proxy was voted with respect to securities held in that client’s account.

MSIM’s Legal Department is responsible for filing an annual Form N-PX on behalf of each MSIM Fund for which such filing is required, indicating how all proxies were voted with respect to such Fund’s holdings.

APPENDIX A

The following procedures apply to accounts managed by Morgan Stanley AIP GP LP and Private Investment Partners Inc.(“AIP”).

Generally, AIP will follow the guidelines set forth in Section II of MSIM’s Proxy Voting Policy and Procedures. To the extent that such guidelines do not provide specific direction, or AIP determines that consistent with the Client Proxy Standard, the guidelines should not be followed, the Proxy Review Committee has delegated the voting authority to vote securities held by accounts managed by AIP to the Fund of Hedge Funds investment team, the Private Equity Fund of Funds investment team or the Private


Equity Real Estate Fund of Funds investment team of AIP. A summary of decisions made by the investment teams will be made available to the Proxy Review Committee for its information at the next scheduled meeting of the Proxy Review Committee.

In certain cases, AIP may determine to abstain from determining (or recommending) how a proxy should be voted (and therefore abstain from voting such proxy or recommending how such proxy should be voted), such as where the expected cost of giving due consideration to the proxy does not justify the potential benefits to the affected account(s) that might result from adopting or rejecting (as the case may be) the measure in question.

Waiver of Voting Rights

For regulatory reasons, AIP may either 1) invest in a class of securities of an underlying fund (the “Fund”) that does not provide for voting rights; or 2) waive 100% of its voting rights with respect to the following:

 

  1. Any rights with respect to the removal or replacement of a director, general partner, managing member or other person acting in a similar capacity for or on behalf of the Fund (each individually a “Designated Person,” and collectively, the “Designated Persons”), which may include, but are not limited to, voting on the election or removal of a Designated Person in the event of such Designated Person’s death, disability, insolvency, bankruptcy, incapacity, or other event requiring a vote of interest holders of the Fund to remove or replace a Designated Person; and

 

  2. Any rights in connection with a determination to renew, dissolve, liquidate, or otherwise terminate or continue the Fund, which may include, but are not limited to, voting on the renewal, dissolution, liquidation, termination or continuance of the Fund upon the occurrence of an event described in the Fund’s organizational documents; provided, however, that, if the Fund’s organizational documents require the consent of the Fund’s general partner or manager, as the case may be, for any such termination or continuation of the Fund to be effective, then AIP may exercise its voting rights with respect to such matter.

Approved by Morgan Stanley Funds Board on September 27-28, 2011

 

ITEM 8. PORTFOLIO MANAGERS.

(a)(1) This information is as of March 8, 2012:

The personnel of the Adviser who have primary responsibility for management of the Partnership are:

Mustafa A. Jama. Mr. Jama is a Managing Director of Morgan Stanley Investment Management Inc. (“MSIM”). Effective February 2005, Mr. Jama began serving as Chief Investment Officer and Head of Morgan Stanley AIP Fund of Hedge Funds of Morgan Stanley AIP and, since 2004, he has been a portfolio manager for several Morgan Stanley AIP Fund of Hedge Funds portfolios, including the Fund. Prior to joining MSIM in January 2004, he was with Glenwood Capital Investments where he was a senior investment professional and a member of its Investment Committee. Previously, he was a portfolio manager at Deutsche Asset Management in its hedge fund group, focusing on long/short equity, fixed income, and convertible arbitrage strategies. He holds an M.B.A. from Harvard Business School and a B.S. in civil engineering from Southern University.


José F. González-Heres. Mr. González-Heres is a Managing Director of MSIM and a portfolio manager for several Morgan Stanley AIP Fund of Hedge Funds portfolios, including the Fund. He was promoted to Portfolio Manager in 2004 after having served as Senior Research Analyst since 2001. Prior to joining MSIM, he served as Chief Executive Officer of Suggestionator, Inc., a privately held software company. Mr. González-Heres has also worked as an Investment Banker in the Public Finance departments of Bear, Stearns & Co., Inc. and Prudential Securities Inc. Prior to his investment banking positions, Mr. González-Heres worked at IBM Corporation in Engineering, Sales, Marketing and Consulting and at IBM Credit Corporation in its Corporate Finance Department. While at IBM, he earned a U.S. and international patent for his work on algorithms. Mr. González-Heres is a past Board Member of the City of Boca Raton and Florida’s Telecommunications Advisory Board. He holds an M.B.A. from the Yale University School of Management in Finance and Investments and a B.S. in Electrical Engineering from Northwestern University.

Paresh Bhatt. Mr. Bhatt is a Managing Director of MSIM and a portfolio manager for several Morgan Stanley AIP Fund of Hedge Funds portfolios, including the Fund. He was promoted to portfolio manager in July 2004 after having served as a Research Analyst since he joined MSIM in May 2003. Prior to joining MSIM, he was a Senior Investment Analyst with SEI Investments where he managed multi-manager global equity and Europe, Australia and Far East (EAFE) portfolios as well as led due diligence activities on institutional quality funds of hedge funds. Prior to joining SEI Investments, he was an Equity Analyst for Granite Associates where he conducted equity research in the technology, media and telecom sector and monitored hedge fund investments. He has also held positions at Lehman Brothers and Bankers Trust, where he focused on credit risk management of derivatives portfolios. Mr. Bhatt began his career with the Federal Reserve Board. Mr. Bhatt holds an M.B.A. from the Wharton School in Finance and a B.A. in Economics from Union College.

Mark L.W. van der Zwan, CFA. Mr. van der Zwan is a Managing Director of MSIM and a portfolio manager for several Morgan Stanley AIP Fund of Hedge Funds portfolios, including the Fund since 2006. He was promoted to portfolio manager in September 2006 after having served as an investment analyst since he joined MSIM in September 2004. He is also a member of the Investment Committee. Prior to his current role, Mr. van der Zwan was an investment analyst. Before joining the firm, Mr. van der Zwan was a senior consultant with Alan D. Biller & Associates, Inc., an institutional investment consulting firm with approximately $40 billion in assets under advisory. He has also held various positions at the National Research Council of Canada where he conducted advanced computational modeling research. Mr. van der Zwan received both a B.Sc. with honors in chemistry and an M.B.A. in finance from Queen’s University in Ontario, Canada. Mr. van der Zwan holds the Chartered Financial Analyst designation.

Lawrence Berner. Mr. Berner is an Executive Director of MSIM and a portfolio manager for several Morgan Stanley AIP Fund of Hedge Funds portfolios, including the Fund since 2008. Mr. Berner joined the Morgan Stanley AIP Fund of Hedge Funds team in April 2006 as an investment analyst, focusing on credit and event driven strategies including merger arbitrage, equity special situations, credit arbitrage, capital structure arbitrage and distressed investing, he is also a member of the Investment Committee. He joined Morgan Stanley AIP in 2006. Before joining AIP, Mr. Berner was an analyst at Man-Glenwood Capital Investments for six years where he was responsible for hedge fund manager selection, portfolio construction and quantitative analysis. Prior to Man-Glenwood, he was a risk analyst at ABN Amro, focusing on fixed income and foreign exchange derivatives. Before that, he was a commodities research analyst at Salomon Smith Barney. Mr. Berner received both a B.S. in computer science and a B.A. in mathematics from the University of Texas, Austin. He also received an M.S. in financial mathematics from The University of Chicago. Mr. Berner holds the Chartered Financial Analyst designation.


Jarrod Quigley. Mr. Quigley is an Executive Director of MSIM and a portfolio manager for several Morgan Stanley AIP Fund of Hedge Funds portfolios, including the Fund since January 2010. Previously, he was an investment analyst at Morgan Stanley AIP since he joined MSIM in 2004, focusing on multi-strategy, convertible bond arbitrage, and other relative value arbitrage strategies. Before joining Morgan Stanley AIP, Mr. Quigley was in the investment banking department at A.G. Edwards, where he was involved in corporate finance and acquisitions for the financial institutions group. Mr. Quigley received a B.S. in business management from Babson College and holds the Chartered Financial Analyst designation.

Eric Stampfel. Mr. Stampfel is an Executive Director of MSIM and a portfolio manager for the Morgan Stanley AIP Fund of Hedge Funds portfolios, including the Fund since January 2011, focusing on the long/short equity strategy. Mr. Stampfel is also a member of the Investment Committee. He joined Morgan Stanley in 2010. Previously, he was vice president and global head of long/short equity at Ivy Asset Management. Prior to that, he was a senior equity analyst at Cambium Capital Management and a senior equity analyst at Kingdon Capital Management where he focused on long/short stock selection. Mr. Stampfel received a B.S. in accounting from Villanova University. He is a member of the New York Society of Security Analysts and an affiliate member of the Market Technicians Association. He holds both the Chartered Alternative Investment Analyst and the Chartered Financial Analyst designations.

(a)(2)(i-iii) Other Accounts Managed by the Portfolio Managers

Because the portfolio managers manage assets for other investment companies, pooled investment vehicles, and/or other accounts (including institutional clients, pension plans and certain high net worth individuals), there may be an incentive to favor one client over another resulting in conflicts of interest. For instance, the Adviser may receive fees from certain accounts that are higher than the fee it receives from the Fund, or it may receive a performance-based fee on certain accounts. In those instances, the portfolio managers may have an incentive to favor the higher and/or performance-based fee accounts over the Fund. In addition, a conflict of interest could exist to the extent the Adviser has proprietary investments in certain accounts, where portfolio managers have personal investments in certain accounts or when certain accounts are investment options in the Adviser’s employee benefits and/or deferred compensation plans. The portfolio manager may have an incentive to favor these accounts over others. If the Adviser manages accounts that engage in short sales of securities of the type in which the Fund invests, the Adviser could be seen as harming the performance of the Fund for the benefit of the accounts engaging in short sales if the short sales cause the market value of the securities to fall. The Adviser has adopted trade allocation and other policies and procedures that it believes are reasonably designed to address these and other conflicts of interest.

The following tables show information regarding accounts (other than the Fund) managed by each named portfolio manager as of December 31, 2011.

 

Mustafa A. Jama

Jose F. Gonzalez-Heres

Paresh Bhatt

Mark L. W. van der Zwan

Lawrence Berner

Jarrod Quigley

Eric Stampfel

   Number of Accounts    Total Assets in
Accounts ($ billion)

Registered Investment Companies

   Three    $    1.0

Other Pooled Investment Vehicles

   Twelve    $    2.0

Other Accounts

   Thirty-four    $    4.6


(a)(2)(iv) Conflicts of Interests -

THE ADVISER AND THE INVESTMENT MANAGERS

The Adviser also provides investment advisory and other services, directly and through affiliates, to various entities and accounts other than the Fund (“Adviser Accounts”). The Fund has no interest in these activities. The Adviser and the investment professionals who, on behalf of the Adviser, provide investment advisory services to the Fund are engaged in substantial activities other than on behalf of the Fund, may have differing economic interests in respect of such activities, and may have conflicts of interest in allocating their time and activity between the Fund and the Adviser Accounts. Such persons devote only so much time to the affairs of the Fund as in their judgment is necessary and appropriate.

Set out below are practices that the Adviser may follow. Although the Adviser anticipates that Investment Managers will follow practices similar to those described below, no guarantee or assurances can be made that similar practices will be followed or that an Investment Manager will adhere to, and comply with, its stated practices. An Investment Manager may provide investment advisory and other services, directly or through affiliates, to various entities and accounts other than the Investment Funds.

PARTICIPATION IN INVESTMENT OPPORTUNITIES

The Adviser expects to employ an investment program for the Fund that is substantially similar to the investment program (or, in some cases, to portions of the investment program) employed by it for certain Adviser Accounts. As a general matter, the Adviser will consider participation by the Fund in all appropriate investment opportunities that are under consideration for those Adviser Accounts. There may be circumstances, however, under which the Adviser will cause one or more Adviser Accounts to commit a larger percentage of their respective assets to an investment opportunity than that to which the Adviser will commit the Fund’s assets. There also may be circumstances under which the Adviser will consider participation by Adviser Accounts in investment opportunities in which the Adviser does not intend to invest on behalf of the Fund, or vice versa.

The Adviser evaluates for the Fund and for the Adviser Accounts a variety of factors that may be relevant in determining whether a particular investment opportunity or strategy is appropriate and feasible for the Fund or an Adviser Account at a particular time, including, but not limited to, the following: (1) the nature of the investment opportunity taken in the context of the other investments at the time; (2) the liquidity of the investment relative to the needs of the particular entity or account; (3) the availability of the opportunity (i.e., size of obtainable position); (4) the transaction costs involved; and (5) the investment or regulatory limitations applicable to the particular entity or account. Because these considerations may differ for the Fund and the Adviser Accounts in the context of any particular investment opportunity, the investment activities of the Fund and the Adviser Accounts may differ from time to time. In addition, the fees and expenses of the Fund differ from those of the Adviser Accounts. Accordingly, the future performance of the Fund and the Adviser Accounts will vary.

When the Adviser determines that it would be appropriate for the Fund and one or more Adviser Accounts to participate in an investment transaction in the same Investment Fund or other investment at the same time, it will attempt to aggregate, place and allocate orders on a basis that the Adviser believes to be fair and equitable, consistent with its responsibilities under applicable law. Decisions in this regard are necessarily subjective and there is no requirement that the Fund participate, or participate to the same extent as the Adviser Accounts, in all investments or trades. However, no participating entity or account will receive preferential treatment over any other and the Adviser will take steps to ensure that no


participating entity or account will be systematically disadvantaged by the aggregation, placement and allocation of orders and investments.

Situations may occur, however, where the Fund could be disadvantaged because of the investment activities conducted by the Adviser for the Adviser Accounts. Such situations may be based on, among other things, the following: (1) legal restrictions or other limitations (including limitations imposed by Investment Managers with respect to Investment Funds) on the combined size of positions that may be taken for the Fund and/or the Adviser Accounts, thereby limiting the size of the Fund’s position or the availability of the investment opportunity; (2) the difficulty of liquidating an investment for the Fund and the Adviser Accounts where the market cannot absorb the sale of the combined positions; and (3) the determination that a particular investment is warranted only if hedged with an option or other instrument and there is a limited availability of such options or other instruments. In particular, the Fund may be legally restricted from entering into a “joint transaction” (as defined in the 1940 Act) with the Adviser Accounts with respect to the securities of an issuer without first obtaining exemptive relief from the SEC. See “Other Matters” below.

Directors, principals, officers, employees and affiliates of the Adviser and each Investment Manager may buy and sell securities or other investments for their own accounts and may have actual or potential conflicts of interest with respect to investments made on behalf of the Fund or an Investment Fund in which the Fund invests. As a result of differing trading and investment strategies or constraints, positions may be taken by directors, principals, officers, employees and affiliates of the Adviser or an Investment Manager, or by the Adviser for the Adviser Accounts, or by an Investment Manager on behalf of its own other accounts (“Investment Manager Accounts”) that are the same as, different from or made at a different time from that of, positions taken for the Fund or an Investment Fund.

Investment Managers or their affiliates may from time to time provide investment advisory or other services to private investment funds and other entities or accounts managed by the Adviser or its affiliates. In addition, Investment Managers or their affiliates may from time to time receive research products and services in connection with the brokerage services that affiliates of the Adviser may provide to one or more Investment Manager Accounts.

OTHER MATTERS

An Investment Manager may from time to time cause an Investment Fund to effect certain principal transactions in securities with one or more Investment Manager Accounts, subject to certain conditions. For example, these transactions may be made in circumstances in which the Investment Manager determined it was appropriate for the Investment Fund to purchase and an Investment Manager Account to sell, or the Investment Fund to sell and an Investment Manager Account to purchase, the same security or instrument on the same day. Future investment activities of the Investment Managers, or their affiliates, and the principals, partners, directors, officers or employees of the foregoing, may give rise to additional conflicts of interest.

The Adviser and its affiliates will not purchase securities or other property from, or sell securities or other property to, the Fund, except that the Fund may in accordance with rules under the 1940 Act engage in transactions with accounts that are affiliated with the Fund as a result of common officers, directors, advisers or managing general partners. These transactions would be effected in circumstances in which the Adviser determined that it would be appropriate for the Fund to purchase and another client to sell, or the Fund to sell and another client to purchase, the same security or instrument on the same day.

Future investment activities of the Adviser and its affiliates and their principals, partners, directors, officers or employees may give rise to conflicts of interest other than those described above.


(a)(3) Portfolio Manager Compensation Structure

Portfolio managers receive a combination of base compensation and discretionary compensation, comprising a cash bonus and several deferred compensation programs described below. The methodology used to determine portfolio manager compensation is applied across all funds/accounts managed by the portfolio managers.

BASE SALARY COMPENSATION. Generally, portfolio managers receive base salary compensation based on the level of their position with the Adviser.

DISCRETIONARY COMPENSATION. In addition to base compensation, portfolio managers may receive discretionary compensation.

Discretionary compensation can include:

 

   

Cash Bonus.

 

   

Morgan Stanley’s Long Term Incentive Compensation awards - a mandatory program that defers a portion of discretionary year-end compensation into restricted stock units or other awards based on Morgan Stanley common stock or other plans that are subject to vesting and other conditions. All long term incentive compensation awards are subject to clawback provisions where awards can be cancelled if an employee takes any action, or omits to take any action which; causes a restatement of Morgan Stanley’s consolidated financial results; or constitutes a violation of Morgan Stanley’s risk policies and standards.

 

   

Investment Management Alignment Plan (IMAP) awards - a mandatory program that defers a portion of discretionary year-end compensation and notionally invests it in designated funds advised by the Adviser or its affiliates. The award is subject to vesting and other conditions. Portfolio managers must notionally invest a minimum of 25% to a maximum of 100% of their IMAP deferral account into a combination of the designated funds they manage that are included in the IMAP fund menu, which may or may not include the Fund. In addition to the clawbacks listed above for long term incentive compensation awards, the provision on IMAP awards is further strengthened such that it may also be triggered if any employee’s actions cause substantial financial loss on a trading strategy, investment, commitment or other holding provided that previous gains on those position were relevant to the employees’ prior year compensation decisions.

 

   

Voluntary Deferred Compensation Plans - voluntary programs that permit certain employees to elect to defer a portion of their discretionary year-end compensation and notionally invest the deferred amount across a range of designated investment funds, which may include funds advised by the Adviser or its affiliates.

Several factors determine discretionary compensation, which can vary by portfolio management team and circumstances. These factors include:

 

   

Revenues generated by the investment companies, pooled investment vehicles and other accounts managed by the portfolio manager.

 

   

The investment performance of the funds/accounts managed by the portfolio manager.


   

Contribution to the business objectives of the Adviser.

 

   

The dollar amount of assets managed by the portfolio manager.

 

   

Market compensation survey research by independent third parties.

 

   

Other qualitative factors, such as contributions to client objectives.

 

   

Performance of Morgan Stanley and Morgan Stanley Investment Management, and the overall performance of the investment team(s) of which the portfolio manager is a member.

(a)(4)Securities Ownership of Portfolio Managers

As of December 31, 2011, the dollar range of securities beneficially owned by each portfolio manager in the Fund is shown below:

 

Mustafa A. Jama:

   None

Jose F. Gonzalez-Heres:

   None

Paresh Bhatt:

   None

Mark L. W. van der Zwan:

   None

Lawrence Berner:

   None

Jarrod Quigley:

   None

Eric Stampfel:

   None

(b) 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, as the subject to the disclosure required by Item 2.

 

  (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/ Jacques Chappuis

  Name:  Jacques Chappuis
  Title:  President
  Date:  March 8, 2012

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/ Jacques Chappuis

  Name:  Jacques Chappuis
  Title:  Principal Executive Officer
  Date:  March 8, 2012

 

By:  

/s/ Noel Langlois

  Name:  Noel Langlois
  Title:  Principal Financial Officer
  Date:  March 8, 2012