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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-10593
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Morgan Stanley Institutional Fund of Hedge Funds LP
(Exact name of Registrant as specified in Charter)
One Tower Bridge
100 Front Street, Suite 1100
West Conshohocken, Pennsylvania 19428-2881
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (610) 260-7600
Barry Fink, Esq.
Morgan Stanley Investment Management Inc.
1221 Avenue of the Americas
New York, NY 10020
(Name and address of agent for service)
COPY TO:
Leonard B. Mackey, Jr., Esq.
Clifford Chance US LLP
200 Park Avenue
New York, NY 10166
Date of fiscal year end: December 31
Date of reporting period: December 31, 2003
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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:
2
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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MORGAN STANLEY
INSTITUTIONAL FUND OF HEDGE FUNDS LP
Financial Statements with Report of
Independent Auditors
For the Year Ended December 31, 2003
Morgan Stanley Institutional Fund of Hedge Funds LP is operated by persons who
have claimed an exclusion from the definition of the term "commodity pool
operator" under the U.S. Commodity Exchange Act, as amended ("CEA"), pursuant to
U.S. Commodity Futures Trading Commission Regulation 4.5 (a)(1) and (b)(1), and
therefore who are not subject to registration or regulation as a pool operator
under the CEA.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Oath and Affirmation
To the best of my knowledge and belief, the information contained in this
document is accurate and complete.
/s/ Noel C. Langlois
- ----------------------------------------
Noel C. Langlois, Vice President
Morgan Stanley Alternative Investment
Partners LP as General Partner of Morgan
Stanley Institutional
Fund of Hedge Funds LP
(This oath is required by Regulation 4.7 of the Regulations under the Commodity
Exchange Act, as amended).
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Financial Statements with Report of Independent Auditors
For the Year Ended December 31, 2003
Contents
Report of Independent Auditors.................................................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
Information Concerning Directors and Officers (Unaudited).....................21
[LOGO] Ernst & Young
[ ] Ernst & Young LLP [ ] Phone: (212)773-3000
5 Times Square www.ey.com
New York, NY 10036
Report of Independent Auditors
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 "Fund"),
including the schedule of investments, as of December 31, 2003, and the related
statements of operations and cash flows for the year then ended and the
statements of changes in partners' capital for the year then ended and for the
period from July 1, 2002 (commencement of operations) to December 31, 2002.
These financial statements are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of December 31, 2003,
by correspondence with management of the investment funds and others. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. 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, 2003, 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 periods indicated above, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
February 23, 2004
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Statement of Assets, Liabilities and Partners' Capital
December 31, 2003
Assets
Investments in investment funds, at fair value
(cost $928,678,019) $ 1,024,223,805
Purchased options, at fair value (cost $1,023,500) 539,911
Cash and cash equivalents (cost $18,008,339) 18,008,339
Due from broker 25,021,188
Prepaid investments in investment funds 4,500,000
Receivable for investments sold 26,779,232
Unrealized appreciation on swap contract 1,291,245
Other assets 70,769
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Total assets 1,100,434,489
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Liabilities
Payable for partner redemptions 2,546,890
Management fee payable 692,499
Interest payable on open swap contract 95,194
Directors' fee payable 11,375
Accrued expenses and other liabilities 289,934
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Total liabilities 3,635,892
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Net assets $ 1,096,798,597
=================
Partners' capital
Represented by:
Net capital contributions $ 1,000,445,155
Accumulated net unrealized appreciation on investments 96,353,442
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Total partners' capital $ 1,096,798,597
=================
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Statement of Operations
For the Year Ended December 31, 2003
Investment income
Interest $ 476,720
Expenses
Management fees 7,258,336
Legal fees 658,698
Organization costs 567,882
Interest expense on swap contract 415,453
Accounting and administration fees 235,496
Insurance expense 164,441
Other 506,207
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Total expenses 9,806,513
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Net investment loss (9,329,793)
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Realized and unrealized gain (loss) from investments :
Net realized gain from investments in investment
funds 8,740,781
Net realized gain from swap contracts 131,841
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Net realized gain from investments 8,872,622
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Net change in unrealized appreciation on
investments in investment funds 94,345,754
Net change in unrealized depreciation /
appreciation on swap contracts 1,941,534
Net change in unrealized depreciation on purchased
options (483,589)
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Net unrealized appreciation on investments 95,803,699
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Net realized and unrealized gain from investments 104,676,321
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Net increase in partners' capital resulting from operations $ 95,346,528
=================
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Statements of Changes in Partners' Capital
General Limited
Partner Partners Total
--------------- --------------- ---------------
For the period July 1, 2002* through
December 31, 2002
Partners' capital at July 1, 2002 $ -- $ -- $ --
--------------- --------------- ---------------
Increase / decrease in partners' capital:
From operations
Net investment loss (120,993) (3,200,166) (3,321,159)
Net realized gain from investments 11,776 329,360 341,136
Net unrealized appreciation/depreciation
on investments (58,430) 608,173 549,743
--------------- --------------- ---------------
Net decrease in partners' capital resulting
from operations (167,647) (2,262,633) (2,430,280)
--------------- --------------- ---------------
From partners' capital transactions
Proceeds from partner subscriptions 25,000,868 696,810,950 721,811,818
Payments for partner redemptions -- (25,193) (25,193)
Reallocation of performance incentive 41,834 (41,834) --
--------------- --------------- ---------------
Net increase in partners' capital from
capital transactions 25,042,702 696,743,923 721,786,625
--------------- --------------- ---------------
Total increase in partners' capital 24,875,055 694,481,290 719,356,345
--------------- --------------- ---------------
Partners' capital at December 31, 2002 $ 24,875,055 $ 694,481,290 $ 719,356,345
=============== =============== ===============
For the year ended December 31, 2003
Increase / decrease in partners' capital:
From operations
Net investment loss (250,370) (9,079,423) (9,329,793)
Net realized gain from investments 238,377 8,634,245 8,872,622
Net unrealized appreciation on investments 2,651,516 93,152,183 95,803,699
--------------- --------------- ---------------
Net increase in partners' capital resulting
from operations 2,639,523 92,707,005 95,346,528
--------------- --------------- ---------------
From partners' capital transactions
Proceeds from partner subscriptions -- 285,079,446 285,079,446
Payments for partner redemptions -- (2,983,722) (2,983,722)
Reallocation of performance incentive 5,747,835 (5,747,835) --
--------------- --------------- ---------------
Net increase in partners' capital from
capital transactions 5,747,835 276,347,889 282,095,724
--------------- --------------- ---------------
Total increase in partners' capital 8,387,358 369,054,894 377,442,252
--------------- --------------- ---------------
Partners' capital at December 31, 2003 $ 33,262,413 $ 1,063,536,184 $ 1,096,798,597
=============== =============== ===============
* Commencement of operations
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Statement of Cash Flows
For the Year Ended December 31, 2003
Cash flows from operating activities
Net increase in partners' capital from operations $ 95,346,528
Adjustments to reconcile net increase in partners' capital
from operations to net cash used in operating activities:
Net realized gain from investments (8,872,622)
Net unrealized appreciation on investments (95,803,699)
Purchases of investments (368,005,340)
Proceeds from sales of investments 113,216,598
Decrease in receivable for investments sold 1,896,749
Increase in due from broker (21,188)
Decrease in prepaid investments in investment funds 120,000,000
Decrease in other assets 24,076
Increase in management fee payable 239,018
Decrease in interest payable on open swap contract (40,770)
Increase in directors' fee payable 11,375
Decrease in accrued expenses and other liabilities (10,775)
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Net cash used in operating activities (142,020,050)
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Cash flows from financing activities
Proceeds from partner subscriptions 142,342,817
Payments for partner redemptions (436,832)
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Net cash provided by financing activities 141,905,985
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Net decrease in cash and cash equivalents (114,065)
Cash and cash equivalents at beginning of year 18,122,404
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Cash and cash equivalents at end of year $ 18,008,339
=================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest expense $ 456,223
=================
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Schedule of Investments
December 31, 2003
Percent of First
First Investment Percent of Available
Acquisition Fair Fund Partners' Redemption
Description Date Cost Value Held Capital Date * Liquidity **
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Investment Funds
Convertible Arbitrage
Alta Partners, L.P. 7/1/2002 $ 11,375,000 $ 15,568,358 11.23% 1.42% N/A Quarterly
KBC Convertible
Opportunities, L.P. 7/1/2002 21,000,000 25,436,005 17.72 2.32 N/A Quarterly
Lydian Partners II,
L.P. 7/1/2002 23,750,000 29,338,525 15.89 2.67 9/30/2004 Quarterly
Tiburon Fund, L.P. 8/1/2002 29,000,000 31,216,421 8.57 2.85 N/A Quarterly
Triborough Partners,
LLC 7/1/2002 8,250,000 8,431,888 21.50 0.77 N/A Quarterly
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Total Convertible
Arbitrage 93,375,000 109,991,197 10.03
Credit Trading and Capital
Structure Arbitrage
AXA Kappa 12/1/2003 5,000,000 5,009,088 4.47 0.46 N/A Monthly
D.E. Shaw Laminar Fund,
LLC 7/1/2002 28,750,000 37,499,820 22.00 3.42 N/A Quarterly
Fir Tree Recovery Fund,
L.P. 7/1/2002 15,500,000 20,659,275 6.14 1.88 6/30/2004 Quarterly
Hammerman Capital
Partners, L.P. 7/1/2002 8,500,000 12,999,224 9.23 1.19 N/A Quarterly
KBC Credit Arbitrage
Fund 1/1/2003 10,000,000 11,296,883 13.35 1.03 N/A Monthly
KBC Return Enhancement
Fund 9/1/2003 20,000,000 19,870,071 35.11 1.81 8/31/2005 Monthly
Mariner Relative Value
Fund, LP 9/1/2003 8,000,000 8,243,423 20.96 0.75 9/30/2004 Quarterly
OZF Credit
Opportunities Fund,
L.P. 7/1/2002 20,750,000 27,767,977 14.51 2.53 6/30/2004 Quarterly
Pequot Credit
Opportunities Fund,
L.P. 7/1/2003 13,250,000 13,699,878 10.72 1.25 6/30/2004 Quarterly
Trilogy Financial
Partners, L.P. 1/1/2003 8,000,000 9,212,688 4.58 0.84 N/A Quarterly
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Total Credit Trading and
Capital Structure
Arbitrage 137,750,000 166,258,327 15.16
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Schedule of Investments (continued)
December 31, 2003
Percent of First
First Investment Percent of Available
Acquisition Fair Fund Partners' Redemption
Description Date Cost Value Held Capital Date * Liquidity **
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Investment Funds
(continued)
Fixed Income Arbitrage
FrontPoint Fixed Income
Opportunities Fund,
L.P. 7/1/2002 $ 24,750,000 $ 26,867,632 3.62% 2.45% N/A Quarterly
Highland Opportunity
Fund, L.P. 8/1/2002 21,000,000 21,541,158 21.99 1.96 N/A Quarterly
Vega Relative Value
Fund, Ltd. 7/1/2002 24,750,000 31,492,457 1.13 2.87 N/A Monthly
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Total Fixed Income
Arbitrage 70,500,000 79,901,247 7.28
Long Only Distressed
Avenue Asia
Investments, L.P. 7/1/2002 18,100,000 22,556,915 5.34 2.05 N/A Annually
ORN European Distressed
Debt Fund, LLC 11/1/2003 7,631,840 7,899,847 28.56 0.72 12/31/2004 Quarterly
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Total Long Only Distressed 25,731,840 30,456,762 2.77
Long-Short
Bryn Mawr Capital, L.P. 10/1/2002 13,000,000 14,150,663 10.60 1.29 N/A Quarterly
Frontpoint Healthcare
Fund, L.P. 5/1/2003 7,000,000 7,458,491 5.06 0.68 N/A Quarterly
Gotham Asset
Management, L.P. 8/1/2003 14,500,000 15,564,675 7.07 1.42 12/31/2004 Annually
KiCap Network Fund,
L.P. 1/1/2003 15,000,000 15,360,471 7.72 1.40 N/A Quarterly
Lancer Partners, L.P. 7/1/2002 15,625,000 0(a) N/A 0.00 N/A Semi-annually(c)
Maverick Fund USA, Ltd. 7/1/2002 21,875,000 23,226,713 1.12 2.12 12/31/2005 Annually
Tiger Consumer
Partners, L.P. 9/1/2003 5,000,000 4,869,000 5.80 0.44 9/30/2004 Quarterly
Tiger Technology, L.P. 1/1/2003 6,500,000 7,432,700 1.50 0.68 6/30/2006 Annually
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Total Long-Short 98,500,000 88,062,713 8.03
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Schedule of Investments (continued)
December 31, 2003
Percent of First
First Investment Percent of Available
Acquisition Fair Fund Partners' Redemption
Description Date Cost Value Held Capital Date * Liquidity **
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Investment Funds
(continued)
Merger Arbitrage
European Merger Fund,
LLC 7/1/2002 $ 11,250,000 $ 11,571,879 19.28% 1.05% N/A Quarterly
Gruss Arbitrage
Partners, L.P. 7/1/2002 6,250,000 6,575,905 1.86 0.60 N/A Quarterly
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Total Merger Arbitrage 17,500,000 18,147,784 1.65
Mortgage Arbitrage
Ellington Mortgage
Partners, L.P. 7/1/2002 26,750,000 31,812,408 16.58 2.90 12/31/2004 Annually
Metacapital Fixed
Income Relative Value
Fund, L.P. 7/1/2003 7,000,000 7,243,768 9.98 0.66 6/30/2004 Quarterly
Parmenides Fund, L.P. 9/1/2003 10,000,000 10,518,441 16.84 0.96 2/29/2004 Monthly
Safe Harbor Fund,
L.P. (b) 7/1/2002 18,750,000 7,960,852 N/A 0.73 N/A Monthly
Structured Servicing
Holdings, L.P. 7/1/2002 17,825,940 23,369,372 7.89 2.13 N/A Monthly
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Total Mortgage Arbitrage 80,325,940 80,904,841 7.38
Multi -Strategy
AQR Absolute Return
Instit. Fund, L.P. 7/1/2002 24,750,000 27,552,394 5.64 2.51 N/A Quarterly
Citadel Wellington
Partners L.P. 7/1/2002 50,250,000 57,206,336 3.01 5.22 6/30/2004 3 Years
Clinton Multistrategy
Fund, LLC 7/1/2002 30,477,770 32,734,540 17.39 2.98 N/A Quarterly
Deephaven Market
Neutral Fund, LLC 7/1/2002 33,000,000 39,260,360 6.04 3.58 N/A Monthly
HBK Fund, L.P. 7/1/2002 34,161,678 39,076,000 2.94 3.56 N/A Quarterly
Jet Capital Arbitrage
and Event Fund I, L.P. 1/1/2003 14,000,000 14,763,450 15.95 1.35 N/A Quarterly
K Capital II, L.P. 1/1/2003 22,000,000 23,087,182 3.40 2.10 3/31/2004 Annually
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Schedule of Investments (continued)
December 31, 2003
Percent of First
First Investment Percent of Available
Acquisition Fair Fund Partners' Redemption
Description Date Cost Value Held Capital Date * Liquidity **
- ---------------------------------------------------------------------------------------------------------------------------
Investment Funds
(continued)
Multi -Strategy
(continued)
Nisswa Fund, L.P. 7/1/2002 $ 16,875,000 $ 17,980,820 28.00% 1.64% N/A Quarterly
Onyx Capital Fund, L.P. 4/1/2003 18,000,000 16,813,072 27.29 1.53 N/A Annually
OZ Domestic Partners,
L.P. 7/1/2002 37,500,000 45,850,526 3.25 4.18 9/30/2004 Quarterly
Q Funding III, L.P. 7/1/2002 11,500,000 18,784,977 6.63 1.71 N/A Quarterly
Sagamore Hill Partners,
L.P. 7/1/2002 26,750,000 30,333,236 6.73 2.77 N/A Quarterly
The Animi Fund, LP 10/1/2003 20,000,000 20,391,558 23.16 1.86 N/A Monthly
-------------------------------------------- ----------
Total Multi-Strategy 339,264,448 383,834,451 34.99
Other Arbitrage
Western Investment
Hedged Partners, L.P. 11/1/2003 5,000,000 5,063,267 7.19 0.46 10/31/2004 Monthly
-------------------------------------------- ----------
Total Other Arbitrage 5,000,000 5,063,267 0.46
Statistical Arbitrage
Altus Fund, L.P. 7/1/2002 6,250,000 5,878,469 19.28 0.54 N/A Quarterly
Glacis Domestic Fund,
LLC 10/1/2003 8,000,000 7,532,954 12.00 0.69 9/30/2004 Quarterly
IKOS, L.P. Equity Class 7/1/2002 25,206,130 26,665,160 39.40 2.43 6/30/2005 Quarterly
Sabre Fund Investment,
L.P. 7/1/2002 4,712,406 4,581,109 11.87 0.42 N/A Monthly
Thales Fund, L.P. 7/1/2002 4,562,255 4,791,132 7.12 0.44 N/A Quarterly
Ventus Fund Limited 1/1/2003 12,000,000 12,154,392 7.01 1.11 N/A Monthly
-------------------------------------------- ----------
Total Statistical
Arbitrage 60,730,791 61,603,216 5.63
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Schedule of Investments (continued)
December 31, 2003
Percent of
Fair Partners'
Cost Value Capital
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments in
Investment Funds $ 928,678,019 $ 1,024,223,805 93.38%
Purchased Options
Trac-X NA Swaption
expires 9/20/04 1,023,500 539,911 0.05
Short -Term Investments
State Street Euro
Dollar Time Deposit
0.50% due 1/02/04 18,008,339 18,008,339 1.64
------------------------------ ----------
Total Investments in
Investment Funds,
Options, and Short-Term
Investments $ 947,709,858 1,042,772,055 95.07
=============
Other Assets, less
Liabilities 54,026,542 4.93
--------------- ----------
Total Partners' Capital $ 1,096,798,597 100.00%
=============== ==========
Detailed information about the Investment Funds' portfolios is not available.
* From original investment date
** Available frequency of redemptions after initial lock-up period
N/A Initial lock-up period has either expired prior to December 31, 2003 or
Investment Fund did not have an initial lock-up period.
(a) Fair valued at value other than that provided by the Investment Fund
manager. See discussion in Note 2 to the financial statements.
(b) In liquidation. See discussion in Note 2 to the financial statements.
(c) Liquidity restricted. See discussion in Note 2 to the financial statements.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements
For the Year Ended December 31, 2003
1. Organization
Morgan Stanley Institutional Fund of Hedge Funds LP (the "Partnership") was
organized under the laws of the State of Delaware as a limited partnership on
November 6, 2001 pursuant to a limited partnership agreement and commenced
operations on July 1, 2002 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 ("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
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.
The Partnership's Board of Directors (the "Board") provides broad oversight over
the operations and affairs of the Partnership. A majority of the Board is
comprised of persons who are independent with respect to the Partnership.
Morgan Stanley Alternative Investment Partners LP serves as the General Partner
(the "General Partner") of the Partnership subject to the ultimate supervision
of, and subject to any policies established by, the Board of the Partnership.
The General Partner is registered as an investment adviser under the Investment
Advisers Act of 1940 (the "Advisers Act"), and as a commodity pool operator
("CPO") with the Commodity Futures Trading Commission ("CFTC") and the National
Futures Association ("NFA"). Effective as of December 24, 2003, the General
Partner has filed with the NFA a notice claiming an exclusion from the
definition of CPO under the U.S. Commodity Exchange Act, as amended ("CEA"), and
the rules of the CFTC promulgated thereunder, with respect to its operation of
the Partnership. Accordingly , the General Partner is no longer subject to
registration or regulation as a CPO with respect to the Partnership. Morgan
Stanley AIP GP LP 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 Advisers Act and as a commodity
trading adviser ("CTA") and a CPO under the CEA. In addition, the Adviser is in
the process of filing with the NFA a notice claiming exemption from registration
as a CTA under the CEA, and the rules of the CFTC promulgated thereunder, with
respect to its commodity trading advisory activities on behalf of the
Partnership. The General Partner and the Adviser are affiliates of Morgan
Stanley. The Partnership has no fixed termination date and will continue until
dissolved in accordance with the terms of the Agreement.
Limited partnership interests (the "Interests") are generally issued at the
beginning of each calendar quarter, unless otherwise determined at the
discretion of the General Partner. Additional subscriptions for Interests by
eligible investors are accepted into the Partnership at net asset value. The
Partnership may
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (continued)
1. Organization (continued)
from time to time offer to repurchase Interests (or portions of them) at net
asset value pursuant to written tender made by a limited partner of the
Partnership (a "Limited Partner"). Repurchases will be made at such times, in
such amounts and on such terms as may be determined by the Board in its sole
discretion.
The Partnership began making offers to repurchase Interests (or portions of
them) from Limited Partners as of June 30, 2003 and anticipates doing so
quarterly thereafter. In general, the Partnership will initially pay at least
90% of the estimated value of the repurchased Interests (or portions of them) to
Limited Partners within 30 days after the value of the Interests to be
repurchased is determined; the remaining amount will be paid out promptly after
completion of the Partnership's year end audit.
2. Significant Accounting Policies
The following significant accounting policies are in conformity with accounting
principles generally accepted in the United States. Such policies are
consistently followed by the Partnership in preparation of its financial
statements. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires the
General Partner 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 will be determined as of the close of
business at the end of any fiscal period 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.
At December 31, 2003, 95.81% of the Partnership's portfolio was comprised of
investments in Investment Funds. Of the remainder of the portfolio, 2.46%, based
on the notional value, was invested in a total return equity swap (see Note 5),
0.05% in purchased options and 1.68% in a Eurodollar time deposit. 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 such Investment Fund, as
supplied by the Investment Fund's investment manager from time to time, usually
monthly. Such valuations are net of management and performance incentive fees or
allocations payable to the Investment Funds' managers pursuant to the Investment
Funds' agreements. The Investment Funds value their underlying investments in
accordance with policies established by each Investment Fund, as described in
each of their financial statements and offering memoranda. The Partnership's
investments in Investment Funds are subject to the terms and conditions of the
respective operating agreements and offering memoranda, as appropriate. 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. In
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Portfolio Valuation (continued)
accordance with the Agreement, the Adviser values the Partnership's assets based
on such reasonably available relevant information as it considers material.
Because of the inherent uncertainty of valuation, the values of the Partnership
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.
Lancer Partners, L.P. ("Lancer"), an Investment Fund, was fair valued in good
faith by the Adviser at December 31, 2003 at a value of $0 representing 0.00% of
partners' capital. The manager of Lancer has failed to deliver audited financial
statements for 2001 and 2002 for Lancer. In February 2003, the General Partner
initiated a legal action against Lancer and its manager in the Superior Court of
the State of Connecticut for access to the full books and records of Lancer.
Subsequently, Lancer filed a petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. The General Partner is a member of the creditors committee
formed as part of that proceeding. On July 8, 2003, the SEC instituted a civil
action against Lancer, Lancer Management Group, LLC, Lancer Management Group II,
LLC (Lancer's general partner and fund manager, referred to with Lancer
Management Group, LLC as "Lancer Management"), Michael Lauer (the principal of
Lancer Management) as well as against other entities affiliated with Lauer. The
SEC alleges that Lauer and Lancer Management made fraudulent misrepresentations
to investors by, among other things, overstating the value of the funds and
manipulating the price of shares of some of the companies in which Lancer
invested. The SEC obtained a temporary restraining order which appointed a
receiver for Lancer Management and granted other relief against Lancer
Management and Lauer, while deferring to the bankruptcy court with respect to
Lancer. Subsequently, the SEC receiver advised the bankruptcy court that it was
now in control of Lancer, that Lauer would not be contesting the preliminary
injunction sought by the SEC, and that Lauer had agreed not to take any further
action with respect to Lancer. It is anticipated that the receiver will evaluate
the financial status of Lancer and, in consultation with the creditor and equity
committees in the bankruptcy proceeding, propose a plan for winding up Lancer.
The Partnership will continue to pursue its rights with regard to the bankruptcy
action. The investment in Safe Harbor Fund, L.P. ("Safe Harbor"), an Investment
Fund formerly managed by Beacon Hill Asset Management LLC and currently managed
by Ellington Management Group, L.L.C., with a value of $7,960,852 representing
0.73% of partners' capital, was in liquidation at December 31, 2003. The fair
value of Safe Harbor has been determined based on information provided by Safe
Harbor's administrator consistent with the methodology approved by Safe Harbor's
Board of Directors. Safe Harbor's fair value does not reflect any potential
contingent liabilities associated with either the liquidation of Safe Harbor or
the pending Securities and Exchange Commission action against Safe Harbor and
its former investment advisor.
Income Recognition and Expenses
The Partnership recognizes interest income on an accrual basis. Income, expenses
and realized and unrealized gains and losses are recorded monthly. The change in
Investment Funds' net asset value is included in net change in unrealized
appreciation/depreciation on investments in Investment Funds on the
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Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Income Recognition and Expenses (continued)
Statement of Operations. Redemption proceeds received, whether in the form of
cash or securities, are applied as a reduction of the Investment Fund's cost and
realized gain (loss) on investments in Investment Funds on a pro-rata basis.
The Partnership's Private Placement Memorandum dated April 5, 2002 provided that
the Partners would not bear any initial organization and offering expenses in
excess of 0.15% of partners' capital as a result of the Partnership's start up.
During the first twelve months of operations ending June 30, 2003, the
organization and offering costs incurred by the Partnership amounted to
$1,056,125 which represented 0.14% of partners' capital. Ongoing offering costs
are charged to capital as incurred.
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.
Cash and Cash Equivalents
The Partnership treats all highly liquid financial instruments that have
original maturities within three months of acquisition as cash equivalents. Cash
equivalents are valued at cost plus accrued interest, which approximates fair
value. All cash is invested overnight in a short-term time deposit with the
Partnership's custodian, State Street Bank and Trust Company.
Income Taxes
No provision for federal, state, or local income taxes is provided in the
financial statements. In accordance with the Internal Revenue Code of 1986 as
amended, the Limited Partners and General Partner (collectively, the "Partners")
are to include their respective share of the Partnership's realized profits or
losses in their individual tax returns.
For the year ended December 31, 2003, in accordance with the accounting guidance
provided in the AICPA Audit and Accounting Guide, "Audits of Investment
Companies", the Partnership reclassified $9,329,793 and $8,872,622 from
accumulated net investment loss and accumulated net realized gain, respectively,
to net capital contributions. This reclassification was to reflect, as an
adjustment to net capital contributions, the amounts of taxable income or loss
that have been allocated to the Partners and had no effect on net assets.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (continued)
3. Management Fee, Performance Incentive, Related Party Transactions and Other
Under the terms of the Investment Advisory Agreement dated June 30, 2002 between
the Adviser and the Partnership, the Adviser receives a management fee for
services provided to the Partnership, calculated and paid monthly at a rate of
0.063% (0.75% on an annualized basis) of the Partnership's net assets as of the
end of business on the last business day of each month, before adjustment for
any redemptions effective on that day. At December 31, 2003, $692,499 in
management fees were payable to the Adviser. For the year ended December 31,
2003, the Partnership incurred management fees of $7,258,336.
The Adviser from time to time has, and may continue to, out of its own resources
and in its sole discretion, make payments to significant investors and also
certain employees of the Adviser and certain affiliates of the Adviser. The
Adviser also may make payments out of its own resources to placement agents that
assist in the placement of Interests and that may be affiliated with the Adviser
and the General Partner.
Under the terms of the Agreement, the General Partner's "Performance Incentive"
for each Incentive Period, as defined in the Agreement, is equal to 15% 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) the greater of (a) the Limited
Partner's Hurdle Rate Amount (as defined below) for the Incentive Period or (b)
the Loss Carryforward Amount(s), as defined in the Agreement, 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
initially will not exceed 1.75% of the Limited Partner's ending capital account
balance for that Incentive Period, as determined prior to the deduction of the
Performance Incentive.
The Partnership's "Hurdle Rate" for a given Incentive Period is initially equal
to 5% per annum plus the rate of return achieved by the Citi Three-Month U.S.
Treasury Bill Index (formerly known as the Salomon Smith Barney Three-Month U.S.
Treasury Bill Index) over the same Incentive Period. A Limited Partner's "Hurdle
Rate Amount" for a given Incentive Period is equal to the Hurdle Rate calculated
for a given Incentive Period multiplied by the Limited Partner's capital account
balance as of the beginning of that Incentive Period. The Hurdle Rate is not
cumulative and resets for each Incentive Period at the beginning of each such
Incentive Period. The Performance Incentive will be debited from each Partner's
capital account and credited to the General Partner's capital account at the end
of each such Incentive Period. During the period from July 1, 2002 to December
31, 2002 and the year ended December 31, 2003, the Performance Incentive earned
was $41,834 and $5,747,835, respectively.
State Street Bank and Trust Company (the "Administrator") provides
administrative services to the Partnership under an Administration Agreement.
Under the Administration Agreement, the Administrator is paid a fee computed and
payable monthly at an annual rate of 0.0325% of the Partnership's average
monthly net assets. Effective January 1, 2004, the annual rate used in computing
this fee increased to 0.0650%. In addition, the Partnership is charged for
certain reasonable out-of-pocket expenses incurred by the Administrator on its
behalf.
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Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (continued)
3. Management Fee, Performance Incentive, Related Party Transactions and Other
(continued)
State Street Bank and Trust Company also serves as the custodian for the
Partnership. Custody fees are payable monthly based on assets held in custody
and investment purchases and sales activity, plus reimbursement for certain
reasonable out-of-pocket expenses.
Each Director of the Partnership who is not a director, officer or employee of
the Adviser, the General Partner or other subsidiary of Morgan Stanley, and not
otherwise an "interested person" of the Partnership as defined under the 1940
Act, is paid an annual retainer of $3,000 plus reasonable out-of-pocket
expenses. Directors are reimbursed by the Partnership for their travel expenses
related to Board meetings. For the year ended December 31, 2003, the Partnership
incurred $49,710 in Directors' fees.
Placement agents may be retained by the Partnership or the General Partner to
assist in the placement of Interests. A placement agent, which may be affiliated
with the General Partner or the Adviser, will generally be entitled to receive a
placement fee from each investor purchasing an Interest through a placement
agent. The placement fee will be added to a prospective investor's subscription
amount; it will not constitute a capital contribution made by the investor to
the Partnership nor part of the assets of the Partnership. The placement fee may
be adjusted or waived at the sole discretion of the placement agent in
consultation with the General Partner. No fees were paid to placement agents for
the year ended December 31, 2003.
At December 31, 2003, there was one Limited Partner, unaffiliated with Morgan
Stanley, with a capital balance that represented approximately 57% of the
Partnership's capital.
4. Investments in Investment Funds
As of December 31, 2003, the Partnership invested primarily in Investment Funds,
none of which were affiliates of Morgan Stanley. The agreements related to
investments in Investment Funds provide for compensation to the Investment
Funds' managers/general partners in the form of management fees ranging from
1.0% to 2.5% annually of net assets and performance incentive fees/allocations
ranging from 20% to 25% of net profits earned. Of the investments in Investment
Funds, Citadel Wellington Partners L.P., at 5.22% of the Partnership's capital,
is the sole investment representing more than 5% of the Partnership's capital.
Accrued management fees and incentive fees/allocations payable or allocable of
$0 and $1,404,753, respectively by Citadel Wellington Partners L.P., and
$11,892,934 and $22,638,784, respectively by other underlying Investment Fund
managers/general partners representing approximately 79.84% of the Partnership's
capital were indirectly charged to the Partners by virtue of the Partnership's
investments in Investment Funds as reported to the Partnership. The General
Partner was not able to obtain specific fee/allocation amounts charged to the
Partnership for the remaining 8.32% of the Partnership's capital and does not
know what these amounts were. Detailed information related to each Investment
Fund is included on the Schedule of Investments. At December 31, 2003,
approximately 7.04% of the Partnership's capital is invested in Investment Funds
with lock-ups extending beyond one year from December 31, 2003.
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Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (continued)
4. Investments in Investment Funds (continued)
Prepaid investments in Investment Funds represent amounts transferred to
Investment Funds prior to period end relating to investments to be made
effective January 1, 2004, pursuant to each Investment Fund's offering
memorandum/member/limited partnership agreements (as applicable).
For the year ended December 31, 2003, aggregate purchases and proceeds of sales
of Investment Funds were $366,981,840 and $113,084,757, respectively.
The cost of investments for Federal income tax purposes is adjusted for items of
taxable income or loss allocated to the Partnership from the Investment Funds.
The allocated taxable income or loss is reported to the Partnership by the
Investment Funds on Schedules K-1. The Partnership has not yet received all such
Schedules K-1 for the year ended December 31, 2003.
5. Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Investment Funds in which the Partnership
invests trade various financial instruments and enter into various investment
activities with off-balance sheet risk. These include, but are not limited to,
short selling activities, written option contracts, and equity swaps. The
Partnership's risk of loss in these Investment Funds is limited to the value of
these investments as reported by the Partnership.
Options
The Partnership may utilize options and so-called "synthetic" options written by
broker-dealers or other permissible financial intermediaries. Options
transactions may be effected on securities exchanges or in the over-the-counter
market. Options are valued based on market values provided by dealers. When
options are purchased over-the-counter, the Partnership bears the risk that the
counterparty that wrote the option will be unable or unwilling to perform its
obligations under the option contract. Options may also be illiquid and, in such
cases, the Adviser may have difficulty closing out the Partnership's position.
Over-the-counter options also may include options on baskets of specific
securities.
The Partnership may purchase call and put options on specific securities, and
may write and sell covered or uncovered call and put options for hedging
purposes in pursuing its investment objectives. During the year ended December
31, 2003, the Partnership had identified sufficient cash and/or securities to
cover any commitments under these contracts. A put option gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
security at a stated exercise price, typically at any time prior to the
expiration of the option. A call option gives the purchaser of the option the
right to buy, and obligates the writer to sell, the underlying security at a
stated exercise price, typically at any time prior to the expiration of the
option. A covered call option is a call option with respect to which the seller
of the option owns the underlying security. The sale of such an option exposes
the seller during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security
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Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (continued)
5. Financial Instruments with Off-Balance Sheet Risk (continued)
Options (continued)
or to possible continued holding of a security that might otherwise have been
sold to protect against depreciation in the market price of the security. A
covered put option is a put option with respect to which cash or liquid
securities have been placed in a segregated account on the books of or with a
custodian to fulfill the obligation undertaken. The sale of such an option
exposes the seller during the term of the option to a decline in price of the
underlying security while depriving the seller of the opportunity to invest the
segregated assets.
The Partnership may close out a position when writing options by purchasing an
option on the same security with the same exercise price and expiration date as
the option that it has previously written on the security. In such a case, the
Partnership will realize a profit or loss if the amount paid to purchase an
option is less or more than the amount received from the sale of the option.
The Partnership may purchase and sell call and put options on stock indices
listed on national securities exchanges or traded in the over-the-counter market
for hedging purposes and non-hedging purposes in seeking to achieve its
investment objectives. A stock index fluctuates with changes in the market
values of the stocks included in the index. Successful use of options on stock
indexes will be subject to the Adviser's ability to predict correctly movements
in the direction of the stock market generally or of a particular industry or
market segment, which requires different skills and techniques from those
involved in predicting changes in the price of individual stocks.
Swap Agreements
The Partnership may enter into equity, interest rate, index and currency rate
swap agreements. These transactions will be undertaken in an attempt to obtain a
particular return when the Adviser determines appropriate, possibly at a lower
cost than if the Partnership had invested directly in the investment or
instrument. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than a
year. In a standard swap transaction, two parties agree to exchange the returns
(or differentials in rates of returns) earned or realized on particular
predetermined investments or instruments, which may be adjusted for an interest
factor. The gross returns to be exchanged or "swapped" between the parties are
generally calculated with respect to a "notional amount," that is, the return on
or increase in value of a particular dollar amount invested at a particular
interest rate, in a particular non-U.S. currency, or in a "basket" of securities
representing a particular index.
Most swap agreements entered into by the Partnership require the calculation of
the obligations of the parties to the agreements on a "net basis." Consequently,
current obligations (or rights) under a swap agreement generally will be equal
only to the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the "net
amount"). Swaps are valued based on market values provided by dealers. The
Partnership is subject to the market
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (continued)
5. Financial Instruments with Off-Balance Sheet Risk (continued)
Swap Agreements (continued)
risk associated with changes in the value of the underlying investment or
instrument, as well as exposure to credit risk associated with counterparty
nonperformance on swap contracts. The risk of loss with respect to swaps is
limited to the net amount of payments that the Partnership is contractually
obligated to make. If the other party to a swap defaults, the Partnership's risk
of loss consists of the net amount of payments that the Partnership
contractually is entitled to receive, which may be different than the amounts
recorded on the Statement of Assets, Liabilities and Partners' Capital.
The unrealized appreciation/depreciation, rather than the contract amount,
represents the approximate future cash to be received or paid, respectively.
As of December 31, 2003, the following swap contract was outstanding:
Net
Notional Maturity Unrealized
Amount Date Description Appreciation
- -------------- --------- ------------------------------------ ------------
$ 25,000,000 9/30/04 Agreement with UBS AG, London $ 1,291,245
Branch, dated 8/01/02 to receive the
total return of the Series B
Investment Class shares of Anova
Fund Ltd. in exchange for an amount
to be paid quarterly, equal to the
LIBOR rate plus 0.33%.
Cash for the full notional amount has been deposited with the counterparty and
is included in "Due from broker" in the Statement of Assets, Liabilities and
Partners' Capital.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
Notes to Financial Statements (continued)
6. Financial Highlights
The following represents ratios to average Limited Partners' capital and other
supplemental information for Limited Partners. The calculations below are not
annualized.
For the
Period From
For the Year July 1,
Ended 2002(a) to
December 31, December 31,
2003 2002
------------ ------------
Total return - prior to performance
incentive 10.61% (0.67)%
Performance incentive (0.67)% (0.00)%(c)
Total return - net of performance
incentive (b) 9.94% (0.67)%
Ratio of total expenses to average
Limited Partners' Capital 1.04%(d) 0.55%(d)
Performance incentive to average Limited
Partners' Capital 0.63% 0.00%(c)
Ratio of total expenses and performance
incentive to Limited Partners' Capital 1.67%(d) 0.55%(d)
Ratio of net investment loss to average
Limited Partners' Capital (e) (0.99)%(d) (0.51)%(d)
Portfolio turnover 13% 5%
Net assets at end of the period (000s) $ 1,096,799 $ 719,356
(a) Commencement of operations.
(b) Total return assumes a purchase of an interest in the Partnership at the
beginning of the period indicated and a sale of the Partnership interest on the
last day of the period indicated, after Performance Incentive, if any, to the
Adviser, and does not reflect the impact of placement fees, if any, incurred
when subscribing to the Partnership.
(c) Impact of performance incentive represented less than 0.005%.
(d) Ratios do not reflect the Partnership's proportionate share of the income
and expenses of the Investment Funds.
(e) Excludes impact of performance incentive.
7. Subsequent Events
From January 1, 2004 through February 23, 2004, the Partnership accepted
approximately $8 million in additional contributions, all of which were received
in 2004.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Information Concerning Directors and Officers (Unaudited)
Term of Number of
Position(s) Office/ Portfolios Other
Held Length of Principal Overseen Directorships
with the Time Occupation(s) Within the Held Outside
Name, Address and Age Partnership Served* During Past 5 Years Complex ** the Complex **
- ----------------------- ----------- --------- ---------------------------- ---------- --------------------
Independent Directors
Michael Bozic (63) Director Director Retired; Director or Trustee 211 Director of Weirton
1 Trimont Lane since of the Retail Funds and the Steel Corporation.
Apartment 1000A 2003 Institutional Funds;
Pittsburgh, PA 15211 formerly Vice Chairman of
Kmart Corporation, Chairman
and Chief Executive Officer
of Levitz Furniture
Corporation and President
and Chief Executive Officer
of Hills Department Stores;
formerly variously Chairman,
Chief Executive Officer,
President and Chief
Operating Officer of the
Sears Merchandise Group of
Sears, Roebuck & Co.
Edwin J. Garn (70) Director Director Director or Trustee of the 211 Director of Franklin
Summit Ventures LLC since Retail Funds and the Covey (time
One Utah Center 2003 Institutional Funds; member management systems),
201 South Main Street of the Utah Regional BMW Bank of North
Salt Lake City, Advisory Board of Pacific America, Inc.
UT 84111 Corp.; formerly, United (industrial loan
States Senator (R-Utah) and corporation), United
Chairman, Senate Banking Space Alliance
Committee, Mayor of Salt (joint venture
Lake City, Utah, Astronaut, between Lockheed
Space Shuttle Discovery and Martin and The
Vice Chairman, Huntsman Boeing Company) and
Corporation (chemical Nuskin Asia Pacific
company). (multilevel
marketing); member
of the board of
various civic and
charitable
organizations.
Wayne E. Hedien (70) Director Director Retired; Director or Trustee 211 Director of the PMI
WEH Associates since of the Retail Funds and the Group Inc. (private
5750 Old Orchard Road 2003 Institutional Funds; mortgage insurance);
Suite 530 formerly associated with the Trustee and Vice
Skokie, IL 60077 Allstate Companies, most Chairman of the
recently as Chairman of The Field Museum of
Allstate Corporation and Natural History;
Chairman and Chief Executive director of various
Officer of its wholly -owned other business and
subsidiary, Allstate charitable
Insurance Company. organizations.
Dr. Manuel H. Johnson Director Director Chairman of the Audit 211 Director of NVR,
(55) since Committee and Director or Inc. (home
Johnson Smick Group, 2003 Trustee of the Retail Funds construction);
Inc. and the Institutional Funds; Chairman and Trustee
2099 Pennsylvania Senior Partner, Johnson of the Financial
Avenue, NW Suite 950 Smick International, Inc. Accounting
Washington, D.C. 20006 (consulting firm); Foundation
Co-Chairman and a founder of (oversight
the Group of Seven Council organization of the
(G7C), an international Financial Accounting
economic commission; Standards Board);
formerly, Vice Chairman of Director of RBS
the Board of Governors of Greenwich Capital
the Federal Reserve System Holdings (financial
and Assistant Secretary of holdings company).
the U.S. Treasury.
* Each director serves an indefinite term, until his or her successor is
elected.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
- --------------------------------------------------------------------------------
Information Concerning Directors and Officers (Unaudited)
Term of Number of
Position(s) Office/ Portfolios Other
Held Length of Principal Overseen Directorships
with the Time Occupation(s) Within the Held Outside
Name, Address and Age Partnership Served* During Past 5 Years Complex ** the Complex **
- ----------------------- ----------- --------- ---------------------------- ---------- --------------------
Joseph J. Kearns (61) Director Director Deputy Chairman of the Audit 212 Director of Electro
Kearns & Associates LLC since Committee and Director or Rent Corporation
PMB754 1994 Trustee of the Retail Funds (equipment leasing),
23852 Pacific Coast and the Institutional The Ford Family
Malibu Highway, Funds; previously Chairman Foundation and the
CA 90265 of the Audit Committee of UCLA Foundation.
the Institutional Funds;
President, Kearns &
Associates LLC (investment
consulting); formerly, CFO
of The J. Paul Getty Trust
Michael Nugent (67) Director Director Chairman of the Insurance 211 Director of various
Triumph Capital, L.P. since Committee and Director or business
445 Park Avenue, 2002 Trustee of the Retail Funds organizations.
10th Floor and the Institutional Funds;
New York, NY 10022 General Partner of Triumph
capital, L.P., (private
investment partnership);
formerly, Vice President,
Bankers Trust Company and BT
Capital Corporation.
Fergus Reid (71) Director Director Director or Trustee of the 212 Trustee and Director
Lumelite Plastics since Retail Funds and the of certain
85 Charles Coleman 2002 Institutional Funds; investment companies
Blvd. Chairman of Lumelite in the JP Morgan
Pawling, NY 12564 Plastics Corporation. Funds complex
managed by JP Morgan
Investment
Management Inc.
* Each director serves an indefinite term, until his or her successor is
elected.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
- --------------------------------------------------------------------------------
Information Concerning Directors and Officers (Unaudited)
Term of Number of
Position(s) Office/ Portfolios Other
Held Length of Principal Overseen Directorships
with the Time Occupation(s) Within the Held Outside
Name, Address and Age Partnership Served* During Past 5 Years Complex ** the Complex **
- ----------------------- ----------- --------- ---------------------------- ---------- --------------------
Interested Directors**
Charles A. Fiumefreddo Chairman Chairman Chairman and Director or 211 None
(70) and and Trustee of the Retail Funds
Morgan Stanley Funds Director Director and the Institutional Funds;
Harborside Financial since formerly, Chief Executive
Center 2003 Officer of the Retail Funds
Plaza Two 3rd Floor and TCW/DW Term Trust 2003.
Jersey City, NJ 07311
James F. Higgins (56) Director Director Director or Trustee of the 211 Director of AXA
Morgan Stanley since Retail Funds and the Financial, Inc. and
Harborside Financial 2003 Institutional Funds; Senior The Equitable Life
Center Advisor of Morgan Stanley; Assurance Society of
Plaza Two 2nd Floor Director of Morgan Stanley the United States
Jersey City, NJ 07311 Distributors Inc. and Dean (financial
Witter Realty Inc.; services).
previously President and
Chief Operating Officer of
the Private Client Group of
Morgan Stanley and President
and Chief Operating Officer
of Individual Securities of
Morgan Stanley.
Philip J. Purcell (60) Director Director Director or Trustee of the 211 Director of American
Morgan Stanley since Retail Funds and the Airlines, Inc. and
1585 Broadway 2003 Institutional Funds; its parent company,
39th Floor Chairman of the Board of AMR Corporation.
New York, NY 10036 Directors and Chief
Executive Officer of Morgan
Stanley and Morgan Stanley
DW Inc.; Director of Morgan
Stanley Distributors Inc.;
Chairman of the Board of
Directors and Chief
Executive Officer of Novus
Credit Services Inc.;
Director and/or officer of
various Morgan Stanley
subsidiaries.
* Each Director serves an indefinite term, until his or her successor is
elected.
** The Complex includes all funds that have an investment advisor that is an
affiliated entity of Morgan Stanley Investment Management Inc. ("MSIM"), Morgan
Stanley Investment Advisors Inc. ("MSIA") and Morgan Stanley AIP GP LP). The
Retail Funds are those funds advised by MSIA. The Institutional Funds are
certain U.S. registered funds advised by MSIM and Morgan Stanley AIP GP LP.
Additional information about the Partnership's Directors can be found in the
Partnership's Private Placement Memorandum (PPM). The PPM may be obtained
without charge upon request, by calling the Partnership at 1 -610-260-7600. You
may also retrieve this information on-line at the Securities and Exchange
Commission's web site at "http://www.sec.gov". To aid you in obtaining this
information on-line, the Partnership's Central Index Key (CIK) number is
0001161973 and the PPM is found within form type POS AMI.
23
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Information Concerning Directors and Officers (Unaudited)
Term of
Position(s) Office/
Held Length of
with the Time Principal Occupation(s)
Name, Address and Age Partnership Served* During Past 5 Years
- ----------------------- -------------- ---------- ----------------------------------------------------------
Officers
Mitchell M. Merin (50) President President President and Chief Operating Officer of Morgan Stanley
Morgan Stanley since 2003 Investment Management Inc.; President, Director and Chief
Investment Management Executive Officer of Morgan Stanley Investment Advisors,
Inc. Inc. and Morgan Stanley Services Company Inc.; Chairman
1221 Avenue of the and Director of Morgan Stanley Distributors Inc.; Chairman
Americas and Director of Morgan Stanley Trust; Director of various
33rd Floor Morgan Stanley subsidiaries; President of the
New York, NY 10020 Institutional Funds and President of the Retail Funds;
Trustee and President of the Van Kampen Closed-End funds;
Trustee and President of the Van Kampen Open-End funds.
Ronald E. Robison (65) Executive Vice Executive Chief Global Operations Officer and Managing Director of
Morgan Stanley President and Vice Morgan Stanley Investment Management Inc.; Managing
Investment Management Principal President Director of Morgan Stanley & Co. Incorporated; Managing
Inc. Executive and Director of Morgan Stanley; Managing Director, Chief
1221 Avenue of the Officer Principal Administrative Officer and Director of Morgan Stanley
Americas Executive Investment Advisors Inc. and Morgan Stanley Services
34th Floor Officer Company Inc.; Chief Executive Officer and Director of
New York, NY 10020 since Morgan Stanley Trust; Executive Vice President and
2003 Principal Executive Officer of the Retail Funds;
previously President and Director of the Institutional
Funds.
Barry Fink (49) Vice President Vice General Counsel and Managing Director of Morgan Stanley
Morgan Stanley President Investment Management; Managing Director, Secretary and
Investment Management since 2003 Director of Morgan Stanley Investment Advisors Inc. and
Inc. Morgan Stanley Services Company Inc.; Assistant Secretary
1221 Avenue of the of Morgan Stanley DW Inc.; Vice President and General
Americas Counsel of the Retail Funds; Managing Director, Secretary,
22nd Floor and Director of Morgan Stanley Distributors Inc.;
New York, NY 10020 previously Secretary of the Retail Funds; previously Vice
President and Assistant General Counsel of Morgan Stanley
Investment Advisors Inc. and Morgan Stanley Services
Company Inc.
Joseph J. McAlinden Vice President Vice Managing Director and Chief Investment Officer of Morgan
(60) President Stanley Investment Advisors Inc. and Morgan Stanley
Morgan Stanley since 2003 Investment Management Inc.; Director of Morgan Stanley
Investment Management Trust, Chief Investment Officer of the Van Kampen Funds;
Inc. Vice President of the Institutional Funds and the Retail
1221 Avenue of the Funds.
Americas
33rd Floor
New York, NY 10020
Stefanie V. Chang (37) Vice President Vice Executive Director of Morgan Stanley & Co. Incorporated
Morgan Stanley President and Morgan Stanley Investment Management Inc. and Vice
Investment Management since 2002 President of the Institutional Funds and the Retail Funds;
Inc. formerly practiced law with the New Work law firm of
1221 Avenue of the Rogers & Wells (now Clifford Chance US LLP).
Americas
22nd Floor
New York, NY 10020
Cory Pulfrey (44) Vice President Vice Managing Director of Morgan Stanley Investment Management
Morgan Stanley President Inc. and Morgan Stanley Alternative Investments Inc.; Lead
Alternative Investment since 2003 Portfolio Manager for the Private Markets Portfolios;
Partners LP Formerly, Managing Director of the Weyerhaeuser Pension
One Tower Bridge Fund Investment Group.
100 Front Street, Suite
1100
West Conshohocken, PA
19428
* Each officer serves an indefinite term, until his or her successor is elected.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Information Concerning Directors and Officers (Unaudited)
Term of
Position(s) Office/
Held Length of
with the Time Principal Occupation(s)
Name, Address and Age Partnership Served* During Past 5 Years
- ----------------------- -------------- ---------- ----------------------------------------------------------
Officers
James W. Garrett (35) Treasurer and Assistant Executive Director of Morgan Stanley & Co. Incorporated
Morgan Stanley Chief Treasurer and Morgan Stanley Investment Management Inc.; Treasurer
Investment Management Financial from 2002 and Chief Financial Officer of the Institutional Funds;
Inc. Officer to 2003 Previously with PriceWaterhouse LLP (now
1221 Avenue of the Treasurer PriceWaterhouseCoopers LLP).
Americas and
34th Floor CFO since
New York, NY 10020 2003
Noel Langlois (34) Assistant Treasurer Executive Director of Morgan Stanley & Co. Incorporated
Morgan Stanley Treasurer from 2002 and Morgan Stanley Investment Management Inc. and Vice
Alternative to 2003 President of Morgan Stanley Alternative Investments Inc.;
Investment Partners LP Assistant Chartered Financial Analyst Charterholder.
One Tower Bridge Treasurer
100 Front Street, Suite since 2003
1100
West Conshohocken, PA
19428
Mary E. Mullin (37) Secretary Secretary Executive Director of Morgan Stanley & Co. Incorporated
Morgan Stanley since 2002 and Morgan Stanley Investment Management Inc.; Secretary
Investment Management of the Institutional Funds and the Retail Funds; formerly
Inc. practiced law with the New York law firms of McDermott,
1221 Avenue of the Will & Emery and Skadden, Arps, Slate, Meagher & Flom LLP.
Americas
22nd Floor
New York, NY 10020
* Each officer serves an indefinite term, until his or her successor is elected.
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MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS LP
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Morgan Stanley Institutional Fund of Hedge Funds LP
One Tower Bridge
100 Front Street, Suite 1100
West Conshohocken, Pennsylvania 19428
Directors
Charles A. Fiumefreddo
Michael Bozic
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael Nugent
Philip J. Purcell
Fergus Reid
Officers
Charles A. Fiumefreddo, Chairman of the Board and Director
Mitchell M. Merin, President
Ronald E. Robison, Executive Vice President and Principal Executive Officer
Joseph J. McAlinden, Vice President
Barry Fink, Vice President
Stefanie Chang Yu, Vice President
Cory Pulfrey, Vice President
James W. Garrett, Treasurer and Chief Financial Officer
Noel Langlois, Assistant Treasurer
Mary E. Mullin, Secretary
Investment Adviser
Morgan Stanley AIP GP LP
One Tower Bridge
100 Front Street, Suite 1100
West Conshohocken, Pennsylvania 19428
Administrator, Custodian, Fund Accounting Agent and Escrow Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02116
Independent Auditors
Ernst & Young LLP
5 Times Square
New York, New York 10036
Legal Counsel
Clifford Chance US LLP
200 Park Avenue
New York, New York 10166
26
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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) The Registrant has not amended its Code of Ethics during the
period covered by the shareholder report presented in Item 1
hereto.
(d) The Registrant has not granted a waiver or an implicit waiver
from a provision of its Code of Ethics.
(e) Not applicable.
(f)
(1) The Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Registrant's Board of Managers has determined that it has two "audit
committee financial experts" serving on its audit committee, each of whom are
"independent" Managers. Dr. Manuel H. Johnson and 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 Managers
in the absence of such designation or identification.
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ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2003
Covered
Registrant Entities/(1)/
Audit Fees....................... $ 51,500 N/A
Non-Audit Fees
Audit-Related Fees............ $ 0 $ 93,000/(2)/
Tax Fees ..................... $ 17,500/(3)/ $ 163,414/(4)/
All Other Fees................ $ 0 $ 341,775/(5)/
Total Non-Audit Fees............. $ 17,500 $ 598,189
Total............................ $ 69,000 $ 598,189
2002
Covered
Registrant Entities/(1)/
Audit Fees....................... $ 85,000 N/A
Non-Audit Fees
Audit-Related Fees............ $ 0 $ 179,000/(2)/
Tax Fees...................... $ 17,000/(3)/ $ 0
All Other Fees................ $ 0 $ 595,150/(6)/
Total Non-Audit Fees............. $ 17,000 $ 774,150
Total............................ $ 102,000 $ 774,150
- ----------
N/A- Not applicable, as not required by Item 4.
/(1)/ Covered Entities include Morgan Stanley AIP GP LP (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, including Registrant's general partner, Morgan Stanley
Alternative Investment Partners LP.
/(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.
/(3)/ Tax Fees represent tax advice and compliance services provided in
connection with the review of the Registrant's tax return.
/(4)/ Tax Fees represent tax advice services provided to Covered Entities,
including research and identification of Passive Foreign Investment
Company entities.
/(5)/ All Other Fees represent attestation services provided in connection with
performance presentation standards.
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/(6)/ All Other Fees represent attestation services provided in connection with
performance presentation standards, general industry education seminars
provided, and a regulatory review project performed.
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
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.
For both types of pre-approval, the Audit Committee will consider whether
such services are consistent with the SEC's rules on auditor independence. The
Audit Committee will also consider whether the Independent Auditors are best
positioned to provide the most effective and efficient services, for reasons
such as its familiarity with the Fund's business, people, culture, accounting
systems, risk profile and other factors, and whether the service might enhance
the Fund's ability to manage or control risk or improve audit quality. All such
factors will be considered as a whole, and no one factor should necessarily be
determinative.
The Audit Committee is also mindful of the relationship between fees for
audit and non-audit services in deciding whether to pre-approve any such
services and may determine for each fiscal year, the appropriate ratio between
the total amount of fees for Audit, Audit-related and Tax services for the Fund
(including any Audit-related or Tax service fees for Covered Entities that were
subject to pre-approval), and the total amount of fees for certain permissible
non-audit services classified as All Other services for the Fund (including any
such services for Covered Entities subject to pre-approval).
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.
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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.
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 monitor the Audit services engagement as necessary, but no less
than on a quarterly basis, and will also 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 following Audit services. All
other Audit services not listed below must be specifically pre-approved by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
has been delegated):
. Statutory audits or financial audits for the Fund.
. Services associated with SEC registration statements (including new
funds), periodic reports and other documents filed with the SEC or
other documents issued in connection with securities offerings (e.g.,
comfort letters for closed-end fund offerings, consents), and
assistance in responding to SEC comment letters.
. Consultations by the Fund's management as to the accounting or
disclosure treatment of transactions or events and/or the actual or
potential impact of final or proposed rules, standards or
interpretations by the SEC, FASB, or other regulatory or standard
setting bodies (Note: Under SEC rules, some consultations may be
"audit related" services rather than "audit" services).
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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 -CSR.
The Audit Committee has pre-approved the following Audit-related services.
All other Audit-related services not listed below must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated):
. Attest procedures not required by statute or regulation (including
agreed upon procedures related to the Closed-End Fund asset coverage
tests required by the rating agencies and/or lenders and agreed upon
procedures related to fund profitability analysis in connection with
15c management contract renewal process.
. Services associated with registration statement with Japanese
regulatory authorities, including issuance of consent and opinion for
Morgan Stanley Asia-Pacific Fund.
. Due diligence services pertaining to potential fund mergers.
. Issuance of SAS-70 reports on internal controls of a service provider.
. Consultations by the Fund's management as to the accounting or
disclosure treatment of transactions or events and/or the actual or
potential impact of final or proposed rules, standards or
interpretations by the SEC, FASB, or other regulatory or
standard-setting bodies (Note: Under SEC rules, some consultations may
be "audit" services rather than "audit-related" services).
. Information systems reviews not performed in connection with the audit
(e.g., application data center and technical reviews).
. General assistance with implementation of the requirements of SEC
rules or listing standards promulgated pursuant to the Sarbanes-Oxley
Act.
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. Hence, the Audit Committee believes it may grant
general pre-approval to those Tax services that have historically been provided
by the Independent
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Auditors, that the Audit Committee has reviewed and believes would not impair
the independence of the Independent Auditors, and that are consistent with the
SEC's rules on auditor independence. The Audit Committee will not permit the
retention of the Independent Auditors in connection with a transaction initially
recommended by the Independent Auditors, the sole business purpose of which may
be tax avoidance and the tax treatment of which may not be supported in the
Internal Revenue Code and related regulations. The Audit Committee will consult
with Director of Tax or outside counsel to determine that the tax planning and
reporting positions are consistent with this policy.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved
the following Tax Services. All Tax services involving large and complex
transactions not listed below must be specifically pre-approved by the Audit
Committee (or by any member of the Audit Committee to which pre-approval has
been delegated), including tax services proposed to be provided by the
Independent Auditors to any executive officer or trustee/director/managing
general partner of the Fund, in his or her individual capacity, where such
services are paid for by the Fund (generally applicable only to internally
managed investment companies):
. U.S. federal, state and local tax planning and advice.
. U.S. federal, state and local tax compliance.
. International tax planning and advice.
. International tax compliance.
. Review/preparation of federal, state, local and international income,
franchise, and other tax returns.
. Identification of Passive Foreign Investment Companies.
. Preparation of local Indian Tax Returns.
. Domestic and foreign tax planning, compliance, and advice.
. Assistance with tax audits and appeals before the IRS and similar
state, local and foreign agencies.
. Tax advice and assistance regarding statutory, regulatory or
administrative developments (e.g., excise tax reviews, evaluation of
Fund's tax compliance function).
. Review the calculations of taxable income from corporate actions
including reorganizations related to bankruptcy filings and provide
guidance related to the foregoing.
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.
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The Audit Committee has pre-approved the following All Other services.
Permissible All Other services not listed below must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated):
. Risk management advisory services, e.g., assessment and testing of
security infrastructure controls.
The following is a list of the SEC's prohibited non-audit services. The
SEC's rules and relevant guidance should be consulted to determine the precise
definitions of these services and the applicability of exceptions to certain of
the prohibitions:
. Bookkeeping or other services related to the accounting records or
financial statements of the audit client.
. Financial information systems design and implementation.
. Appraisal or valuation services, fairness opinions or
contribution-in-kind reports.
. Actuarial services.
. Internal audit outsourcing services.
. Management functions.
. Human resources.
. Broker-dealer, investment adviser or investment banking services.
. Legal services.
. Expert services unrelated to the audit.
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. For each fiscal year, the Audit
Committee may determine the appropriate ratio between the total amount of fees
for Audit, Audit-related, and Tax services for the Fund (including any
Audit-related or Tax services fees for Covered Entities subject to
pre-approval), and the total amount of fees for certain permissible non-audit
services classified as All Other services for the Fund (including any such
services for Covered Entities subject to pre-approval).
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
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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.
The Audit Committee will also review the internal auditor's annual internal
audit plan to determine that the plan provides for the monitoring of the
Independent Auditors' services.
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
Morgan Stanley Investments LP
Van Kampen Asset Management Inc.
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
Morgan Stanley Institutional Funds
----------------------------------
Morgan Stanley Investment Management Inc.
Morgan Stanley Investments LP
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
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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 Managers 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. [RESERVED]
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:
I. POLICY STATEMENT
----------------
Introduction - Morgan Stanley Investment Management's ("MSIM") policies and
procedures for voting proxies with respect to securities held in the
accounts of clients applies to those MSIM entities that provide
discretionary Investment Management services and for which a MSIM entity
has the authority to vote their proxies. The policies and procedures and
general guidelines in this section will be reviewed and, as necessary,
updated periodically to address new or revised proxy voting issues. The
MSIM entities covered by these policies and procedures currently include
the following: Morgan Stanley Investment Advisors Inc., Morgan Stanley
Alternative Investment Partners, L.P., Morgan Stanley AIP GP LP, Morgan
Stanley Investment Management Inc., Morgan Stanley Investment Group 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, Morgan
Stanley Investments LP, Morgan Stanley Hedge Fund Partners GP LP, Morgan
Stanley Hedge Fund Partners LP, Van Kampen Investment Advisory Corp., Van
Kampen Asset Management Inc., and Van Kampen Advisors Inc. (each a "MSIM
Affiliate" and collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will vote proxies as part of its authority to manage,
acquire and dispose of account assets. With respect to the MSIM registered
management investment companies (Van Kampen, Institutional and Advisor
Funds)(collectively referred to as the "MSIM Funds"), each MSIM Fund will
vote proxies pursuant to authority granted under its applicable investment
advisory agreement or, in the absence of such authority, as authorized by
its Board of Directors or Trustees. A MSIM Affiliate will not vote proxies
if the "named fiduciary" for an ERISA account has reserved the authority
for itself, or in the case of an account not governed by ERISA, the
Investment Management Agreement does not authorize the MSIM Affiliate to
vote proxies.
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MSIM Affiliates will, in a prudent and diligent manner, vote proxies in the
best interests of clients, including beneficiaries of and participants in a
client's benefit plan(s) for which we 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 a
MSIM Affiliate with a statement of proxy voting policy. In these
situations, the MSIM Affiliate will comply with the client's policy unless
to do so would be inconsistent with applicable laws or regulations or the
MSIM Affiliate's fiduciary responsibility.
Proxy Research Services - To assist the MSIM Affiliates in their
responsibility for voting proxies and the overall global proxy voting
process, Institutional Shareholder Services ("ISS") and the Investor
Responsibility Research Center ("IRRC") have been retained as experts in
the proxy voting and corporate governance area. ISS and IRRC 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 to MSIM Affiliates include in-depth
research, global issuer analysis, and voting recommendations. In addition
to research, ISS provides vote execution, reporting, and recordkeeping.
MSIM's Proxy Review Committee (see Section IV.A. below) will carefully
monitor and supervise the services provided by the proxy research services.
Voting Proxies for certain Non-US Companies - While the proxy voting
process is well established in the United States and other developed
markets with a number of tools and services available to assist an
investment manager, voting proxies of non-US companies located in certain
jurisdictions, particularly emerging markets, may involve a number of
problems that may restrict or prevent a MSIM Affiliate's ability to vote
such proxies. 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
the MSIM Affiliate's voting instructions. As a result, clients' non-U.S.
proxies will be voted on a best efforts basis only, consistent with the
Client Proxy Standard. ISS has been retained to provide assistance to the
MSIM Affiliates in connection with voting their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
-------------------------------
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these
Proxy Voting Policies and Procedures, including the guidelines set forth
below. These guidelines address a broad range of issues, including board
size and composition, executive compensation, anti-takeover proposals,
capital structure proposals and social responsibility issues and are meant
to be general voting parameters on issues that arise most frequently. The
MSIM Affiliates, however, may vote in a manner that is contrary to the
following general guidelines, pursuant to the procedures set forth in
Section IV. below, provided the vote is consistent with the Client Proxy
Standard.
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III. GUIDELINES
----------
A. Management Proposals
1. When voting on routine ballot items the following proposals are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
. Selection or ratification of auditors.
. Approval of financial statements, director and auditor reports.
. Election of Directors.
. Limiting Directors' liability and broadening indemnification of
Directors.
. Requirement that a certain percentage (up to 66 2/3%) of its
Board's members be comprised of independent and unaffiliated
Directors.
. Requirement that members of the company's compensation,
nominating and audit committees be comprised of independent or
unaffiliated Directors.
. Recommendations to set retirement ages or require specific levels
of stock ownership by Directors.
. General updating/corrective amendments to the charter.
. Elimination of cumulative voting.
. Elimination of preemptive rights.
. Provisions for confidential voting and independent tabulation of
voting results.
. Proposals related to the conduct of the annual meeting except
those proposals that relate to the "transaction of such other
business which may come before the meeting."
2. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
Capitalization changes
----------------------
. Capitalization changes that eliminate other classes of stock and
voting rights.
. Proposals to increase the authorization of existing classes of
common stock (or securities convertible into common stock) if:
(i) a clear and legitimate business purpose is stated; (ii) the
number of shares requested is reasonable in relation to the
purpose for which authorization is requested; and (iii) the
authorization does not exceed 100% of shares currently authorized
and at least 30% of the new authorization will be outstanding.
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. Proposals to create a new class of preferred stock or for
issuances of preferred stock up to 50% of issued capital.
. Proposals for share repurchase plans.
. Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
. Proposals to effect stock splits.
. 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 will generally be
approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for common stock
increases.
Compensation
------------
. Director fees, provided the amounts are not excessive relative to
other companies in the country or industry.
. Employee stock purchase plans that permit discounts up to 15%,
but only for grants that are part of a broad based employee plan,
including all non-executive employees.
. Establishment of Employee Stock Option Plans and other employee
ownership plans.
Anti-Takeover Matters
---------------------
. Modify or rescind existing supermajority vote requirements to
amend the charters or bylaws.
. Adoption of anti-greenmail provisions provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large
block holders 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.
3. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on the shareholder, are
generally voted against (notwithstanding management support), subject
to the review and approval of the Proxy Review Committee, as
appropriate.
. Capitalization changes that add classes of stock which
substantially dilute the voting interests of existing
shareholders.
. Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting
rights.
. Creation of "blank check" preferred stock.
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. Changes in capitalization by 100% or more.
. Compensation proposals that allow for discounted stock options
that have not been offered to employees in general.
. Amendments to bylaws that would require a supermajority
shareholder vote to pass or repeal certain provisions.
. Proposals to indemnify auditors.
4. The following types of non-routine proposals, which potentially may
have a potential financial or best interest impact on an issuer, are
voted as determined by the Proxy Review Committee.
Corporate Transactions
----------------------
. Mergers, acquisitions and other special corporate transactions
(i.e., takeovers, spin-offs, sales of assets, reorganizations,
restructurings and recapitalizations) will be examined on a
case-by-case basis. In all cases, ISS and IRRC research and
analysis will be used along with MSIM Affiliates' research and
analysis, based on, among other things, MSIM internal
company-specific knowledge.
. Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements that benefit
management and would be costly to shareholders if triggered.
Shareholders rights plans that allow appropriate offers to
shareholders to be blocked by the board or trigger provisions
that prevent legitimate offers from proceeding.
. Executive/Director stock option plans. Generally, stock option
plans should meet the following criteria:
(i) Whether the stock option plan is incentive based;
(ii) For mature companies, should be no more than 5% of the
issued capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the
issued capital at the time of approval.
Anti-Takeover Provisions
------------------------
. Proposals requiring shareholder ratification of poison pills.
. Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or
effectively deter the appropriate tender offers and other offers.
B. Shareholder Proposals
1. The following shareholder proposals are generally supported, subject
to the review and approval of the Proxy Review Committee, as
appropriate:
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. Requiring auditors to attend the annual meeting of shareholders.
. Requirement that members of the company's compensation,
nominating and audit committees be comprised of independent or
unaffiliated Directors.
. Requirement that a certain percentage of its Board's members be
comprised of independent and unaffiliated Directors.
. Confidential voting.
. Reduction or elimination of supermajority vote requirements.
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
. Proposals that limit tenure of directors.
. Proposals to limit golden parachutes.
. Proposals requiring directors to own large amounts of stock to be
eligible for election.
. Restoring cumulative voting in the election of directors.
. Proposals that request or require disclosure of executive
compensation in addition to the disclosure required by the
Securities and Exchange Commission ("SEC") regulations.
. Proposals that limit retirement benefits or executive
compensation.
. Requiring shareholder approval for bylaw or charter amendments.
. Requiring shareholder approval for shareholder rights plan or
poison pill.
. Requiring shareholder approval of golden parachutes.
. Elimination of certain anti-takeover related provisions.
. Prohibit payment of greenmail.
3. The following shareholder proposals are generally not supported,
subject to the review and approval of the Committee, as appropriate.
. Requirements that the issuer prepare reports that are costly to
provide or that would require duplicative efforts or expenditures
that are of a non-business nature or would provide no pertinent
information from the perspective of institutional shareholders.
. Restrictions related to social, political or special interest
issues that impact the ability of the company to do business or
be competitive and that have a significant financial or best
interest impact to the shareholders.
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. Proposals that require inappropriate endorsements or corporate
actions.
IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. Proxy Review Committee
1. The MSIM Proxy Review Committee ("Committee") is responsible for
creating and implementing MSIM's Proxy Voting Policy and Procedures
and, in this regard, has expressly adopted them. Following are some of
the functions and responsibilities of the Committee.
(a) The Committee, which will consist of members designated by MSIM's
Chief Investment Officer, is responsible for establishing MSIM's
proxy voting policies and guidelines and determining how MSIM
will vote proxies on an ongoing basis.
(b) The Committee will periodically review and have the authority to
amend as necessary MSIM's proxy voting policies and guidelines
(as expressed in these Proxy Voting Policy and Procedures) and
establish and direct voting positions consistent with the Client
Proxy Standard.
(c) The Committee will meet at least monthly to (among other
matters): (1) address any outstanding issues relating to MSIM's
Proxy Voting Policy and Procedures; and (2) generally review
proposals at upcoming shareholder meetings of MSIM portfolio
companies in accordance with this Policy and Procedures
including, as appropriate, the voting results of prior
shareholder meetings of the same issuer where a similar proposal
was presented to shareholders. The Committee, or its designee,
will timely communicate to ISS MSIM's Proxy Voting Policy and
Procedures (and any amendments to them and/or any additional
guidelines or procedures it may adopt).
(d) The Committee will meet on an ad hoc basis to (among other
matters): (1) authorize "split voting" (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
Procedures); (2) review and approve upcoming votes, as
appropriate, for matters for which specific direction has been
provided in Sections I, II, and III above; and (3) determine how
to vote matters for which specific direction has not been
provided in Sections I, II and III above. Split votes will
generally not be approved within a single Global Investor Group
team. The Committee may take into account ISS recommendations and
the research provided by IRRC as well as any other relevant
information they may request or receive.
(e) In addition to the procedures discussed above, if the Committee
determines that an issue raises a potential material conflict of
interest, or gives rise to the appearance of a potential material
conflict of interest, the Committee will designate a special
committee to review, and recommend a course of action with
respect to, the conflict(s) in question ("Special Committee").
The Special Committee may request the assistance of the Law and
Compliance Departments
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and will have sole discretion to cast a vote. In addition to the
research provided by ISS and IRRC, the Special Committee may
request analysis from MSIM Affiliate investment professionals and
outside sources to the extent it deems appropriate.
(f) The Committee and the Special Committee, or their designee(s),
will document in writing all of their decisions and actions,
which documentation will be maintained by the Committee and the
Special Committee, or their designee(s) for a period of at least
6 years. To the extent these decisions relate to a security held
by a MSIM U.S. registered investment company, the Committee and
Special Committee, or their designee(s), will report their
decisions to each applicable Board of Trustees/Directors of those
investment companies at each Board's next regularly Scheduled
Board meeting. The report will contain information concerning
decisions made by the Committee and Special Committee during the
most recently ended calendar quarter immediately preceding the
Board meeting.
(g) The Committee and Special Committee, or their designee(s), will
timely communicate to applicable PMs, the Compliance Departments
and, as necessary to ISS, decisions of the Committee and Special
Committee so that, among other things, ISS will vote proxies
consistent with their decisions.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
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.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Registrant's internal
controls or in other factors that could significantly affect the Registrant's
internal controls subsequent to the date of their evaluation.
ITEM 10. EXHIBITS.
(a) Code of Ethics
(b) Certifications of Principal Executive Officer and Principal
Financial Officer attached to this report as part of EX-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/ Ronald E. Robison
-----------------------------------
Name: Ronald E. Robison
Title: March 8, 2004
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/ Ronald E. Robison
-----------------------------------
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: March 8, 2004
By: /s/ James W. Garrett
-----------------------------------
Name: James W. Garrett
Title: Principal Financial Officer
Date: March 8, 2004