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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORMN-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, Pennsylvania19428-2881
(Address of principal executive offices)
Registrant’s Telephone Number, including Area Code: (610)260-7600
Kara Fricke, Esq.
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, New York 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: June 30, 2019
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ITEM 1. | REPORTS TO STOCKHOLDERS. The Registrant’s semi-annual report transmitted to limited partners pursuant to Rule30e-1 under the Investment Company Act of 1940 is as follows: |
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
MORGAN STANLEY INSTITUTIONAL FUND OF HEDGE FUNDS LP | ||
Financial Statements (Unaudited) | ||
For the Period from January 1, 2019 to June 30, 2019 |
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Financial Statements (Unaudited)
For the Period from January 1, 2019 to June 30, 2019
Financial Statements (Unaudited) | ||||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
5 | ||||
9 | ||||
20 | ||||
Proxy Voting Policies and Procedures and Proxy Voting Record | 23 | |||
23 |
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Statement of Assets, Liabilities and Partners’ Capital (Unaudited)
June 30, 2019
Assets | ||||
Investments in investment funds, at fair value (cost $ 182,286,447) | $ | 248,994,115 | ||
Cash and cash equivalents | 1,962,393 | |||
Receivable for investments sold | 41,085,667 | |||
Due from Feeder Fund | 125,457 | |||
Other assets | 28,623 | |||
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Total assets | $ | 292,196,255 | ||
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Liabilities and partners’ capital | ||||
Payable for capital repurchases | $ | 52,152,096 | ||
Line of credit payable | 3,500,000 | |||
Withholding tax payable | 279,161 | |||
Management fee payable | 259,841 | |||
Accrued expenses and other liabilities | 507,085 | |||
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Total liabilities | 56,698,183 | |||
Partners’ capital | 235,498,072 | |||
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Total liabilities and partners’ capital | $ | 292,196,255 | ||
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The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.
1
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Statement of Operations (Unaudited)
For the Period January 1, 2019 to June 30, 2019
Investment income | ||||
Dividend | $ | 97,880 | ||
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Expenses | ||||
Management fees | 882,928 | |||
Interest expense | 187,746 | |||
Accounting and administration fees | 108,603 | |||
Professional fees | 99,203 | |||
Custody fees | 43,602 | |||
Registration fees | 19,220 | |||
Directors’ fees | 8,822 | |||
Other | 38,694 | |||
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Total expenses | 1,388,818 | |||
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Net investment income (loss) | (1,290,938 | ) | ||
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Realized and unrealized gain (loss) from investments | ||||
Net realized gain (loss) from investments in investment funds | 29,347,732 | |||
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Net realized gain (loss) from investments | 29,347,732 | |||
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Net change in unrealized appreciation/depreciation on investments in investment funds | (12,365,846 | ) | ||
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Net change in unrealized appreciation/depreciation on investments | (12,365,846 | ) | ||
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Net realized and unrealized gain (loss) from investments | 16,981,886 | |||
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Net increase (decrease) in partners’ capital resulting from operations | $ | 15,690,948 | ||
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The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.
2
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Statements of Changes in Partners’ Capital (Unaudited)
General | Limited | |||||||||||
Partner | Partners | Total | ||||||||||
Partners’ capital at December 31, 2017 | $ | 790,219 | $ | 471,723,844 | $ | 472,514,063 | ||||||
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For the year ended December 31, 2018 | ||||||||||||
Increase (decrease) in partners’ capital: | ||||||||||||
From operations | ||||||||||||
Net investment income (loss) | $ | (5,939 | ) | $ | (3,078,068 | ) | $ | (3,084,007 | ) | |||
Net realized gain (loss) from investments | 50,913 | 26,656,249 | 26,707,162 | |||||||||
Net change in unrealized appreciation/depreciation on investments | (40,881 | ) | (19,990,067 | ) | (20,030,948 | ) | ||||||
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Net increase (decrease) in partners’ capital resulting from operations | 4,093 | 3,588,114 | 3,592,207 | |||||||||
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From partners’ capital transactions Capital repurchases | — | (125,888,207 | ) | (125,888,207 | ) | |||||||
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Net increase (decrease) in partners’ capital from capital transactions | — | (125,888,207 | ) | (125,888,207 | ) | |||||||
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Net increase (decrease) in partners’ capital | 4,093 | (122,300,093 | ) | (122,296,000 | ) | |||||||
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Partners’ capital at December 31, 2018 | $ | 794,312 | $ | 349,423,751 | $ | 350,218,063 | ||||||
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For the period from January 1, 2019 to June 30, 2019 | ||||||||||||
Increase (decrease) in partners’ capital: | ||||||||||||
From operations | ||||||||||||
Net investment income (loss) | $ | (3,283 | ) | $ | (1,287,655 | ) | $ | (1,290,938 | ) | |||
Net realized gain (loss) from investments | 72,546 | 29,275,186 | 29,347,732 | |||||||||
Net change in unrealized appreciation/depreciation on investments | (29,876 | ) | (12,335,970 | ) | (12,365,846 | ) | ||||||
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Net increase (decrease) in partners’ capital resulting from operations | 39,387 | 15,651,561 | 15,690,948 | |||||||||
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From partners’ capital transactions | ||||||||||||
Capital contributions | — | 6,500,000 | 6,500,000 | |||||||||
Capital repurchases | — | (136,910,939 | ) | (136,910,939 | ) | |||||||
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Net increase (decrease) in partners’ capital from capital transactions | — | (130,410,939 | ) | (130,410,939 | ) | |||||||
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Net increase (decrease) in partners’ capital | 39,387 | (114,759,378 | ) | (114,719,991 | ) | |||||||
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Partners’ capital at June 30, 2019 | $ | 833,699 | $ | 234,664,373 | $ | 235,498,072 | ||||||
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The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Statement of Cash Flows (Unaudited)
For the Period January 1, 2019 to June 30, 2019
Cash flows from operating activities | ||||
Net increase (decrease) in partners’ capital resulting from operations | $ | 15,690,948 | ||
Adjustments to reconcile net increase (decrease) in partners’ capital resulting from operations to net cash provided by (used in) operating activities: | ||||
Net change in unrealized appreciation/depreciation on investments in investment funds | 12,365,846 | |||
Net realized (gain) loss from investments in investment funds | (29,347,732 | ) | ||
Proceeds from sales of investments in investment funds | 133,445,642 | |||
(Increase) decrease in receivable for investments sold | (5,317,290 | ) | ||
(Increase) decrease in due from Feeder Fund | (2,970 | ) | ||
(Increase) decrease in other assets | (5,352 | ) | ||
Increase (decrease) in management fee payable | (100,682 | ) | ||
Increase (decrease) in accrued expenses and other liabilities | 92,637 | |||
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Net cash provided by (used in) operating activities | 126,821,047 | |||
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Cash flows from financing activities | ||||
Proceeds from advances on line of credit | 37,200,000 | |||
Repayments of advances on line of credit | (44,500,000 | ) | ||
Capital contributions | 6,500,000 | |||
Capital repurchases, net of change in payable for capital repurchases | (127,330,192 | ) | ||
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Net cash provided by (used in) financing activities | (128,130,192 | ) | ||
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Net change in cash and cash equivalents | (1,309,145 | ) | ||
Cash and cash equivalents at beginning of period | 3,271,538 | |||
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Cash and cash equivalents at end of period | $ | 1,962,393 | ||
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Supplemental disclosure of cash flow information: | ||||
Cash paid during the period for interest | $ | 213,909 | ||
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The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.
4
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Schedule of Investments (Unaudited)
June 30, 2019
Next | ||||||||||||||||||||||||
First | Percent of | Available | ||||||||||||||||||||||
Acquisition | Fair | Partners’ | Redemption | |||||||||||||||||||||
Description | Date | Cost | Value | Capital | Date* | Liquidity** | ||||||||||||||||||
Investment Funds | ||||||||||||||||||||||||
Commodity Trading Advisors - Managed Futures | ||||||||||||||||||||||||
IPM Systematic Macro Fund LP | 8/1/2018 | $ | 7,088,375 | $ | 6,768,858 | 2.87 | % | 7/31/2019 | Monthly | |||||||||||||||
Two Sigma Absolute Return Macro Enhanced Fund, LP | 4/1/2016 | 7,525,000 | 8,173,367 | 3.47 | 7/31/2019 | Monthly | ||||||||||||||||||
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Total Commodity Trading Advisors - Managed Futures | 14,613,375 | 14,942,225 | 6.34 | |||||||||||||||||||||
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Distressed | ||||||||||||||||||||||||
VR Global Onshore Fund, L.P. | 10/1/2016 | 10,940,540 | 13,196,176 | 5.60 | 9/30/2019 | Quarterly | ||||||||||||||||||
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Total Distressed | 10,940,540 | 13,196,176 | 5.60 | |||||||||||||||||||||
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Equity Long/Short - High Hedge | ||||||||||||||||||||||||
Deep Basin Long-Short Fund LP | 11/1/2018 | 5,900,000 | 6,123,126 | 2.60 | 9/30/2019 | Quarterly | ||||||||||||||||||
Holocene Advisors Fund LP | 5/1/2017 | 9,075,000 | 11,229,721 | 4.77 | 9/30/2019 | Quarterly | ||||||||||||||||||
Magnetar Equity Opportunities Fund LLC | 2/1/2011 | 985,541 | 4,995,927 | 2.12 | 7/31/2019 | Monthly | ||||||||||||||||||
Millennium USA, L.P. | 8/1/2008 | 3,374,932 | 6,510,415 | 2.76 | 9/30/2019 | Quarterly | ||||||||||||||||||
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Total Equity Long/Short - High Hedge | 19,335,473 | 28,859,189 | 12.25 | |||||||||||||||||||||
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Equity Long/Short - Opportunistic | ||||||||||||||||||||||||
Boldhaven Fund | 8/1/2018 | 10,000,000 | 10,546,903 | 4.48 | 9/30/2019 | Quarterly | ||||||||||||||||||
Castle Hook Fund LP | 11/1/2016 | 5,225,913 | 5,363,198 | 2.28 | 9/30/2019 | Quarterly | ||||||||||||||||||
Pelham Global Financials Fund LP | 6/1/2017 | 7,108,439 | 7,688,966 | 3.26 | 9/30/2019 | Monthly | ||||||||||||||||||
Pelham Long/Short Fund LP | 11/1/2009 | 6,025,318 | 9,707,358 | 4.12 | (a) | (a) | ||||||||||||||||||
Pleiad Asia Onshore Feeder Fund | 8/1/2015 | 4,978,600 | 5,323,718 | 2.26 | 9/30/2019 | Quarterly | ||||||||||||||||||
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Total Equity Long/Short - Opportunistic | 33,338,270 | 38,630,143 | 16.40 | |||||||||||||||||||||
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The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.
5
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Schedule of Investments (Unaudited) (continued)
June 30, 2019
Next | ||||||||||||||||||||||||
First | Percent of | Available | ||||||||||||||||||||||
Acquisition | Fair | Partners’ | Redemption | |||||||||||||||||||||
Description | Date | Cost | Value | Capital | Date* | Liquidity** | ||||||||||||||||||
Investment Funds (continued) | ||||||||||||||||||||||||
Event Driven Equity | ||||||||||||||||||||||||
Sachem Head LP | 10/1/2014 | $ | 2,014,676 | $ | 2,555,558 | 1.09 | % | 9/30/2019 | Quarterly | |||||||||||||||
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Total Event Driven Equity | 2,014,676 | 2,555,558 | 1.09 | |||||||||||||||||||||
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Fixed Income Arbitrage | ||||||||||||||||||||||||
Obsidian Relative Value Strategy Fund, Ltd. | 9/1/2018 | 11,000,000 | 11,319,978 | 4.81 | 8/31/2019 | Monthly | ||||||||||||||||||
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Total Fixed Income Arbitrage | 11,000,000 | 11,319,978 | 4.81 | |||||||||||||||||||||
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Macro | ||||||||||||||||||||||||
AKAZ Onshore Fund LP | 11/1/2018 | 5,050,080 | 4,657,470 | 1.98 | 9/30/2019 | Quarterly | ||||||||||||||||||
Autonomy Global Macro Fund L.P. | 11/1/2012 | 7,698,757 | 13,372,249 | 5.68 | 8/31/2019 | Monthly | ||||||||||||||||||
Brevan Howard US Rates Opportunities Fund L.P. | 12/1/2018 | 1,800,000 | 2,001,439 | 0.85 | 7/31/2019 | Monthly | ||||||||||||||||||
D.E. Shaw Oculus Fund, L.L.C. | 11/1/2004 | 3,400,555 | 6,232,304 | 2.65 | 9/30/2019 | Quarterly | ||||||||||||||||||
Element Capital US Feeder Fund LLC | 4/1/2017 | 7,439,420 | 9,030,684 | 3.83 | 9/30/2019 | Quarterly | ||||||||||||||||||
Gemsstock Fund LP | 2/1/2018 | 8,250,000 | 6,962,614 | 2.96 | 7/31/2019 | Monthly | ||||||||||||||||||
Rokos Global Macro Fund LP | 11/1/2015 | 6,595,436 | 8,120,263 | 3.45 | 9/30/2019 | Monthly | ||||||||||||||||||
X2 Opportunistic Debt Fund, LLC | 3/1/2017 | 5,694,562 | 7,430,509 | 3.15 | 9/30/2019 | Quarterly | ||||||||||||||||||
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Total Macro | 45,928,810 | 57,807,532 | 24.55 | |||||||||||||||||||||
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Merger/Risk Arbitrage | ||||||||||||||||||||||||
Castlerigg Merger Arbitrage Enhanced Fund, L.P. | 9/1/2017 | 8,911,954 | 9,748,679 | 4.14 | 8/31/2019 | Monthly | ||||||||||||||||||
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Total Merger/Risk Arbitrage | 8,911,954 | 9,748,679 | 4.14 | |||||||||||||||||||||
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Mortgage Arbitrage | ||||||||||||||||||||||||
Shelter Growth Opportunities Fund LP | 10/1/2015 | 4,271,817 | 5,750,699 | 2.44 | 9/30/2019 | Quarterly | ||||||||||||||||||
Tilden Park Investment Fund LP | 4/1/2012 | 3,353,721 | 7,906,434 | 3.36 | (a) | (a) | ||||||||||||||||||
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Total Mortgage Arbitrage | 7,625,538 | 13,657,133 | 5.80 | |||||||||||||||||||||
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The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Schedule of Investments (Unaudited) (continued)
June 30, 2019
Description | First Acquisition Date | Cost | Fair Value | Percent of Partners’ Capital | Next Available Redemption Date* | Liquidity** | ||||||||||||||||||
Investment Funds (continued) | ||||||||||||||||||||||||
Multi-Strategy | ||||||||||||||||||||||||
Citadel Wellington LLC | 7/1/2002 | $ | 5,577,671 | $ | 17,339,317 | 7.36 | % | 9/30/2019 | Quarterly | |||||||||||||||
QVT SLV Onshore Ltd. | 3/1/2012 | 97,984 | 220,775 | 0.09 | (a) | (a) | ||||||||||||||||||
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Total Multi-Strategy | 5,675,655 | 17,560,092 | 7.45 | |||||||||||||||||||||
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Statistical Arbitrage | ||||||||||||||||||||||||
D.E. Shaw Valence Fund, L.L.C. | 1/1/2015 | 9,325,000 | 14,214,211 | 6.04 | 9/30/2019 | Quarterly | ||||||||||||||||||
Two Sigma Spectrum U.S. Fund, LP | 4/1/2010 | 13,577,156 | 26,503,199 | 11.26 | 9/30/2019 | Quarterly (a) | ||||||||||||||||||
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Total Statistical Arbitrage | 22,902,156 | 40,717,410 | 17.30 | |||||||||||||||||||||
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Total Investments in Investment Funds | $ | 182,286,447 | 248,994,115 | 105.73 | ||||||||||||||||||||
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Liabilities in excess of Other Assets | (13,496,043 | ) | (5.73 | ) | ||||||||||||||||||||
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Total Partners’ Capital | $ | 235,498,072 | 100.00 | % | ||||||||||||||||||||
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The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.
7
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Schedule of Investments (Unaudited) (continued)
June 30, 2019
Detailed information about all of the Investment Funds’ portfolios is not available. Investment Funds arenon-income producing.
* | Investments in Investment Funds may be composed of multiple tranches. The Next Available Redemption Date relates to the earliest date after June 30, 2019 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 initiallock-up period, if any. Different tranches may have different liquidity terms. |
(a) | A portion or all of the Partnership’s interests in the Investment Fund have restricted liquidity. In addition to any redemption proceeds that may have already been received, that Partnership will continue to receive proceeds periodically as the Investment Fund is able to liquidate underlying investments. |
Percent of | ||||
Partners’ | ||||
Strategy Allocation | Capital | |||
Macro | 24.55 | % | ||
Statistical Arbitrage | 17.30 | |||
Equity Long/Short - Opportunistic | 16.40 | |||
Equity Long/Short - High Hedge | 12.25 | |||
Multi-Strategy | 7.45 | |||
Commodity Trading Advisors - Managed Futures | 6.34 | |||
Mortgage Arbitrage | 5.80 | |||
Distressed | 5.60 | |||
Fixed Income Arbitrage | 4.81 | |||
Merger/Risk Arbitrage | 4.14 | |||
Event Driven Equity | 1.09 | |||
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Total Investments in Investment Funds | 105.73 | % | ||
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The accompanying notes are an integral part of these financial statements and should be read in conjunction therewith.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (Unaudited)
June 30, 2019
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 aclosed-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 “Investment Adviser”) and Morgan Stanley Investment Management Limited serves as the Partnership’ssub-adviser (the“Sub-Adviser”) (collectively with the Investment Adviser, the “Adviser”). The Adviser is responsible for providingday-to-day investment management services to the Partnership, subject to the supervision of the Board. Each of the Investment Adviser andSub-Adviser is an affiliate of Morgan Stanley and is registered as an investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Partnership has no fixed termination date and will continue 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 June 30, 2019, Riverview Institutional Cayman Fund LP (the “Feeder Fund”), a feeder fund to the Partnership, represented 58.48% of the Partnership’s capital.
The Board has overall responsibility for monitoring and overseeing the Partnership’s investment program and its management and operations. None of the members of the Board are “interested persons” (as defined by the 1940 Act) of the Partnership, the Investment Adviser or theSub-Adviser.
Limited partnership interests of the Partnership (the “Interests”) may be issued at the beginning of each calendar month. Additional contributions for Interests by eligible investors are accepted into the Partnership at net asset value.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (Unaudited) (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 to5-25% of the Partnership’s capital. 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 June 30, 2019, the Holdback Amount was $2,736,719, which included any Holdback Amount for repurchases as of June 30, 2019, and was included in payable for share repurchases in the Statement of Assets and Liabilities.
On June 12, 2019, the Board approved thede-registration of the Partnership with the Securities and Exchange Commission, for which the Partnership is expected to file in the fourth quarter of 2019. The General Partner has elected to repurchase all Partnership interests owned by limited partners as of June 30, 2019 with capital account balances less than $5,000,000. The Partnership anticipates paying the applicable proceeds from the repurchase in late July or early August of 2019, less an audit holdback.
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 General Partner has determined that the Partnership is an investment company in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services – Investment Companies”, for the purpose of financial reporting. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases or decreases in partners’ capital from operations during the reporting period. Actual results could differ from those estimates. The Partnership’s financial statements are stated in United States dollars.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (Unaudited) (continued)
2. Significant Accounting Policies (continued)
Portfolio Valuation
The Partnership’s capital 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 June 30, 2019, all of the Partnership’s portfolio was comprised of investments in Investment Funds.
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 asset value of each such Investment Fund (“NAV”), 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.
Some of the Investment Funds may hold a portion of their assets in “side pockets,” which aresub-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. At June 30, 2019, $22,652,683 of the Partnership’s capital was invested in side pockets maintained by the Investment Funds.
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.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (Unaudited) (continued)
2. Significant Accounting Policies (continued)
Portfolio Valuation (continued)
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 the fair value of the Investment Fund. In order to determine the fair value of these Investment Funds, the Adviser has established the Fund of Hedge Funds Valuation Committee (the “Valuation Committee”). The Valuation Committee is responsible for determining and implementing the Partnership’s valuation policies and procedures, which have been adopted by the Board and are subject to Board supervision. The Valuation Committee consists of voting members from Morgan Stanley’s accounting, financial reporting and risk management groups, andnon-voting members from portfolio management, legal and compliance groups. A member of the portfolio management team may attend each Valuation Committee meeting to provide knowledge, insight, and recommendations on valuation issues. The portfolio management team will recommend to the Valuation Committee a fair value for an Investment Fund, using valuation techniques such as a market approach or income approach. In applying these valuation techniques, the portfolio management team uses their knowledge of the Investment Fund, industry expertise, information obtained through communication with the Investment Fund’s investment manager, and available relevant information as it considers material. After consideration of the portfolio management team’s recommendation, the Valuation Committee will determine, in good faith, the fair value of the Investment Fund. The Valuation Committee shall meet at least annually to analyze changes in fair value measurements. 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 these Investment Funds held by the Partnership been available.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash held on deposit and short term highly liquid investments that are readily convertible to known amounts of cash and have maturities of three months or less. Money market funds are recorded at fair value and are categorized as Level 1 securities as described in Note 4. As of June 30, 2019, the Partnership did not hold any cash equivalents.
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’ fair 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.
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.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (Unaudited) (continued)
2. Significant Accounting Policies (continued)
Income Recognition and Expenses (continued)
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.
Income and Withholding Taxes
The Partnership is required to withhold up to 30% U.S. tax from U.S. source dividends and 21% (37% fornon-corporatenon-U.S. investors) U.S. tax from effectively connected income allocable to itsnon-U.S. investors and to remit those amounts to the U.S. Internal Revenue Service on behalf of thenon-U.S. investors. The rate of withholding is generally the rate at which the particularnon-U.S. investor is subject to U.S. federal income tax. Thenon-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.
For the period from January 1, 2019 to June 30, 2019, the Partnership recorded an estimated tax withholding amount of $191,547, which is included in capital repurchases in the Statements 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 June 30, 2019. 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, open tax years under potential examination vary by jurisdiction, but at least each of the tax years in the four-year period ended December 31, 2018 remains subject to examination by major taxing authorities.
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.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (Unaudited) (continued)
3. Financial Instruments withOff-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 withoff-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 the Partnership’s interest in 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.
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), or 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) |
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.
For the period from January 1, 2019 to June 30, 2019, the Partnership did not have any transfers between Levels 1, 2, or 3.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (Unaudited) (continued)
4. Fair Value of Financial Instruments (continued)
As of June 30, 2019, all of the investments in Investment Funds are fair valued using the NAV as practical expedient and are therefore excluded from the fair value hierarchy.
5. Investments in Investment Funds
The following table summarizes the fair value and liquidity terms of the Investment Funds as of June 30, 2019, aggregated by investment strategy:
Redemption | Redemption Notice | |||||||
Fair Value | Frequency | Period (if | ||||||
Investment Funds | (if applicable) | applicable) | ||||||
Commodity Trading Advisors - Managed Futures(a) | $ | 14,942,225 | Monthly | 10-15 days | ||||
Distressed(b) | 13,196,176 | Quarterly | 45 days | |||||
Equity Long/Short - High Hedge(c) | 28,859,189 | Monthly to Quarterly | 30-90 days | |||||
Equity Long/Short - Opportunistic(d) | 38,630,143 | Monthly to Quarterly | 45-180 days | |||||
Event Driven Equity(e) | 2,555,558 | Quarterly | 65 days | |||||
Fixed Income Arbitrage(f) | 11,319,978 | Monthly | 60 days | |||||
Macro(g) | 57,807,532 | Monthly to Quarterly | 30-90 days | |||||
Merger/Risk Arbitrage(h) | 9,748,679 | Monthly | 45 days | |||||
Mortgage Arbitrage(i) | 13,657,133 | Quarterly | 90 days | |||||
Multi-Strategy(j) | 17,560,092 | Quarterly | 45 days | |||||
Statistical Arbitrage(k) | 40,717,410 | Quarterly | 55-75 days | |||||
|
| |||||||
Total Investment Funds | $ | 248,994,115 | ||||||
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(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) | The Investment Fund in this strategy invests 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. |
(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. |
(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. An Investment Fund tranche representing 4.12% of the Partnership’s net assets have restricted liquidity. The remaining restriction period for such Investment Fund tranches is unknown. |
(e) | 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. |
(f) | Investment Funds in this strategy seek to profit by exploiting pricing differences between related fixed income securities and their derivatives, neutralizing exposure to market risk by combining long and short positions. |
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (Unaudited) (continued)
5. Investments in Investment Funds (continued)
(g) | Investment Funds in this strategy invest by making leveraged bets on anticipated price movements of stock markets, interest rates foreign exchange and physical commodities. |
(h) | The Investment Fund in this strategy involves investing in securities of companies that are the subject of some form of extraordinary corporate transactions, including acquisition or merger proposals, exchange offers, cash tender offers and leveragedbuy-outs. |
(i) | Investment Funds in this strategy seek to exploit pricing differentials between various issues of mortgage-related bonds. An Investment Fund tranche representing 3.36% of the Partnership’s net assets have restricted liquidity. The remaining restriction period for such an Investment Fund tranche is unknown. |
(j) | Investment Funds in this strategy tactically allocate capital to various hedge fund strategies based on their perceived risk and return profiles. An Investment Fund tranche representing 0.09% of the Partnership’s net assets has restricted liquidity. The Partnership estimates the remaining restriction period for such an Investment Fund tranche to be 6 months. |
(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. Investment Fund tranches representing 2.05% of the Partnership’s net assets have restricted liquidity. The remaining restriction period for such Investment Fund tranches is unknown. |
As of June 30, 2019, 9.62% of the Partnership’s capital was invested in Investment Funds with restricted liquidity.
For the period from January 1, 2019 to June 30, 2019, aggregate purchases and proceeds from sales of investments in Investment Funds were $0 and $133,445,642, respectively.
The cost of investments for federal income tax purposes is adjusted for items of taxable income or loss allocated to the Partnership from the Investment Funds. The allocated taxable income or loss is reported to the Partnership by the Investment Funds on SchedulesK-1. Such tax adjustments for the year ended December 31, 2018 will be made once the Partnership has received all 2018 SchedulesK-1 from the Investment Funds.
6. Investment Receivables and Prepaid Investments
As of June 30, 2019, $41,085,667 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 atperiod-end or holdback amounts that will be received from certain Investment Funds after completion of their annual audit. Substantially all of the receivable balance was collected subsequent to the balance sheet date.
Prepaid investments in Investment Funds represent amounts transferred to Investment Funds prior toperiod-end relating to investments to be made effective July 1, 2019, pursuant to each Investment Fund’s operating agreements. As of June 30, 2019, the Partnership did not have any prepaid investments in Investment Funds.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (Unaudited) (continued)
7. Due from Feeder Fund
Due from Feeder Fund in the Statement of Assets, Liabilities and Partners’ Capital represents amounts due to the Partnership for expense payments made by the Partnership on behalf of the Feeder Fund. As of June 30, 2019, the Partnership has a receivable of $125,457 due from the Feeder Fund.
8. Management Fee, 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, 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. The Investment Adviser pays theSub-Adviser a portion of the management fees the Investment Adviser receives from the Partnership on a monthly basis. For the period from January 1, 2019 to June 30, 2019, the Partnership incurred management fees of $882,928, of which $259,841 was payable to the Adviser at June 30, 2019.
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 0.045% to 0.075%, based on the aggregate monthly net assets of certain Morgan Stanley products, including the Partnership, for which State Street serves as the administrator.
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 of 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 reasonableout-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 period. 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
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (Unaudited) (continued)
8. Management Fee, Related Party Transactions and Other (continued)
deferred compensation obligation and do not affect the net asset value of the Partnership. At June 30, 2019, the Partnership’s proportionate share of assets attributable to the DC Plan was $24,175, which is included in the Statement of Assets, Liabilities and Partners’ Capital under other assets and accrued expenses and other liabilities.
As of June 30, 2019, there was one Limited Partner, unaffiliated with Morgan Stanley, with a capital balance that represented approximately 41% of the Partnership’s capital.
9. Line of Credit
Effective December 16, 2016, the Partnership entered into a committed credit agreement with State Street for a revolving line of credit (the “Facility”). The maximum availability under the Facility is the lesser of $30,000,000 commitment amount or 20% of the Partnership’s adjusted capital. Effective March 1, 2018, the Partnership pays an annual commitment fee related to the Facility of 0.30% of the unused commitment amount. The annual interest rate on borrowings is the greater of the Federal Fund Rate plus 1.25% or the overnight USD LIBOR rate plus 1.25%. Under the terms of the Facility, borrowings are repayable within 180 days of the initial date of advance or no later than May 18, 2020, the termination date of the Facility. At June 30, 2019, there was $3,500,000 outstanding against the Facility. For the period from January 1, 2019 to June 30, 2019, the Partnership incurred interest expense of $187,746 in connection with the Facility. Borrowings are secured by the Partnership’s investments in Investment Funds. Detailed below is a summary information concerning the borrowings:
# of Days Outstanding | Average Daily Balance | Annualized Weighted Average Rate | ||||
154 | $ | 11,936,364 | 3.68% |
10. 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.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (Unaudited) (continued)
11. Financial Highlights
The following represents ratios to average Limited Partners’ capital and other financial highlights information for Limited Partners. The calculations below are not annualized for periods less than one year.
For the Period | For the Year | For the Year | For the Year | For the Year | For the Year | |||||||||||||||||||
from January 1, | Ended | Ended | Ended | Ended | Ended | |||||||||||||||||||
2019 to June 30, | December 31, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||
Total return(a) | 4.96 | % | 0.52 | % | 3.67 | % | 1.57 | % | 1.85 | % | 5.48 | % | ||||||||||||
Ratio of total expenses(b) | 0.43 | % | 0.76 | % | 0.74 | % | 0.74 | % | 0.75 | % | 0.73 | % | ||||||||||||
Ratio of net investment income (loss)(c) | (0.40 | %) | (0.73 | %) | (0.73 | %) | (0.74 | %) | (0.75 | %) | (0.73 | %) | ||||||||||||
Portfolio turnover | 0 | % | 16 | % | 16 | % | 23 | % | 23 | % | 30 | % | ||||||||||||
Limited Partners’ capital at end of the period (000s) | $ | 234,664 | $ | 349,424 | $ | 471,724 | $ | 480,566 | $ | 493,325 | $ | 485,959 |
(a) | Total return is calculated as the change in Limited Partners’ capital, adjusted for contributions and repurchases during the period, 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. |
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.
12. Subsequent Events
Unless otherwise stated throughout the Notes to Financial Statements, the Partnership noted no subsequent events that require disclosure in the financial statements.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Investment Advisory Agreement Approval (Unaudited)
Nature, Extent and Quality of Services
The Board reviewed and considered the nature and extent of the investment advisory services provided by the Adviser under the Partnership’s investment advisory agreement, including selection of Investment Funds for investment of the Partnership’s assets, allocation of the Partnership’s assets among, and monitoring performance of, Investment Funds, evaluation of risk exposure of Investment Funds and reputation, experience and training of investment managers, management of short-term cash and operations of the Partnership,day-to-day portfolio management and general due diligence examination of Investment Funds before and after committing assets of the Partnership for investment. The Board reviewed similar information and factors regarding theSub-Adviser, to the extent applicable. The Board also considered the Adviser’s investment in personnel and infrastructure that benefits the Partnership. (The investment advisory andsub-advisory agreements together are referred to as the “Advisory Agreement.”) The Board also reviewed and considered the nature and extent of thenon-advisory, administrative services that the Adviser provides, or arranges at its expense, under the Advisory Agreement, including among other things, providing to the Partnership office facilities, equipment and personnel. The Board also considered that the Adviser serves a variety of other investment advisory clients and has experience overseeing service providers.
The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the advisory and administrative services to the Partnership. The Board determined that the Adviser’s portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Partnership and supported its decision to approve the Advisory Agreement.
Performance, Fees and Expenses of the Partnership
The Board reviewed the performance of the Partnership compared to an appropriate benchmark and its peers, as determined by the Adviser. The Board also reviewed the fees and expenses of the Partnership compared to its peers, as prepared by Strategic Insight. The Board discussed with the Adviser the performance goals and the actual results achieved in managing the Partnership. When considering a fund’s performance, the Board and the Adviser place emphasis on trends and longer-term returns (focusing onone-year, three-year and five-year performance, as of December 31, 2018, or since inception, as applicable). When a fund underperforms its benchmark and/or its peer group, the Board and the Adviser discuss the causes of such underperformance and, where necessary, they discuss specific changes to investment strategy or investment personnel. The Board noted that the Partnership’s performance was better than its benchmark for theone-, three- and five-year periods.The Board discussed with the Adviser the level of the advisory fee for the Partnership relative to comparable funds and/or other accounts advised by the Adviser and/or compared to its peers as prepared by Strategic Insight. In addition to the advisory fee, the Board also reviewed the Partnership’s total expense ratio. The Board noted that the Partnership’s advisory fee and total expense ratio were lower than its peer group averages. After discussion, the Board concluded that the Partnership’s (i) performance was competitive and (ii) advisory fee and total expense ratio were competitive with its peer group averages.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Investment Advisory Agreement Approval (Unaudited) (continued)
Economies of Scale
The Board considered the size and growth prospects of the Partnership and how that relates to the Partnership’s total expense ratio and particularly the Partnership’s advisory fee rate, which does not include breakpoints. In conjunction with its review of the Adviser’s profitability, the Board discussed with the Adviser how a change in assets can affect the efficiency or effectiveness of managing the Partnership and whether the advisory fee level is appropriate relative to current and projected asset levels and/or whether the advisory fee structure reflects economies of scale as asset levels change. The Board concluded that economies of scale for the Partnership were not a factor that needed to be considered at the present time.
Profitability of the Adviser and Affiliates
The Board considered information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last year from their relationship with the Partnership and during the last two years from their relationship with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost allocation methodology used to determine the profitability of the Adviser and affiliates. The Board has determined that its review of the analysis of the Adviser’s expenses and profitability supports its decision to approve the Advisory Agreement.
Other Benefits of the Relationship
The Board considered other direct and indirect benefits to the Adviser and/or its affiliates derived from their relationship with the Partnership and other funds advised by the Adviser. These benefits may include, among other things, fees for trading, distribution and/or shareholder servicing and for transaction processing and reporting platforms used by securities lending agents, and research received by the Adviser generated from commission dollars spent on funds’ portfolio trading. The Board reviewed with the Adviser these arrangements and the reasonableness of the Adviser’s costs relative to the services performed. The Board has determined that its review of the other benefits received by the Adviser or its affiliates supports its decision to approve the Advisory Agreement.
Resources of the Adviser and Historical Relationship Between the Partnership and the Adviser
The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Advisory Agreement. The Board also reviewed and considered the historical relationship between the Partnership and the Adviser, including the organizational
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Investment Advisory Agreement Approval (Unaudited) (continued)
Resources of the Adviser and Historical Relationship Between the Partnership and the Adviser (continued)
structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Partnership’s operations and the Board’s confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Advisory Agreement and that it is beneficial for the Partnership to continue its relationship with the Adviser.
Other Factors and Current Trends
The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Partnership’s Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Partnership’s business.
General Conclusion
After considering and weighing all of the above factors, with various written materials and verbal information presented by the Adviser, the Board concluded that it would be in the best interest of the Partnership and its Limited Partners to approve renewal of the Advisory Agreement for another year. In reaching this conclusion the Board did not give particular weight to any single piece of information or factor referenced above. The Board considered these factors and information over the course of the year and in numerous meetings, some of which were in executive session with only the independent Board members and their counsel present. It is possible that individual Board members may have weighed these factors, and the information presented, differently in reaching their individual decisions to approve the Advisory Agreement.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP
Proxy Voting Policies and Procedures and Proxy Voting Record (Unaudited)
A copy of (1) the Partnership’s policies and procedures with respect to the voting of proxies relating to the Investment Funds; and (2) how the Partnership voted proxies relating to Investment Funds during the most recent12-month period ended June 30 is available without charge, upon request, by calling the Partnership at1-888-322-4675. This information is also available on the Securities and Exchange Commission’s website athttp://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 FormN-Q. The Partnership’s FormsN-Q are available on the Securities and Exchange Commission’s website athttp://www.sec.gov. The Partnership’s FormsN-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 calling1-800-SEC-0330. Once filed, the most recent FormN-Q will be available without charge, upon request, by calling the Partnership at1-888-322-4675.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
Morgan Stanley Institutional Fund of Hedge Funds LP | ||
100 Front Street, Suite 400 | ||
West Conshohocken, PA 19428 | ||
Directors | Legal Counsel | |
Michael Nugent, Chairperson of the Board and Director | Dechert LLP | |
Frank L. Bowman | 1095 Avenue of the Americas | |
Kathleen A. Dennis | New York, NY 10036 | |
Nancy C. Everett | ||
Jakki L. Haussler | Counsel to the Independent | |
Patricia Maleski | Directors | |
Dr. Manuel H. Johnson | Perkins Coie LLP | |
Joseph J. Kearns | 1155 Avenue of the Americas | |
Michael F. Klein | New York, New York 10036 | |
W. Allen Reed | ||
Officers | ||
John H. Gernon, President and Principal Executive Officer | ||
Michael J. Key, Vice President | ||
Matthew Graver, Vice President | ||
Timothy Knierim, 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 | ||
Sub-Adviser | ||
Morgan Stanley Investment Management Limited 25 Cabot Square | ||
Canary Wharf | ||
LondonE14-4QA, England | ||
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 |
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ITEM 2. | CODE OF ETHICS. Not applicable to a semi-annual report. |
ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable to a semi-annual report. |
ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable to a semi-annual report. |
ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to the Registrant. |
ITEM 6. | INVESTMENTS. |
(a) | Schedule of Investments. Refer to Item 1. |
(b) | Not applicable. |
ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FORCLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to a semi-annual report. |
ITEM 8. | PORTFOLIO MANAGERS OFCLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. |
ITEM 9. | PURCHASES OF EQUITY SECURITIES BYCLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
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 FormN-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. | DISCLOSURE OF SECURITIES LENDING ACTIVITIES FORCLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
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ITEM 12. | EXHIBITS. |
(a)
(1) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. Not applicable to a semi-annual report
(2) Certifications of Principal Executive Officer and Principal Financial Officer are attached to this report as part ofEX-99.CERT.
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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/ John H. Gernon | |
Name: John H. Gernon | ||
Title: President | ||
Date: August 30, 2019 |
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/ John H. Gernon | |
Name: John H. Gernon | ||
Title: Principal Executive Officer | ||
Date: August 30, 2019 | ||
By: | /s/ Noel Langlois | |
Name: Noel Langlois | ||
Title: Principal Financial Officer | ||
Date: August 30, 2019 |