UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
N-CSR
CERTIFIED
SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment
Company Act file number: 811-21831
ALTERNATIVE
INVESTMENT PARTNERS ABSOLUTE RETURN FUND STS
(Exact
name of Registrant as specified in Charter)
100
Front Street, Suite 400
West Conshohocken, Pennsylvania 19428-2881
(Address
of principal executive offices)
Registrant’s
Telephone Number, including Area Code: (610) 260-7600
Kara
Fricke, Esq.
Morgan Stanley Investment Management Inc.
1633 Broadway
New York, New York 10019
(Name
and address of agent for service)
COPY
TO:
Allison
M. Fumai, Esq.
DECHERT LLP
1095 Avenue of the Americas
New York, NY 10036-6797
(212) 698-3500
Date of fiscal year
end: December 31
Date of reporting
period: December 31, 2023
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ITEM
1. |
REPORTS
TO STOCKHOLDERS. The Registrant’s annual report transmitted to shareholders
pursuant to Rule 30e-1 under the Investment Company Act of 1940 is as follows: |
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ALTERNATIVE INVESTMENT PARTNERS
ABSOLUTE RETURN FUND STS
Consolidated Financial Statements with Report of
Independent Registered Public Accounting Firm
For the Year Ended December 31, 2023
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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.
Lee Spector, Executive Director of Morgan Stanley Alternative Investment LLC, the General Partner
of Morgan Stanley AIP GP LP, the Commodity Pool Operator of Alternative Investment Partners
Absolute Return Fund STS
(This oath is required by Section 4.12(c)(3) of the Commodity Futures Trading Commission Regulations under the
Commodity Exchange Act, as amended.)
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Audited financial statements for Alternative Investment Partners Absolute Return Fund for the year ended December 31, 2023
are attached to these consolidated financial statements and are an integral part thereof.
Alternative Investment Partners Absolute Return Fund STS
Consolidated Financial Statements with Report of Independent
Registered Public Accounting Firm
For the Year Ended December 31, 2023
Contents
Management’s Discussion of Fund Performance (Unaudited)………………………………………1
Report of Independent Registered Public Accounting Firm …………………………………………………….. 4
Audited Consolidated Financial Statements
Consolidated Statement of Assets and Liabilities …………………………………………………………………… 5
Consolidated Statement of Operations ………………………………………………………………………………….. 6
Consolidated Statements of Changes in Net Assets ………………………………………………………………… 7
Consolidated Statement of Cash Flows ………………………………………………………………………………… 8
Notes to Consolidated Financial Statements ………………………………………………………………………….. 9
Proxy Voting Policies and Procedures and Proxy Voting Record (Unaudited) …………………………. 15
Quarterly Portfolio Schedule (Unaudited) …………………………………………………………………………… 15
Information Concerning Trustees and Officers (Unaudited) ………………………………………………….. 16
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1
Alternative Investment Partners Absolute Return Fund STS
Management’s Discussion of Fund Performance
Investment Objective and Strategy Summary
Alternative Investment Partners Absolute Return Fund STS’s (the “Fund”) investment objective is to seek
capital appreciation.
The Fund, through the investment of substantially all of its assets in Alternative Investment Partners
Absolute Return Fund (the “Master Fund”), invests substantially all its assets in private investment funds
(commonly referred to as hedge funds) that are managed by a select group of alternative investment
managers that employ different “absolute return” investment strategies in pursuit of attractive risk-adjusted returns consistent with the preservation of capital. “Absolute return” refers to a broad class of
investment strategies that are managed without reference to the performance of equity, debt and other
markets. “Absolute return” investment strategies allow unaffiliated third-party investment managers the
flexibility to use leveraged or short-sale positions to take advantage of perceived inefficiencies across the
global capital markets. These strategies are in contrast to the investment programs of “traditional”
registered investment companies, such as mutual funds. Absolute return strategies can be contrasted with
“relative return strategies” which generally seek to outperform a corresponding benchmark equity or fixed
income index. The Master Fund seeks attractive “risk-adjusted” returns, which are returns adjusted to take
into account the volatility of those returns. The Master Fund intends to invest in private investment funds
that employ the following principal strategies: relative value strategies, security selection strategies,
specialist credit strategies and directional strategies.
Performance Discussion
Total Returns
One Year Five Years Ten Years
Alternative Investment Partners Absolute Return Fund STS 5.75% 6.30% 4.47%
Average Annual
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2
Alternative Investment Partners Absolute Return Fund STS
Management’s Discussion of Fund Performance (continued)
Performance Discussion (continued)
The chart below illustrates the growth of a hypothetical $50,000 investment in the Fund over the ten years
ending December 31, 2023.
Performance data quoted represents past performance, which is not predictive of future results, and
current performance may be lower or higher than the figures shown. Total returns do not reflect the
deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
During the twelve months ended December 31, 2023, the Fund returned 5.75% (excluding sales load),
outperforming bonds (Bloomberg US Aggregate Bond Index +5.53%) and cash (1 month SOFR +5.20%),
but underperforming equities (S&P 500 Total Return Index +26.29%). The Fund continued its recent
history of generating positive returns untethered from the performance of stocks – the Fund’s 3 year beta
to the S&P 500 Total Return Index at December 31, 2023 is 0.00. In 2022, the Fund’s limited equity beta
benefited the Fund as equities declined; in 2023 the Fund’s limited equity beta resulted in the Fund
receiving little to no benefit from the equity rally.
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3
Alternative Investment Partners Absolute Return Fund STS
Management’s Discussion of Fund Performance (continued)
Performance Discussion (continued)
Each of the Master Fund’s eleven strategies generated positive results in 2023:
CTA/Managed Futures 0.92%
Distressed 0.55%
Equity L/S High Hedge 2.54%
Equity L/S Opportunistic 0.34%
Event Driven Credit 0.51%
Fixed Income Arbitrage 0.62%
Macro 0.27%
Multi Strategy 0.02%
Other Directional 0.09%
Private Placements 0.45%
Statistical Arbitrage 3.43%
Statistical Arbitrage funds (+9.20% average return in 2023), which carry little to no net equity beta,
generated positive results in each quarter, led by Torus (+15.1%) and Squarepoint Focus (+13.9%).
Equity Long/Short High Hedge funds (+12.27% in 2023), with little equity beta, generated positive
results in each month, profiting from multiple funds. Multi-manager platform funds (Alyeska Fund LP
+16.5%, Holocene Advisors Fund LP +11.5%) generated consistently positive results, largely profiting
from equity trading.
Thank you for your support for the Fund.
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4
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of Alternative Investment Partners Absolute Return Fund STS
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of assets and liabilities of Alternative Investment
Partners Absolute Return Fund STS (the “Fund”), as of December 31, 2023, and the related consolidated
statements of operations and cash flows for the year then ended, the consolidated statements of changes in net
assets for each of the two years in the period then ended and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
consolidated financial position of the Fund at December 31, 2023, the consolidated results of its operations and
its cash flows for the year then ended and the consolidated changes in its net assets for each of the two years in
the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an
opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform,
an audit of the Fund’s internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on
the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of December 31, 2023, by correspondence with
the transfer agent. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more Morgan Stanley investment companies since 2000.
Boston, Massachusetts
February 29, 2024
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See accompanying notes and attached audited financial statements for Alternative Investment Partners Absolute Return Fund.
5
Alternative Investment Partners Absolute Return Fund STS
Consolidated Statement of Assets and Liabilities
December 31, 2023
Assets
Investment in Alternative Investment Partners Absolute Return Fund, at fair value 173,758,141 $
Cash and cash equivalents 994,579 Repurchases receivable from Alternative Investment Partners Absolute Return Fund 3,306,439 Withholding tax credit 251,866
Total assets 178,311,025 Liabilities
Payable for share repurchases 3,081,439
Due to Alternative Investment Partners Absolute Return Fund 641,896 Subscriptions received in advance 50,000 Accrued expenses and other liabilities 112,942
Total liabilities 3,886,277 Net assets $ 174,424,748
Net assets consist of:
Net capital 48,805,685 $
Total distributable earnings (loss) 125,619,063 Net assets $ 174,424,748
Net asset value per share:
87,783.074 shares issued and outstanding, no par value,
1,000,000 registered shares 1,987.00 $
Maximum offering price per share
($1,987.00 plus sales load of 3% of net asset value per share) 2,046.61 $
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See accompanying notes and attached audited financial statements for Alternative Investment Partners Absolute Return Fund.
6
Alternative Investment Partners Absolute Return Fund STS
Consolidated Statement of Operations
For the Year Ended December 31, 2023
Net investment income (loss) allocated from Alternative Investment Partners
Absolute Return Fund
Dividend income 134,553 $
Expenses (5,903,386) Net investment income (loss) allocated from Alternative Investment Partners
Absolute Return Fund (5,768,833)
Fund expenses
Withholding taxes 873,644 Professional fees 227,877
Transfer agent fees 86,825 Printing fees 30,026
Registration fees 25,964
Trustees’ fees 4,447 Custody fees 3,260
Other 5,105
Total fund expenses 1,257,148 Net investment income (loss) (7,025,981) Realized and unrealized gain (loss) from investments allocated from
Alternative Investment Partners Absolute Return Fund
Net realized gain (loss) from investments 7,540,354 Net change in unrealized appreciation (depreciation) on investments 9,285,888 Net realized and unrealized gain (loss) from investments allocated from
Alternative Investment Partners Absolute Return Fund 16,826,242 Net increase (decrease) in net assets resulting from operations 9,800,261 $
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See accompanying notes and attached audited financial statements for Alternative Investment Partners Absolute Return Fund.
7
Alternative Investment Partners Absolute Return Fund STS
Consolidated Statements of Changes in Net Assets
For the year ended December 31, 2022
Net increase (decrease) in net assets resulting from operations:
Net investment income (loss) $ (5,927,882)
Net realized gain (loss) from investments 17,904,302
Net change in unrealized appreciation (depreciation) on investments (2,729,538)
Net increase (decrease) in net assets resulting from operations 9,246,882
Shareholder transactions:
Subscriptions (representing 346.222 shares) 625,000
Repurchases (representing 7,139.005 shares) (13,014,347)
Net increase (decrease) in net assets from shareholder transactions (12,389,347)
Total increase (decrease) in net assets (3,142,465)
Net assets, beginning of year (representing 100,343.695 shares) 178,916,273
Net assets, end of year (representing 93,550.912 shares) $ 175,773,808
Net increase (decrease) in net assets resulting from operations:
Net investment income (loss) $ (7,025,981)
Net realized gain (loss) from investments 7,540,354
Net change in unrealized appreciation (depreciation) on investments 9,285,888
Net increase (decrease) in net assets resulting from operations 9,800,261
Shareholder transactions:
Subscriptions (representing 695.439 shares) 1,320,000
Repurchases (representing 6,463.277 shares) (12,469,321)
Net increase (decrease) in net assets from shareholder transactions (11,149,321)
Total increase (decrease) in net assets (1,349,060)
Net assets, beginning of year (representing 93,550.912 shares) 175,773,808
Net assets, end of year (representing 87,783.074 shares) $ 174,424,748
For the year ended December 31, 2023
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See accompanying notes and attached audited financial statements for Alternative Investment Partners Absolute Return Fund.
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Alternative Investment Partners Absolute Return Fund STS
Consolidated Statement of Cash Flows
For the Year Ended December 31, 2023
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations 9,800,261 $
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided by (used in) operating activities:
Net investment (income) loss allocated from Alternative Investment Partners
Absolute Return Fund 5,768,833 Net realized (gain) loss from investments allocated from Alternative Investment
Partners Absolute Return Fund (7,540,354) Net change in unrealized (appreciation) depreciation on investments allocated
from Alternative Investment Partners Absolute Return Fund (9,285,888)
Purchase of investments in Alternative Investment Partners Absolute Return Fund (605,000) Proceeds from sales of investments in Alternative Investment Partners Absolute
Return Fund 13,939,208 (Increase) decrease in repurchases receivable from Alternative Investment Partners
Absolute Return Fund (817,004) (Increase) decrease in withholding tax credit (477) Increase (decrease) in due to Alternative Investment Partners Absolute Return Fund 79,234 Increase (decrease) in accrued expenses and other liabilities (18,579) Net cash provided by (used in) operating activities 11,320,234 Cash flows from financing activities
Subscriptions 1,320,000 Repurchases (12,469,321) Increase (decrease) in payable for share repurchases 586,854 Increase (decrease) in subscriptions received in advance 50,000 Net cash provided by (used in) financing activities (10,512,467) Net change in cash and cash equivalents 807,767 Cash and cash equivalents, at beginning of year 186,812
Cash and cash equivalents, at end of year $ 994,579
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Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements
December 31, 2023
See attached audited financial statements for Alternative Investment Partners Absolute Return Fund.
9
1. Organization and Consolidation
Alternative Investment Partners Absolute Return Fund STS (the “Fund”) was organized under the laws of
the State of Delaware as a statutory trust on October 31, 2005. The Fund commenced operations on
September 1, 2006 and operates pursuant to an Agreement and Declaration of Trust (the “Trust Deed”).
The Fund is registered under the U.S. Investment Company Act of 1940, as amended (the “1940 Act”), as
a closed-end, non-diversified management investment company. The Fund’s term is perpetual unless the
Fund is otherwise terminated under the terms of the Trust Deed or unless and until required by law.
The Fund is a “Feeder” fund in a “Master-Feeder” structure whereby the Fund invests substantially all of
its assets in AIP Absolute Return Fund LDC (the “Offshore Fund”), a Cayman Islands limited duration
company, which in turn invests substantially all of its assets in Alternative Investment Partners Absolute
Return Fund (the “Master Fund”). The Master Fund is a statutory trust organized under the laws of the
State of Delaware and is registered under the 1940 Act, as a closed-end, non-diversified, management
investment company. Morgan Stanley AIP GP LP serves as the Master Fund’s investment adviser (the
“Investment Adviser”). The Investment Adviser is an affiliate of Morgan Stanley and is registered as an
investment adviser under the U.S. Investment Advisers Act of 1940, as amended and as a commodity
trading adviser and a commodity pool operator with the Commodity Futures Trading Commission
(“CFTC”) and the National Futures Association (“NFA”). The Fund and the Offshore Fund have the same
investment objective as the Master Fund. The Master Fund’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 “absolute return” investment strategies in pursuit of
attractive risk-adjusted returns consistent with the preservation of capital. “Absolute return” refers to a
broad class of investment strategies that are managed without reference to the performance of equity,
debt, and other markets. “Absolute return” investment strategies allow investment managers the flexibility
to use leveraged or short-sale positions to take advantage of perceived inefficiencies across the global
capital markets. The Master Fund 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 Fund consolidates the Offshore Fund, a wholly-owned subsidiary, and has included all of the assets
and liabilities and revenues and expenses of the Offshore Fund in the accompanying financial statements.
Intercompany balances have been eliminated through consolidation. As of December 31, 2023, the Fund
had a 59.56% indirect ownership interest in the Master Fund. The financial statements of the Master
Fund, including the Schedule of Investments, are attached to this report and should be read in conjunction
with the Fund’s consolidated financial statements.
The Fund has a Board of Trustees (the “Board”) that has overall responsibility for monitoring and
overseeing the Fund’s investment program and its management and operations. A majority of the
members of the Board (the “Trustees”) are not “interested persons” (as defined by the 1940 Act) of the
Fund or the Investment Adviser. The same Trustees also serve as the Master Fund’s Board of Trustees.
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Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements (continued)
See attached audited financial statements for Alternative Investment Partners Absolute Return Fund.
10
2. Significant Accounting Policies
The following significant accounting policies are in conformity with U.S. generally accepted accounting
principles (“US GAAP”). Such policies are consistently followed by the Fund in preparation of its
consolidated financial statements. Management has determined that the Fund is an investment company in
accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 946, “Financial Services – Investment Companies”, for the purpose of financial reporting.
The preparation of financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
increases or decreases in net assets from operations during the reporting period. Actual results could differ
from those estimates. The Fund’s financial statements are stated in United States dollars.
Investment in the Fund
The Fund offers on a continuous basis through Morgan Stanley Distribution, Inc. (the “Distributor”), an
affiliate of Morgan Stanley, 1,000,000 shares of beneficial interest (“Shares”). The initial closing date
(“Initial Closing Date”) for public offering of Shares was September 1, 2006. Shares were offered until
the Initial Closing Date at an initial offering price of $1,000 per Share, plus any applicable sales load, and
have been continuously offered thereafter for purchase as of the first day of each calendar month at the
Fund’s then current net asset value per Share, plus any applicable sales load. The Distributor may enter
into selected dealer agreements with various brokers and dealers (“Selling Agents”), some of which are
affiliates of the Fund, that have agreed to participate in the distribution of the Fund’s Shares. Shares may
also be purchased through any registered investment adviser (a “RIA”) that has entered into an
arrangement with the Distributor for such RIA to recommend Shares to its clients in conjunction with a
“wrap” fee, asset allocation or other managed asset program by such RIA.
Shares are sold only to certain special tax status investors (“Shareholders”), namely tax-exempt and tax-deferred investors. These investors also must represent that they are “accredited investors” within the
meaning of Rule 501(a) of Regulation D promulgated under the U.S. Securities Act of 1933, as amended.
The Distributor or any Selling Agent or RIA may impose additional eligibility requirements for investors
who purchase Shares through the Distributor or such Selling Agent or RIA. The minimum initial
investment in the Fund by any Shareholder is $50,000. The minimum additional investment in the Fund
by any Shareholder is $25,000. The minimum initial and additional investments may be reduced by the
Fund with respect to certain Shareholders. Shareholders may only purchase their Shares through the
Distributor, a Selling Agent or a RIA.
The Distributor and Selling Agents may charge Shareholders a sales load of up to 3% of the
Shareholder’s purchase. The Distributor or a Selling Agent may, in its discretion, waive the sales load for
certain investors. In addition, purchasers of Shares in conjunction with certain “wrap” fee, asset allocation
or other managed asset programs sponsored by an investment adviser, including an affiliate of the
Adviser, or Morgan Stanley and its affiliates (including the Adviser) and the directors, partners,
principals, officers and employees of Morgan Stanley and its affiliates may not be charged a sales load by
the Distributor or Selling Agent.
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Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements (continued)
See attached audited financial statements for Alternative Investment Partners Absolute Return Fund.
11
2. Significant Accounting Policies (continued)
Investment in the Fund (continued)
The Fund may from time to time offer to repurchase Shares (or portions of them) at net asset value
pursuant to written tenders by Shareholders. Any offer to repurchase Shares by the Fund is only made to
Shareholders at the same times as, and in parallel with, each repurchase offer made by the Master Fund to
its investors, including, indirectly, the Fund. Each such repurchase offer made by the Master Fund will
generally apply to up to 15% of the net assets of the Master Fund. Repurchases are made at such times, in
such amounts and on such terms as may be determined by the Board, in its sole discretion. In determining
whether the Fund should offer to repurchase Shares (or portions of them) from Shareholders, the Board
will consider the recommendations of the Adviser as to the timing of such an offer, as well as a variety of
operational, business and economic factors. The Adviser expects that it will recommend to the Board that
the Fund offers to repurchase Shares (or portions of them) from Shareholders quarterly, on each March
31, June 30, September 30, and December 31. In general, the Fund will initially pay at least 90% of the
estimated value of the repurchased Shares to Shareholders as of the later of: (1) a period of within 30 days
after the value of the Shares to be repurchased is determined, or (2) if the Master Fund has requested
withdrawals of its capital from any Investment Funds in order to fund the repurchase of Shares, within ten
business days after the Master Fund has received at least 90% of the aggregate amount withdrawn by the
Master Fund from such Investment Funds. The remaining amount (the “Holdback Amount”) will be paid
promptly after completion of the annual audit of the Fund and preparation of the Fund’s audited
consolidated financial statements. As of December 31, 2023, the total of all Shareholders’ Holdback
Amounts was $211,805 which includes any Holdback Amount for repurchases as of December 31, 2023,
and is included in payable for share repurchases in the Consolidated Statement of Assets and Liabilities.
Investment in the Master Fund
The Fund records its investment in the Master Fund at fair value which is represented by the Fund’s
proportionate indirect interest in the net assets of the Master Fund as of December 31, 2023. Valuation of
Investment Funds and other investments held by the Master Fund, including the Master Fund’s disclosure
of investments under the three-tier hierarchy, is discussed in the notes to the Master Fund’s financial
statements. The Fund records its pro rata share of the Master Fund’s income, expenses, and realized and
unrealized gains and losses. The performance of the Fund is directly affected by the performance of the
Master Fund. The financial statements of the Master Fund, which are attached, are an integral part of
these consolidated financial statements. Please refer to the accounting policies disclosed in the financial
statements of the Master Fund for additional information regarding significant accounting policies that
affect the Fund.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash held on deposit and short term highly liquid investments that
are readily convertible to known amounts of cash and have maturities of three months or less. As of
December 31, 2023, the Fund did not hold any cash equivalents.
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Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements (continued)
See attached audited financial statements for Alternative Investment Partners Absolute Return Fund.
12
2. Significant Accounting Policies (continued)
Income Recognition and Expenses
The Fund recognizes income and expenses on an accrual basis. Income, expenses, and realized and
unrealized gains and losses are recorded monthly. The Fund accrues its own expenses. The Fund does not
pay the Adviser a management fee. As an indirect holder of shares in the Master Fund, however, the Fund
does bear its allocable portion (based on the net asset value of the Master Fund attributable to the Fund)
of the expenses of the Master Fund, including the management fee paid to the Investment Adviser and
shareholder servicing fees paid to the Distributor as described in the Master Fund’s financial statements.
Please refer to the attached financial statements of the Master Fund for a discussion of the computation of
the management fee and shareholder servicing fee. Included in expenses allocated from the Master Fund
in the Consolidated Statement of Operations is $1,755,742 and $1,305,341, which are the Fund’s
proportionate share of management fees and shareholder servicing fees, respectively, incurred by the
Master Fund for the year ended December 31, 2023.
Third-Party Service Providers
State Street Bank and Trust Company (“State Street”) provides accounting and administrative services to
the Fund. State Street also serves as the Fund’s custodian.
UMB Fund Services, Inc. serves as the Funds transfer agent. Transfer agent fees are payable monthly
based on an annual Fund base fee, annual per Shareholder account changes, and out-of-pocket expenses
incurred by the transfer agent on the Fund’s behalf.
Income and Withholding Taxes
The Fund expects to be treated as a partnership for U.S. federal income tax purposes. No provision for
federal, state, or local income taxes is required in the consolidated financial statements. In accordance
with the U.S. Internal Revenue Code of 1986, as amended, each of the Shareholders is to include its
respective share of the Fund’s realized profits or losses in its individual tax returns. The Fund files tax
returns with the U.S. Internal Revenue Service and various states.
The Master Fund is required to withhold up to 30% U.S. tax from U.S. source dividends and 21% (33%
for non-corporate, non-U.S. investors) U.S. tax from effectively connected income allocable to its non-U.S. investors and remit those amounts to the U.S. internal Revenue Service on behalf of the non-U.S.
investors. If the Master Fund incurs a withholding tax or other tax obligation with respect to the share of
the Master Fund’s income allocable to any Shareholder, then the Master Fund, without limitation of any
other rights of the Fund, will cause a Share repurchase from the Master Fund in the amount of the tax
obligation. The amount of the tax obligation attributable to the Fund will be treated as an expense by the
Fund.
For the year ended December 31, 2023, the Master Fund recorded an estimated tax withholding amount of
$873,644 related to the Fund’s share of withholding taxes, which is included in the Fund’s Consolidated
Statement of Operations.
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Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements (continued)
See attached audited financial statements for Alternative Investment Partners Absolute Return Fund.
13
2. Significant Accounting Policies (continued)
Income and Withholding Taxes (continued)
The Fund has concluded there are no significant uncertain tax positions that would require recognition in
the consolidated financial statements as of December 31, 2023. If applicable, the Fund recognizes interest
accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the
Consolidated Statement of Operations. Generally, open tax years under potential examination vary by
jurisdiction, but at least each of the tax years in the four-year period ended December 31, 2023, remains
subject to examination by major taxing authorities.
3. Market Risk
The value of an investment in the Fund is based on the values of the Fund’s investments, which change
due to economic and other events that affect markets generally, as well as those that affect particular
regions, countries, industries, companies or governments. The risks associated with these developments
may be magnified if certain social, political, economic and other conditions and events adversely interrupt
the global economy and financial markets. Securities in the Fund’s portfolio may underperform due to
inflation (or expectations for inflation), interest rates, global demand for particular products or resources,
natural disasters and extreme weather events, health emergencies (such as epidemics and pandemics),
terrorism, regulatory events and governmental or quasi-governmental actions. The occurrence of global
events similar to those in recent years, such as terrorist attacks around the world, natural disasters, health
emergencies, social and political (including geopolitical) discord and tensions or debt crises and
downgrades, among others, may result in market volatility and may have long term effects on both the
U.S. and global financial markets. It is difficult to predict when events affecting the U.S. or global
financial markets may occur, the effects that such events may have and the duration of those effects
(which may last for extended periods). These events may negatively impact broad segments of businesses
and populations and have a significant and rapid negative impact on the performance of the Fund’s
investments, and exacerbate pre-existing risks to the Fund. The occurrence, duration and extent of these
or other types of adverse economic and market conditions and uncertainty over the long term cannot be
reasonably projected or estimated at this time. The ultimate impact of public health emergencies or other
adverse economic or market developments and the extent to which the associated conditions impact the
Fund and its investments will also depend on other future developments, which are highly uncertain,
difficult to accurately predict and subject to change at any time. The financial performance of the Fund’s
investments (and, in turn, the Fund’s investment results) as well as their liquidity may be adversely
affected because of these and similar types of factors and developments, which may in turn impact
valuation, the Fund’s ability to sell securities and/or its ability to meet redemptions.
4. Contractual Obligations
The Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure
under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to
these contracts and expects the risk of loss to be remote.
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Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements (continued)
See attached audited financial statements for Alternative Investment Partners Absolute Return Fund.
14
5. Financial Highlights
The following represents per Share data, ratios to average net assets, and other financial highlights
information for Shareholders.
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
2023 2022 2021 2020 2019
For a Share outstanding throughout
the year:
Net asset value, beginning of year 1,878.91 $ 1,783.03 $ 1,692.95 $ 1,544.20 $ 1,463.74 $
Net investment income (loss) (a) (76.95) (60.67) (47.91) (44.27) (50.21)
Net realized and unrealized gain (loss)
from investments 185.04 156.55 137.99 193.02 130.67 Net increase (decrease) resulting
from operations 108.09 95.88 90.08 148.75 80.46 Net asset value, end of year 1,987.00 $ 1,878.91 $ 1,783.03 $ 1,692.95 $ 1,544.20 $
Total return (b) 5.75% 5.38% 5.32% 9.63% 5.50%
Ratio of total expenses (c) 4.08% 3.36% 2.79% 2.86% 3.41%
Ratio of net investment income (loss) (d) (4.00%) (3.34%) (2.78%) (2.84%) (3.33%)
Portfolio turnover (e) 19% 25% 11% 23% 33%
Net assets, end of year (000s) 174,425 $ 175,774 $ 178,916 $ 194,422 $ 210,385 $
(a) Calculated based on the average shares outstanding methodology.
(b) Total return assumes a subscription of a Share in the Fund at the beginning of the year indicated and a repurchase of the Share on the last
day of the year indicated, and does not reflect the impact of the sales load, if any, incurred when subscribing to the Fund.
(c) Includes expenses allocated from the Master Fund.
(d) Includes income and expenses allocated from the Master Fund.
(e) The portfolio turnover rate reflects investment activity of the Master Fund.
The above ratios and total returns have been calculated for the Shareholders taken as a whole. An
individual Shareholder’s return and ratios may vary from these returns and ratios due to the timing of
Share transactions and withholding tax allocation, as applicable.
6. Subsequent Events
Unless otherwise stated throughout the Notes to Consolidated Financial Statements, the Fund noted no
subsequent events that require disclosure in or adjustment to the consolidated financial statements through
the date that the financial statements were available to be issued.
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15
Alternative Investment Partners Absolute Return Fund STS
Proxy Voting Policies and Procedures and Proxy Voting Record (Unaudited)
If applicable, a copy of (1) the Fund’s policies and procedures with respect to the voting of proxies
relating to the Fund’s investments; and (2) how the Fund voted proxies relating to Fund investments
during the most recent year ended December 31, is available without charge, upon request, by calling the
Fund at 1-888-322-4675. This information is also available on the Securities and Exchange Commission’s
website at http://www.sec.gov.
Quarterly Portfolio Schedule (Unaudited)
The Fund also files a complete schedule of portfolio holdings with the Securities and Exchange
Commission for the Fund’s first and third fiscal quarters on Form N-PORT. The Fund’s Forms N-PORT
are available on the Securities and Exchange Commission’s website at http://www.sec.gov. and Morgan
Stanley’s public website, www.morganstanley.com/im/shareholderreports. Once filed, the most recent
Form N-PORT will be available without charge, upon request, by calling the Fund at
1-888-322-4675.
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16
Information Concerning Trustees and Officers (Unaudited)
Name, Address and
Birth Year of
Independent
Trustee
Position(s)
Held with
Registrant
Length of
Time
Served*
Principal Occupation(s) During
Past 5 Years and Other Relevant
Professional Experience
Number of
Funds
in Fund
Complex
Overseen by
Independent
Trustee
Other Directorships Held
by Independent Trustee**
Frank L. Bowman
c/o Perkins Coie
LLP
Counsel to the
Independent Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1944
Trustee Since
August
2006
President, Strategic Decisions, LLC
(consulting) (since February 2009);
Director or Trustee of various
Morgan Stanley Funds (since
August 2006); Chairperson of the
Compliance and Insurance
Committee (since October 2015);
formerly, Chairperson of the
Insurance Sub-Committee of the
Compliance and Insurance
Committee (2007-2015); served as
President and Chief Executive
Officer of the Nuclear Energy
Institute (policy organization)
(February 2005-November 2008);
retired as Admiral, U.S. Navy after
serving over 38 years on active duty
including 8 years as Director of the
Naval Nuclear Propulsion Program
in the Department of the Navy and
the U.S. Department of Energy
(1996- 2004); served as Chief of
Naval Personnel (July 1994-
September 1996) and on the Joint
Staff as Director of Political Military
Affairs (June 1992-July 1994);
knighted as Honorary Knight
Commander of the Most Excellent
Order of the British Empire;
awarded the Officier de l’Orde
National du Mérite by the French
Government; elected to the National
Academy of Engineering (2009).
87 Director of Naval and
Nuclear Technologies LLP;
Director Emeritus of the
Armed Services YMCA;
Member of the National
Security Advisory Council
of the Center for U.S.
Global Engagement and a
former member of the CNA
Military Advisory Board;
Chairman of the Board of
Trustees of Fairhaven
United Methodist Church;
Member of the Board of
Advisors of the Dolphin
Scholarship Foundation;
Director of other various
nonprofit organizations;
formerly, Director of BP,
plc (November 2010-May
2019).
Kathleen A. Dennis
c/o Perkins Coie
LLP
Counsel to the
Independent Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1953
Trustee Since
August
2006
Chairperson of the Governance
Committee (since January 2021),
Chairperson of the Liquidity and
Alternatives Sub-Committee of the
Investment Committee (2006-2020)
and Director or Trustee of various
Morgan Stanley Funds (since
August 2006); President,
Cedarwood Associates (mutual fund
and investment management
consulting) (since July 2006);
formerly, Senior Managing Director
of Victory Capital Management
(1993-2006).; Senior Vice President,
Chase Bank (1984-1993).
87 Board Member, University
of Albany Foundation
(2012- present); Board
Member, Mutual Funds
Directors Forum (2014-
present); Director of various
non-profit organizations.
Nancy C. Everett
c/o Perkins Coie
LLP
Counsel to the
Independent Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1955
Trustee
Since
January
2015
Chairperson of the Equity Investment
Committee (since January 2021);
Director or Trustee of various Morgan
Stanley Funds (since January 2015);
Chief Executive Officer, Virginia
Commonwealth University Investment
Company (since November 2015);
Owner, OBIR, LLC (institutional
investment management consulting)
(since June 2014); formerly, Managing
Director, BlackRock, Inc. (February
2011-December 2013) and Chief
Executive Officer, General Motors
Asset Management (a/k/a Promark
Global Advisors, Inc.) (June 2005-
May 2010).
88
Formerly, Member of
Virginia Commonwealth
University School of
Business Foundation (2005-
2016); Member of Virginia
Commonwealth University
Board of Visitors (2013-
2015); Member of
Committee on Directors for
Emerging Markets Growth
Fund, Inc. (2007-2010);
Chairperson of Performance
Equity Management, LLC
(2006-2010); and
Chairperson, GMAM
Absolute Return Strategies
Fund, LLC (2006-2010).
|
|
17
Information Concerning Trustees and Officers (Unaudited) (continued)
Name, Address
and Birth Year of
Independent
Trustee
Position(s)
Held with
Registrant
Length of
Time
Served*
Principal Occupation(s) During
Past 5 Years and Other Relevant
Professional Experience
Number of
Funds
in Fund
Complex
Overseen by
Independent
Trustee
Other Directorships Held by
Independent Trustee**
Jakki L. Haussler
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1957
Trustee
Since
January
2015
Chairman, Opus Capital Group
(since 1996); formerly, CEO, Opus
Capital Group (1996-2019);
Director, Capvest Venture Fund, LP
(May 2000-December 2011);
Partner, Adena Ventures, LP (July
1999-December 2010); Director,
The Victory Funds (February 2005-
July 2008).
88 Vertiv Holdings Co. (VRT)
(August 2022); Director of
Cincinnati Bell Inc. and
Member, Audit Committee and
Chairman, Governance and
Nominating Committee (2008-
2021); Director of Service
Corporation International and
Member, Audit Committee and
Investment Committee;
Director, Barnes Group Inc.
(Since July 2021); Member of
Chase College of Law Centre
for Law and Entrepreneurship;
Board of Advisors; Director of
Best Transport (2005-2019);
Director of Chase College of
Law Board of Visitors;
formerly, Member, University
of Cincinnati Foundation
Investment Committee.
Dr. Manuel H.
Johnson
c/o Johnson Smick
International, Inc.
220 I Street, NE
Suite 200
Washington, D.C.
20002
Birth Year: 1949
Trustee Since July
1991
Senior Partner, Johnson Smick
International, Inc. (consulting firm);
Chairperson of the Fixed Income,
Liquidity and Alternatives
Investment Committee (since
January 2021), Chairperson of the
Investment Committee (2006-2020)
and Director or Trustee of various
Morgan Stanley Funds (since July
1991); Co- Chairman and a founder
of the Group of Seven Council
(G7C) (international economic
commission); formerly,
Chairperson of the Audit
Committee (July 1991- September
2006); Vice Chairman of the Board
of Governors of the Federal
Reserve System and Assistant
Secretary of the U.S. Treasury.
87 Director of NVR, Inc. (home
construction).
Joseph J. Kearns
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1942
Trustee Since
August
1994
(Retired
December
31, 2023)
Senior Adviser, Kearns &
Associates LLC (investment
consulting); Chairperson of the
Audit Committee (2006-2022) and
Director or Trustee of various
Morgan Stanley Funds (since
August 1994); formerly, Deputy
Chairperson of the Audit
Committee (July 2003-September
2006); CFO of the J. Paul Getty
Trust (1982-1999).
88 Director, Rubicon Investments
(since February 2019); Prior to
August 2016, Director of
Electro Rent Corporation
(equipment leasing). Prior to
December 31, 2013, Director
of The Ford Family
Foundation.
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18
Information Concerning Trustees and Officers (Unaudited) (continued)
Name, Address
and Birth Year of
Independent
Trustee
Position(s)
Held with
Registrant
Length of
Time
Served*
Principal Occupation(s) During
Past 5 Years and Other Relevant
Professional Experience
Number of
Funds
in Fund
Complex
Overseen by
Independent
Trustee
Other Directorships Held
by Independent Trustee**
Michael F. Klein
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1958
Trustee
Since
August
2006
Chairperson of the Risk Committee
(since January 2021); Managing
Director, Aetos Alternatives
Management, LP (since March
2000); Co-President, Aetos
Alternatives Management, LP
(since January 2004) and Co-Chief
Executive Officer of Aetos
Alternatives Management, LP
(since August 2013); Chairperson
of the Fixed Income Sub-Committee of the Investment
Committee (2006-2020) and
Director or Trustee of various
Morgan Stanley Funds (since
August 2006); formerly, Managing
Director, Morgan Stanley & Co.
Inc. and Morgan Stanley Dean
Witter Investment Management and
President, various Morgan Stanley
Funds (June 1998-March 2000);
Principal, Morgan Stanley & Co.
Inc. and Morgan Stanley Dean
Witter Investment Management
(August 1997-December 1999).
87 Director of certain
investment funds managed or
sponsored by Aetos
Alternatives Management,
LP; Director of Sanitized AG
and Sanitized Marketing AG
(specialty chemicals).
Patricia A. Maleski
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1960
Trustee
Since
January
2017
Director or Trustee of various
Morgan Stanley Funds (since
January 2017); Managing Director,
JPMorgan Asset Management
(2004-2016); Oversight and
Control Head of Fiduciary and
Conflicts of Interest Program
(2015-2016); Chief Control
Officer—Global Asset
Management (2013-2015);
President, JPMorgan Funds (2010-
2013); Chief Administrative
Officer (2004-2013); various other
positions including Treasurer and
Board Liaison (since 2001).
88
Formerly, Trustee (January
2022 to March 2023),
Treasurer (January 2023 to
March 2023), and Finance
Committee (January 2022 to
March 2023).
W. Allen Reed
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1947
Chair of the
Board and
Trustee
Chair of
the
Boards
since
August
2020 and
Trustee
since
August
2006
Chair of the Boards of various
Morgan Stanley Funds (since
August 2020); Director or Trustee
of various Morgan Stanley Funds
(since August 2006); formerly,
Vice Chair of the Boards of various
Morgan Stanley Funds (January
2020-August 2020); President and
Chief Executive Officer of General
Motors Asset Management;
Chairman and Chief Executive
Officer of the GM Trust Bank and
Corporate Vice President of
General Motors Corporation
(August 1994-December 2005).
87
Formerly, Director of Legg
Mason, Inc. (2006-2019);
and Director of the Auburn
University Foundation
(2010-2015).
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19
Information Concerning Trustees and Officers (Unaudited) (continued)
Name, Address
and Birth Year of
Independent
Trustee
Position(s)
Held with
Registrant
Length of
Time
Served*
Principal Occupation(s) During
Past 5 Years and Other Relevant
Professional Experience
Number of
Funds
in Fund
Complex
Overseen by
Independent
Trustee**
Other Directorships Held
by Independent
Trustee***
Frances L.
Cashman
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of
the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1961
Trustee Trustee
Since
March
2022
Chief Executive Officer, Asset
Management
Portfolio, Delinian Ltd. (financial
information) (May 2021-Present);
Executive Vice President and
various other roles,
Legg Mason & Co. (asset
management)
(2010-2020); Managing Director,
Stifel Nicola (2005-2010).
88 Formerly, Trustee and
Investment Committee
Member, GeorgiaTech
Foundation
(since June 2019); Trustee,
Member of Investment
Committee and Chair
of Marketing Committee,
and Member of Investment
Committee, Loyola
Blakefield (2017-2023);
Trustee, MMI Gateway
Foundation (2017-2023);
Director and
Investment Committee
Member,
Catholic Community
Foundation
Board (2012-2018);
Director and
Investment Committee
Member,
St. Ignatius Loyola
Academy (2011-2017).
Eddie A. Grier
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of
the
Americas
22nd Floor
New York, NY
10036Birth Year:
1955
Trustee Trustee
Since
February
2022
Dean, Santa Clara University
Leavey School of 78
Business (since July 2021);
Dean, Virginia Commonwealth
University School of Business
(2010-2021); President and various
other roles,
Walt Disney Company
(entertainment and media)
(1981-2010)..
88 Director, Witt/Keiffer, Inc.
(executive
search) (since 2016);
Director, NuStar GP, LLC
(energy) (since August
2021);
Director,
Sonida Senior Living, Inc.
(residential
community operator) (2016-
2021);
Director, NVR, Inc.
(homebuilding)
(2013-2020); Director,
Middleburg
Trust Company (wealth
management)
(2014-2019); Director,
Colonial
Williamsburg Company
(2012-2021);
Regent, University of
Massachusetts
Global (since 2021);
Director and Chair
ChildFund International
(2012-2021);
Trustee, Brandman
University
(2010-2021); Director,
Richmond Forum (2013-
2019).
* This is the earliest date the Director began serving the Morgan Stanley Funds. Each Director serves an indefinite term, until his or her successor is elected.
** The Fund Complex includes (as of December 31, 2023) all open-end and closed-end funds (including all of their portfolios) advised by Morgan Stanley
Investment Management Inc. (the “Adviser”) and any funds that have an adviser that is an affiliated person of the Adviser (including, but not limited to, Morgan
Stanley AIP GP LP).
*** This includes any directorships at public companies and registered investment companies held by the Director at any time during the past five years.
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20
Information Concerning Trustees and Officers (Unaudited) (continued)
Position(s) Length of
Name, Address and Birth Held with Time Principal Occupation(s)
Year of Executive Officer Registrant Served** During Past 5 Years
John H. Gernon
522 Fifth Avenue
New York, NY 10036
Birth Year: 1963
President and
Principal
Executive
Officer
Since September
2013
President and Principal Executive Officer of the Equity and Fixed Income Funds and the
Morgan Stanley AIP Funds (since September 2013) and the Liquidity Funds and various
money market funds (since May 2014) in the Fund Complex; Managing Director of the
Adviser.
Deidre A. Downes
1633 Broadway
New York, NY 10019
Birth Year: 1977
Chief
Compliance
Officer
Since November
2021
Executive Director of the Adviser (since January 2021) and Chief Compliance officer of
various Morgan Stanley Funds (since November 2021). Formerly, Vice President and
Corporate Counsel at PGIM and Prudential Financial (October 2016-December 2020).
Christopher Auffenberg
100 Front Street, Suite 400
West Conshohocken, PA
19428
Birth Year: 1984
Vice
President
Since May
2022
Chief Operating Officer of the Morgan Stanley Alternative Investment Partners Hedge Fund
team and Executive Director of Morgan Stanley Investment Management Inc.
Mary E. Mullin
522 Fifth Avenue
New York, NY 10036
Birth Year:1967
Secretary Since June
1999
Managing Director of the Adviser and various entities affiliated with the Adviser; Secretary
of various Morgan Stanley Funds (since June 1999).
Michael J. Key
522 Fifth Avenue
New York, NY 10036
Birth Year: 1979
Vice President Since June 2017 Vice President of the Equity and Fixed Income Funds, Liquidity Funds, various money
market funds and the Morgan Stanley AIP Funds in the Fund Complex (since June 2017);
Managing Director of the Adviser; Head of Product Development for Equity and Fixed
Income Funds (since August 2013).
Francis J. Smith
522 Fifth Avenue
New York, NY 10036
Birth Year: 1965
Treasurer and
Principal
Financial
Officer
Treasurer since
July 2003 and
Principal
Financial Officer
since September
2002
Managing Director of the Adviser and various entities affiliated with the Adviser; Treasurer
(since July 2003) and Principal Financial Officer of various Morgan Stanley Funds (since
September 2002).
* This is the earliest date the officer began serving the Morgan Stanley Funds. Each officer serves an indefinite term, until his or her successor is elected.
In addition, the following individuals who are officers of the Adviser or its affiliates serve as assistant secretaries of the Trust: Princess Kludjeson, Kristina B.
Magolis, Francesca Mead and Jill R. Whitelaw.
The Fund’s statement of additional information includes further information about the Fund’s Directors and Officers, and is available without charge by visiting
www.morganstanley.com/im/shareholderreports or upon request by calling 1 (888) 322-4675.
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21
Alternative Investment Partners Absolute Return Fund STS
100 Front Street, Suite 400
West Conshohocken, PA 19428
Trustees
W. Allen Reed, Chair of the Board and Trustee
Frank L. Bowman
Frances L. Cashman
Kathleen A. Dennis
Nancy C. Everett
Eddie A. Grier
Jakki L. Haussler
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Patricia Maleski
Officers
John H. Gernon, President and Principal Executive Officer
Christopher Auffenberg, Vice President
Michael J. Key, Vice President
Deidre A. Downes, Chief Compliance Officer
Francis J.Smith, Treasurer and Principal Financial Officer
Mary E. Mullin, Secretary
Investment Adviser
Morgan Stanley AIP GP LP
100 Front Street, Suite 400
West Conshohocken, PA 19428
Administrator, Custodian, Fund Accounting Agent and Escrow Agent
State Street Bank and Trust Company
One Lincoln Street
Boston, MA 02111
Transfer Agent
UMB Fund Services, Inc.
803 W. Michigan Street
Milwaukee, WI 53233
Independent Registered Public Accounting Firm
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
Legal Counsel
Dechert LLP
1095 Avenue of the Americas
New York, NY 10036
Counsel to the Independent
Trustees
Perkins Coie LLP
1155 Avenue of the Americas
New York, New York 10036
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ALTERNATIVE INVESTMENT PARTNERS
ABSOLUTE RETURN FUND
Financial Statements with Report of Independent
Registered Public Accounting Firm
For the Year Ended December 31, 2023
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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.
Lee Spector, Executive Director of Morgan Stanley Alternative Investment LLC, the General Partner of
Morgan Stanley AIP GP LP, the Commodity Pool Operator of Alternative Investments Partners Absolute
Return Fund
(This oath is required by Section 4.12(c)(3) of the Commodity Futures Trading Commission Regulations under the
Commodity Exchange Act, as amended.)
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Alternative Investment Partners Absolute Return Fund
Financial Statements with Report of
Independent Registered Public Accounting Firm
For the Year Ended December 31, 2023
Contents
Management’s Discussion of Fund Performance (Unaudited)………………………………………1
Report of Independent Registered Public Accounting Firm 4
Audited Financial Statements
Statement of Assets and Liabilities 5
Statement of Operations 6
Statements of Changes in Net Assets 7
Statement of Cash Flows 8
Schedule of Investments 9
Notes to Financial Statements 14
Proxy Voting Policies and Procedures and Proxy Voting Record (Unaudited) 27
Quarterly Portfolio Schedule (Unaudited) 27
U.S. Privacy Policy (Unaudited) 28
Information Concerning Trustees and Officers (Unaudited) 30
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1
Alternative Investment Partners Absolute Return Fund
Management’s Discussion of Fund Performance
Investment Objective and Strategy Summary
The Fund’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 “absolute return” investment strategies in pursuit of attractive risk-adjusted returns consistent
with the preservation of capital.
The Fund invests substantially all its assets in private investment funds (commonly referred to as hedge
funds) that are managed by a select group of alternative investment managers that employ different
“absolute return” investment strategies in pursuit of attractive risk-adjusted returns consistent with the
preservation of capital. “Absolute return” refers to a broad class of investment strategies that are managed
without reference to the performance of equity, debt and other markets. “Absolute return” investment
strategies allow unaffiliated third-party investment managers the flexibility to use leveraged or short-sale
positions to take advantage of perceived inefficiencies across the global capital markets. These strategies
are in contrast to the investment programs of “traditional” registered investment companies, such as
mutual funds. Absolute return strategies can be contrasted with “relative return strategies” which
generally seek to outperform a corresponding benchmark equity or fixed income index. The Fund seeks
attractive “risk-adjusted” returns, which are returns adjusted to take into account the volatility of those
returns. The Fund intends to invest in private investment funds that employ the following principal
strategies: relative value strategies, security selection strategies, specialist credit strategies and directional
strategies.
Performance Discussion
Total Returns
One Year Five Years Ten Years
Alternative Investment Partners Absolute Return Fund 6.53% 6.91% 4.96%
Average Annual
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2
Alternative Investment Partners Absolute Return Fund
Management’s Discussion of Fund Performance (continued)
Performance Discussion (continued)
The chart below illustrates the growth of a hypothetical $50,000 investment in the Fund over the ten years
ending December 31, 2023.
Performance data quoted represents past performance, which is not predictive of future results, and
current performance may be lower or higher than the figures shown. Total returns do not reflect the
deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
During the twelve months ended December 31, 2023, the Fund returned 6.53% (excluding sales load),
outperforming bonds (Bloomberg US Aggregate Bond Index +5.53%) and cash (1 month SOFR +5.20%),
but underperforming equities (S&P 500 Total Return Index +26.29%). The Fund continued its recent
history of generating positive returns untethered from the performance of stocks – the Fund’s 3 year beta
to the S&P 500 Total Return Index at December 31, 2023 is 0.00. In 2022, the Fund’s limited equity beta
benefited the Fund as equities declined; in 2023 the Fund’s limited equity beta resulted in the Fund
receiving little to no benefit from the equity rally.
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3
Alternative Investment Partners Absolute Return Fund
Management’s Discussion of Fund Performance (continued)
Performance Discussion (continued)
Each of the Fund’s eleven strategies generated positive results in 2023:
CTA/Managed Futures 0.92%
Distressed 0.55%
Equity L/S High Hedge 2.54%
Equity L/S Opportunistic 0.34%
Event Driven Credit 0.51%
Fixed Income Arbitrage 0.62%
Macro 0.27%
Multi Strategy 0.02%
Other Directional 0.09%
Private Placements 0.45%
Statistical Arbitrage 3.43%
Statistical Arbitrage funds (+9.20% average return in 2023), which carry little to no net equity beta,
generated positive results in each quarter, led by Torus (+15.1%) and Squarepoint Focus (+13.9%).
Equity Long/Short High Hedge funds (+12.27% in 2023), with little equity beta, generated positive
results in each month, profiting from multiple funds. Multi-manager platform funds (Alyeska Fund LP
+16.5%, Holocene Advisors Fund LP +11.5%) generated consistently positive results, largely profiting
from equity trading.
Thank you for your support for the Fund.
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4
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of Alternative Investment Partners Absolute Return Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of Alternative Investment Partners
Absolute Return Fund (the “Fund”), including the schedule of investments, as of December 31, 2023, and the
related statements of operations and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Fund at December 31, 2023, the results of its operations and its cash flows for the year then ended and the
changes in its net assets for each of the two years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an
opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform,
an audit of the Fund’s internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on
the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of December 31, 2023, by correspondence with
the custodian, management of the investment funds and others. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more Morgan Stanley investment companies since 2000.
Boston, Massachusetts
February 29, 2024
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The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
5
Alternative Investment Partners Absolute Return Fund
Statement of Assets and Liabilities
December 31, 2023
Assets
Investment in investment funds, at fair value (cost $215,071,421) $ 328,788,076
Cash and cash equivalents 1,153,775
23,871,596
641,896
32,850
Other assets 30,308
Total assets 354,518,501
Liabilities
Line of credit payable 55,521,267
Payable for share repurchases 4,891,270
Management fee payable 738,567
Withholding tax payable 665,825
Shareholder servicing fee payable 547,762
Subscriptions received in advance 50,000
Transfer agent fee payable 3,903
Accrued expenses and other liabilities 355,980
Total liabilities 62,774,574
Net assets $ 291,743,927
Net assets consist of:
Net capital $ 59,905,373
Total distributable earnings (loss) 231,838,554
Net assets $ 291,743,927
Net asset value per share:
127,772.707 shares issued and outstanding, no par value,
1,500,000 registered shares $ 2,283.30
Maximum offering price per share
($2,283.30 plus sales load of 3% of net asset value per share) $ 2,351.80
Due from Alternative Investment Partners Absolute Return Fund STS
Withholding tax credit
Receivable for investments sold
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The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
6
Alternative Investment Partners Absolute Return Fund
Statement of Operations
For the Year Ended December 31, 2023
Investment income
Dividend $ 225,429
Expenses
Interest expense 3,892,366
Management fees 2,941,798
Shareholder servicing fees 2,187,137
Professional fees 451,955
Accounting and administration fees 183,381
Custody fees 83,917
Registration fees 62,688
Transfer agent fees 46,956
Director fees 13,017
Other 28,124
Total expenses 9,891,339
Net investment income (loss) (9,665,910)
Realized and unrealized gain (loss) from investments
Net realized gain (loss) from investments in investment funds 12,626,975
Net realized gain (loss) from investments 12,626,975
Net change in unrealized appreciation/depreciation on investments
in investment funds 15,592,195
Net change in unrealized appreciation/depreciation on investments 15,592,195
Net realized and unrealized gain (loss) from investments 28,219,170
Net increase (decrease) in net assets resulting from operations $ 18,553,260
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The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
7
Alternative Investment Partners Absolute Return Fund
Statements of Changes in Net Assets
For the year ended December 31, 2022
Net increase (decrease) in net assets resulting from operations:
Net investment income (loss) $ (8,142,054)
Net realized gain (loss) from investments 29,651,037
Net change in unrealized appreciation/depreciation on investments (4,530,619)
Net increase (decrease) in net assets resulting from operations 16,978,364
Shareholder transactions
Subscriptions (representing 1,114.620 shares) 2,291,485
Repurchases (representing 9,240.215 shares) (19,165,807)
Net increase (decrease) in net assets from shareholder transactions (16,874,322)
Total increase (decrease) in net assets 104,042
Net assets, beginning of year (representing 145,378.340 shares) 294,067,738
Net assets, end of year (representing 137,252.745 shares) $ 294,171,780
Net increase (decrease) in net assets resulting from operations:
Net investment income (loss) $ (9,665,910)
Net realized gain (loss) from investments 12,626,975
Net change in unrealized appreciation/depreciation on investments 15,592,195
Net increase (decrease) in net assets resulting from operations 18,553,260
Shareholder transactions
Subscriptions (representing 895.404 shares) 1,953,003
Repurchases (representing 10,375.442 shares) (22,934,116)
Net increase (decrease) in net assets from shareholder transactions (20,981,113)
Total increase (decrease) in net assets (2,427,853)
Net assets, beginning of year (representing 137,252.745 shares) 294,171,780
Net assets, end of year (representing 127,772.707 shares) $ 291,743,927
For the year ended December 31, 2023
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The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
8
Alternative Investment Partners Absolute Return Fund
Statement of Cash Flows
For the Year Ended December 31, 2023
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations $ 18,553,260
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by (used in) operating activities:
Net realized (gain) loss from investments in investment funds (12,626,975)
Net change in unrealized (appreciation) depreciation on investments in
investment funds (15,592,195)
Purchase of investments in investment funds (66,931,932)
Proceeds from sale of investments in investment funds 112,326,779
(Increase) decrease in receivable for investments sold (4,282,530)
(Increase) decrease in due from Alternative Investment Partners
Absolute Return Fund STS (79,234)
(Increase) decrease in withholding tax credit 7,269
(Increase) decrease in other assets 5,563
Increase (decrease) in management fee payable (239,228)
Increase (decrease) in shareholder servicing fee payable (179,359)
Increase (decrease) in withholding tax payable 65,786
Increase (decrease) in transfer agent fee payable (7,132)
Increase (decrease) in accrued expenses and other liabilities (282,433)
Net cash provided by (used in) operating activities 30,737,639
Cash flows from financing activities
Proceeds from advances on line of credit 22,200,000
Repayments of advances on line of credit (33,400,000)
Subscriptions 1,953,003
Repurchases (22,934,116)
Increase (decrease) in payable for share repurchases 2,086,433
Increase (decrease) in subscriptions received in advance 50,000
Net cash provided by (used in) financing activities (30,044,680)
Net change in cash and cash equivalents 692,959
Cash and cash equivalents, at beginning of year 460,816
Cash and cash equivalents, at end of year $ 1,153,775
Supplemental disclosure of non-cash flow information:
Non-cash transfer of investment funds $ 11,362,590
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 4,190,473
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The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
9
Alternative Investment Partners Absolute Return Fund
Schedule of Investments
December 31, 2023
Next
First Percent of Percent Available
Acquisition Fair Investment of Net Redemption
Description Date Cost Value Fund Held* Assets Date** Liquidity***
Investment Funds
Commodity Trading Advisors – Managed Futures
Florin Court Capital Fund LP 5/1/2023 $ 10,076,384 $ 10,378,468 15.07% 3.56 % 1/31/2024 Monthly
Squarepoint Core US Feeder LP 7/1/2020 18,500,000 24,549,212 1.63 8.41 3/31/2024 Monthly
Total Commodity Trading Advisors – Managed Futures 28,576,384 34,927,680 11.97
Distressed
Cerberus Partners, LP 11/1/2009 1,218,263 6,982,671 3.29 2.39 (a) (a)
Cerberus SPV, LLC 11/1/2009 752,584 5,762,408 1.89 1.98 (a) (a)
Total Distressed 1,970,847 12,745,079 4.37
Equity Long/Short – High Hedge
Alyeska Fund LP 6/1/2022 14,250,000 18,127,658 0.75 6.22 3/31/2024 Monthly
Holocene Advisors Fund LP 4/1/2017 12,428,356 23,884,580 0.80 8.19 3/31/2024 Quarterly
Magnetar Equity Opportunities Fund LLC 2/1/2011 590,002 6,429,005 24.73 2.20 1/31/2024 Monthly
North Reef Capital LP 11/1/2022 9,700,000 11,294,815 3.87 3/31/2024 Quarterly
Total Equity Long/Short – High Hedge 36,968,358 59,736,058 20.48
Equity Long/Short – Opportunistic
Axon Partners, LP 10/1/2007 4,310,455 1,269,701 0.54 0.44 (a) (a)
Viking Global Equities LP 7/1/2023 13,425,000 14,105,827 0.26 4.83 6/30/2024 Annually
Total Equity Long/Short – Opportunistic 17,735,455 15,375,528 5.27
2.94
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The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
10
Alternative Investment Partners Absolute Return Fund
Schedule of Investments (continued)
December 31, 2023
Next
First Percent of Percent Available
Acquisition Fair Investment of Net Redemption
Description Date Cost Value Fund Held* Assets Date** Liquidity***
Investment Funds (continued)
Event Driven Credit
Davidson Kempner Institutional Partners, L.P. 5/1/2023 $ 11,729,622 $ 12,207,786 0.14% 4.18 % 3/31/2024 Quarterly
FourSixThree Domestic Fund, LLC 8/1/2023 10,000,000 10,323,362 2.14 3.54 3/31/2024 Quarterly
Olympus Peak Onshore LP 8/1/2020 2,618,713 2,774,800 4.02 0.95 3/31/2024 Quarterly
Total Event Driven Credit 24,348,335 25,305,948 8.67
Fixed Income Arbitrage
Elan Feeder Fund Ltd. 12/1/2023 6,863,405 6,900,468 0.16 2.37 2/29/2024 Monthly
LMR Alpha Rates Trading Fund Ltd. 8/1/2022 7,919,885 9,375,193 0.24 3.21 3/31/2024 Quarterly
Total Fixed Income Arbitrage 14,783,290 16,275,661 5.58
Macro
Broad Reach (US) Fund LP 2/1/2020 7,512,487 12,070,292 12.82 4.13 3/31/2024 Quarterly
D.E. Shaw Oculus Fund, L.L.C. 11/1/2006 4,740,145 20,187,248 0.74 6.92 3/31/2024 Quarterly
Element Capital US Feeder Fund LLC 7/1/2018 8,284,028 7,753,785 0.38 2.66 3/31/2024 Quarterly
Total Macro 20,536,660 40,011,325 13.71
Multi-Strategy
Magnetar Capital Fund LP 1/1/2008 60,291 128,302 4.66 0.04 (a) (a)
QVT SLV Onshore Ltd.(c) 3/1/2012 113,939 265,556 3.44 0.09 (a) (a)
Total Multi-Strategy 174,230 393,858 0.13
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The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
11
Alternative Investment Partners Absolute Return Fund
Schedule of Investments (continued)
December 31, 2023
Next
First Percent of Percent Available
Acquisition Fair Investment of Net Redemption
Description Date Cost Value Fund Held* Assets Date** Liquidity***
Investment Funds (continued)
Other Directional
BCIM Credit Opportunities, LP (b) 10/1/2014 $ 238,401 $ 1,633,752 5.06 % 0.56 % (a) (a)
Burford Alternative Income Fund LP (b) 12/19/2018 100,215 3,220,443 3.16 1.10 (a) (a)
Burford Alternative Income Fund II LP (b) 7/1/2022 3,043,806 3,366,380 1.98 1.16 (a) (a)
Total Other Directional 3,382,422 8,220,575 2.82
Private Placement
QVT Roiv Hldgs Onshore Ltd.(c) 1/1/2016 633,624 3,837,937 3.54 1.32 (a) (a)
Total Private Placement 633,624 3,837,937 1.32
Statistical Arbitrage
Aquatic Argo Fund LP 11/1/2023 8,500,000 8,393,397 1.86 2.88 3/31/2024 Quarterly
D.E. Shaw Valence Fund, L.L.C. 1/1/2015 8,979,513 29,892,036 0.92 10.25 3/31/2024 Quarterly
Squarepoint Focus US Feeder LP 9/1/2019 12,190,000 20,459,315 0.88 7.01 3/31/2024 Monthly
Torus Feeder 2 LP 5/1/2022 17,050,000 22,059,230 0.52 7.56 3/31/2024 Monthly
Two Sigma Spectrum U.S. Fund, LP 5/1/2011 6,886,479 17,124,797 0.72 5.87 3/31/2024 Quarterly
Voloridge Fund, LP 11/1/2020 12,355,824 14,029,652 0.79 4.81 1/31/2024 Monthly
Total Statistical Arbitrage 65,961,816 111,958,427 38.38
Total Investments in Investment Funds 215,071,421 328,788,076 112.70
$ 215,071,421 328,788,076 112.70
Liabilities in excess of Other Assets (37,044,149) (12.70)
Total Net Assets $ 291,743,927 100.00 %
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The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
12
Alternative Investment Partners Absolute Return Fund
Schedule of Investments (continued)
December 31, 2023
Detailed information about all of the Investment Funds’ portfolios is not available. Investment Funds are non-income producing.
* May represent percentage ownership of a feeder Investment Fund, which in turn invests in a master Investment Fund. May not reflect year-ended redemptions at Investment Funds.
* * Investments in Investment Funds may be composed of multiple tranches. The Next Available Redemption Date relates to the earliest date after December 31, 2023 that redemption from
a tranche is available. Other tranches may have an available redemption date that is after the Next Available Redemption Date. Redemptions from Investment Funds may be subject to fees.
*** Available frequency of redemptions after initial lock-up period, if any. Different tranches may have different liquidity terms.
(a) A portion or all of the Fund’s interests in the Investment Fund have restricted liquidity. In addition to any redemption proceeds that may have already been
received, the Fund will continue to receive proceeds periodically as the Investment Fund is able to liquidate underlying investments.
(b) The Investment Fund contains capital commitments. The general partner of the Investment Fund may call or distribute capital on a periodic basis.
(c) Fair value was determined by using significant unobservable inputs.
The following table summarizes the initial commitment and unfunded amounts of the Investment Funds as of December 31, 2023, aggregated by investment
strategy:
Investment Funds
Other Directional
BCIM Credit Opportunities, LP $ 14,400,000 $ 11,847,410
Burford Alternative Income Fund LP $ 9,900,000 $ 4,316,428
Burford Alternative Income Fund II LP $ 7,000,000 $ 3,956,194
Commitments Unfunded
This represents a contingent liability, an amount the Investment Fund may call capital for in the future.
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The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
13
Alternative Investment Partners Absolute Return Fund
Schedule of Investments (continued)
December 31, 2023
Strategy Allocation
Statistical Arbitrage 38.38 %
Equity Long/Short – High Hedge 20.48
Macro 13.71
Commodity Trading Advisors – Managed Futures 11.97
Event Driven Credit 8.67
Fixed Income Arbitrage 5.58
Equity Long/Short – Opportunistic 5.27
Distressed 4.37
Other Directional 2.82
Private Placement 1.32
Multi-Strategy 0.13
Total Investments in Investment Funds 112.70 %
Percent of
Net
Assets
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements
December 31, 2023
14
1. Organization
Alternative Investment Partners Absolute Return Fund (the “Fund”) was organized under the laws of the
State of Delaware as a statutory trust on May 12, 2005. The Fund commenced operations on January 1,
2006 and operates pursuant to an Agreement and Declaration of Trust (the “Trust Deed”). The Fund is
registered under the U.S. Investment Company Act of 1940, as amended (the “1940 Act”), as a closed-end, non-diversified management investment company. The Fund’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 “absolute return” investment strategies in pursuit of
attractive risk-adjusted returns consistent with the preservation of capital. “Absolute return” refers to a
broad class of investment strategies that are managed without reference to the performance of equity,
debt, and other markets. “Absolute return” investment strategies allow investment managers the flexibility
to use leveraged or short-sale positions to take advantage of perceived inefficiencies across the global
capital markets. The Fund may seek to gain investment exposure to certain Investment Funds or to adjust
market or risk exposure by entering into derivative transactions, such as total return swaps, options, and
futures.
Morgan Stanley Alternative Investment Partners LP serves as the Fund’s “Special Shareholder”. The
Special Shareholder shall make such contributions to the capital of the Fund from time to time and has
appointed a partnership representative for the Fund, which is treated as a partnership for U.S. federal
income tax purposes. Morgan Stanley AIP GP LP serves as the Fund’s investment adviser (the
“Investment Adviser”). The Adviser is responsible for providing day-to-day investment management
services to the Fund, subject to the supervision of the Fund’s Board of Trustees (the “Board”). The
Investment Adviser is an affiliate of Morgan Stanley. The Adviser is registered as an investment adviser
under the U.S. Investment Advisers Act of 1940, as amended (the “Advisers Act”), and as a commodity
trading adviser and a commodity pool operator with the Commodity Futures Trading Commission and the
National Futures Association. The Fund’s term is perpetual unless the Fund is otherwise terminated under
the terms of the Trust Deed or unless and until required by law.
The Fund is a “Master” fund in a “Master-Feeder” structure whereby the feeder fund invests substantially
all of its assets in the Fund. As of December 31, 2023, Alternative Investment Partners Absolute Return
Fund STS, an indirect feeder fund to the Fund, represented 59.56% of the Fund’s net assets.
The Board has overall responsibility for monitoring and overseeing the Fund’s investment program and
its management and operations. None of the members of the Board are “interested persons” (as defined by
the 1940 Act) of the Fund or the Investment Adviser.
The Fund offers on a continuous basis through Morgan Stanley Distribution, Inc. (the “Distributor”), an
affiliate of Morgan Stanley, 1,500,000 shares of beneficial interest (“Shares”). The initial closing date
(“Initial Closing Date”) for public offering of Shares was July 1, 2006. Shares were offered until the
Initial Closing Date at an initial offering price of $1,000 per Share, plus any applicable sales load, and
have been continuously offered thereafter for purchase as of the first day of each calendar month at the
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
15
1. Organization (continued)
Fund’s then current net asset value per Share, plus any applicable sales load. The Distributor may enter
into selected dealer agreements with various brokers and dealers (“Selling Agents”), some of which are
affiliates of the Fund, that have agreed to participate in the distribution of the Fund’s Shares. Shares may
also be purchased through any registered investment adviser (a “RIA”) that has entered into an
arrangement with the Distributor for such RIA to recommend Shares to its clients in conjunction with a
“wrap” fee, asset allocation or other management asset program by such RIA.
Shares are sold only to investors (“Shareholders”) that represent that they are “accredited investors”
within the meaning of Rule 501(a) of Regulation D promulgated under the U.S. Securities Act of 1933, as
amended. The minimum initial investment in the Fund by any Shareholder is $50,000. The minimum
additional investment in the Fund by any Shareholder is $25,000. The minimum initial and additional
investments may be reduced by the Fund with respect to certain Shareholders. Shareholders may only
purchase their Shares through the Distributor, a Selling Agent or a RIA.
The Fund may from time to time offer to repurchase Shares (or portions of them) at net asset value
pursuant to written tenders by Shareholders, and each such repurchase offer will generally apply to up to
15% of the net assets of the Fund. Repurchases are made at such times, in such amounts and on such
terms as may be determined by the Board, in its sole discretion. In determining whether the Fund should
offer to repurchase Shares (or portions of them) from Shareholders, the Board will consider the
recommendations of the Adviser as to the timing of such an offer, as well as a variety of operational,
business and economic factors. The Adviser expects that, generally, it will recommend to the Board that
the Fund offers to repurchase Shares (or portions of them) from Shareholders quarterly, on each March
31, June 30, September 30 and December 31. In general, the Fund will initially pay at least 90% of the
estimated value of the repurchased Shares to Shareholders as of the later of: (1) a period of within 30 days
after the value of the Shares to be repurchased is determined, or (2) if the Fund has requested withdrawals
of its capital from any Investment Funds in order to fund the repurchase of Shares, within ten business
days after the Fund has received at least 90% of the aggregate amount withdrawn by the Fund from such
Investment Funds. The remaining amount (the “Holdback Amount”) will be paid promptly after
completion of the annual audit of the Fund and preparation of the Fund’s audited financial statements. As
of December 31, 2023, the Holdback Amount was $365,678, which included any Holdback Amount for
repurchases as of December 31, 2023 and was included in payable for share repurchases in the Statement
of Assets and Liabilities.
2. Significant Accounting Policies
The following significant accounting policies are in conformity with U.S. generally accepted accounting
principles (“US GAAP”). Such policies are consistently followed by the Fund in preparation of its
financial statements. Management has determined that the Fund is an investment company in accordance
with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 946, “Financial Services – Investment Companies”, for the purpose of financial reporting. The
preparation of financial statements in conformity with US GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of increases or
decreases in net assets from operations during the reporting period. Actual results could differ from those
estimates. The Fund’s financial statements are stated in United States dollars.
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
16
2. Significant Accounting Policies (continued)
Portfolio Valuation
The net asset value of the Fund is determined as of the close of business at the end of any fiscal period,
generally monthly, in accordance with the valuation principles set forth below or as may be determined
from time to time pursuant to policies established by the Board.
As of December 31, 2023, all of the Fund’s portfolio was comprised of investments in Investment Funds.
Pursuant to Rule 2a-5 of the Act, the Board had designated the Adviser as its valuation designee. The
valuation designee had responsibility for determining fair value and to make the actual calculations
pursuant to the fair valuation methodologies previously approved by the Board. The Board has approved
procedures pursuant to which the Fund values its investments in Investment Funds at fair value, which
ordinarily will be the amount equal to the Fund’s pro rata interest in the net assets of each such
Investment Fund (“NAV”), as such value is supplied by, or on behalf of, the Investment Fund’s
investment manager from time to time, usually monthly. Values received from, or on behalf of, the
Investment Funds’ respective investment managers are typically estimates only, subject to subsequent
revision by such investment managers. Such values are generally net of management fees and
performance incentive fees or allocations payable to the Investment Funds’ managers or general partners
pursuant to the Investment Funds’ operating agreements. The Investment Funds value their underlying
investments in accordance with policies established by each Investment Fund, as described in each of
their financial statements or offering memoranda. The Fund’s investments in Investment Funds are
subject to the terms and conditions of the respective operating agreements and offering memoranda, as
appropriate.
Some of the Investment Funds may hold a portion of their assets in “side pockets”, which are sub-funds
within the Investment Funds that have restricted liquidity, potentially extending over a much longer
period than the typical liquidity an investment in the Investment Funds may provide. Should the Fund
seek to liquidate its investment in an Investment Fund that maintains these side pockets, the Fund might
not be able to fully liquidate its investment without delay, which could be considerable. In such cases,
until the Fund is permitted to fully liquidate its interest in the Investment Fund, the fair value of its
investment could fluctuate based on adjustments to the value of the side pocket as reported by the
Investment Fund’s investment manager. At December 31, 2023, $1,398,003 of the Fund’s capital was
invested in side pockets maintained by the Investment Funds.
The Adviser has designed ongoing due diligence processes with respect to Investment Funds and their
investment managers, which assist the Adviser in assessing the quality of information provided by, or on
behalf of, each Investment Fund and in determining whether such information continues to be reliable or
whether further investigation is necessary. Such investigation, as applicable, may or may not require the
Adviser to forego its normal reliance on the value supplied by, or on behalf of, such Investment Fund and
to determine independently the fair value of the Fund’s interest in such Investment Fund, consistent with
the Fund’s fair valuation procedures.
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
17
2. Significant Accounting Policies (continued)
Portfolio Valuation (continued)
Where no value is readily available from an Investment Fund or where a value supplied by an Investment
Fund is deemed by the Adviser not to be indicative of its fair value, the Adviser will determine the fair
value of the Investment Fund. In order to determine the fair value of these Investment Funds, the Adviser
has established the Fund of Hedge Funds Valuation Committee (the “Valuation Committee”). The
Valuation Committee is responsible for determining and implementing the Fund’s valuation policies and
procedures, which have been adopted by the Board and are subject to Board supervision. The Valuation
Committee consists of voting members from Morgan Stanley’s accounting, financial reporting and risk
management groups, and non-voting members from portfolio management, legal and compliance groups.
A member of the portfolio management team may attend each Valuation Committee meeting to provide
knowledge, insight, and recommendations on valuation issues. The portfolio management team will
recommend to the Valuation Committee a fair value for an investment using valuation techniques such as
a market approach or income approach. In applying these valuation techniques, the portfolio management
team uses their knowledge of the Investment Fund, industry expertise, information obtained through
communication with the Investment Fund’s investment manager, and available relevant information as it
considers material. After consideration of the portfolio management team’s recommendation, the
Valuation Committee will determine, in good faith, the fair value of the Investment Fund. The Valuation
Committee shall meet at least annually to analyze changes in fair value measurements. Because of the
inherent uncertainty of valuation, the fair values of the Fund’s investments may differ significantly from
the values that would have been used had a ready market for these Investment Funds held by the Fund
been available.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash held on deposit and short term highly liquid investments that
are readily convertible to known amounts of cash and have maturities of three months or less. Investments
in money markets are valued at fair value using the net asset value as the price and are categorized as
Level 1 securities as described in Note 4. As of December 31, 2023, cash equivalents consisted of
investments in money market funds valued at $857,673. The Fund maintains cash held on deposit at one
or more financial institutions. The Fund is subject to credit risk should a financial institution be unable to
fulfill its obligations.
Income Recognition and Expenses
The Fund recognizes income and expenses on an accrual basis. Income, expenses, and realized and
unrealized gains and losses are recorded monthly. The changes in Investment Funds’ fair values are
included in net change in unrealized appreciation/depreciation on investments in Investment Funds in the
Statement of Operations. Realized gain (loss) from investments in Investment Funds is calculated using
specific identification.
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
18
2. Significant Accounting Policies (continued)
Income and Withholding Taxes
No provision for federal, state, or local income taxes is required in the financial statements. In accordance
with the U.S. Internal Revenue Code of 1986, as amended, each of the Shareholders and Special
Shareholder is to include its respective share of the Fund’s realized profits or losses in its individual tax
returns. The Fund files tax returns with the U.S. Internal Revenue Service and various states. The Fund
expects to be treated as a partnership for U.S. federal income tax purposes.
The Fund is required to withhold up to 30% U.S. tax from U.S. source dividends and 21% (37% for non-corporate, non-U.S. investors) U.S. tax from effectively connected income allocable to its non-U.S.
investors and remit those amounts to the U.S. Internal Revenue Service on behalf of the non-U.S.
investors. The rate of withholding is generally the rate at which the particular non-U.S. Shareholder is
subject to U.S. federal income tax. The non-U.S. Shareholders are obligated to indemnify the Fund for
any taxes that the Fund is required to withhold as well as any interest or penalties. Withholding taxes
result in a repurchase of Shares from the Fund for any non-U.S. Shareholders who incur the withholding.
For the year ended December 31, 2023, the Fund recorded an estimated tax withholding amount of
$873,644 which is included in repurchases in the Statements of Changes in Net Assets. The Special
Shareholder made no contributions to the capital of the Fund for U.S. Federal income tax purposes during
this period.
The Fund has concluded there are no significant uncertain tax positions that would require recognition in
the financial statements as of December 31, 2023. If applicable, the Fund recognizes interest accrued
related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statement of
Operations. Generally, open tax years under potential examination vary by jurisdiction, but at least each
of the tax years in the four-year period ended December 31, 2023, remains subject to examination by
major taxing authorities.
3. Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Investment Funds in which the Fund invests may trade various
financial instruments and enter into various investment activities with off-balance sheet risk. These
include, but are not limited to, short selling activities, written option contracts, and swaps. The Fund’s
risk of loss in each Investment Fund is limited to the value of the Fund’s interest in each Investment Fund
as reported by the Fund.
4. Fair Value of Financial Instruments
The fair value of the Fund’s assets and liabilities that qualify as financial instruments approximates the
carrying amounts presented in the Statement of Assets and Liabilities. Fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The Fund uses a three-tier hierarchy to distinguish between (a)
inputs that reflect the assumptions market participants would use in pricing an asset or liability developed
based on market data obtained from sources independent of the reporting entity (observable inputs) and
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
19
4. Fair Value of Financial Instruments (continued)
(b) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants
would use in pricing an asset or liability developed based on the best information available in the
circumstances (unobservable inputs) and to establish classification of fair value measurements for
disclosure purposes. Various inputs are used in determining the fair value of the Fund’s investments.
The inputs are summarized in the three broad levels listed below:
• Level 1 – quoted prices in active markets for identical investments
• Level 2 – other significant observable inputs (including quoted prices for similar investments), or
short-term investments that are valued at amortized cost
• Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining
the fair value of investments)
The inputs or methodology used for valuing investments are not necessarily an indication of the risk
associated with investing in those investments.
The units of account that are valued by the Fund are its interests in the Investment Funds or other
financial instruments and not the underlying holdings of such Investment Funds or other financial
instruments. Thus, the inputs used by the Fund to value its investments in each of the Investment Funds or
other financial instruments may differ from the inputs used to value the underlying holdings of such
Investment Funds or other financial instruments.
The following is a summary of the inputs used for investment tranches as of December 31, 2023 in
valuing the Fund’s investments carried at fair value:
Level 1 Level 2 Level 3 Investments measured Total
Investments in Investment Funds at NAV*
Commodity Trading Advisors
– Managed Futures $ – $ – $ – $ 34,927,680 $ 34,927,680
Distressed – – – 12,745,079 12,745,079
Equity Long/Short – High Hedge – – – 59,736,058 59,736,058
Equity Long/Short – Opportunistic – – – 15,375,528 15,375,528
Event Driven Credit – – – 25,305,948 25,305,948
Fixed Income Arbitrage – – – 16,275,661 16,275,661
Macro – – – 40,011,325 40,011,325
Multi-Strategy – – 265,556 128,302 393,858
Other Directional – – – 8,220,575 8,220,575
Private Placement – – 3,837,937 – 3,837,937
Statistical Arbitrage – – – 111,958,427 111,958,427
Total Investments in Investment Funds $ – $ – $ 4,103,493 $ 324,684,583 $ 328,788,076
*All investments that are measured at fair value using the NAV (or its equivalent) as the practical expedient have not been
classified in the fair value hierarchy. The fair value amounts presented in this column are intended to permit reconciliation of the
fair value hierarchy to the amounts presented in the Statement of Financial Condition.
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
20
4. Fair Value of Financial Instruments (continued)
The following is a reconciliation of Level 3 investment tranches for the year ended December 31, 2023:
Balance, Transfers Transfers Sales/ Net realized Net change in unrealized Balance,
Investment Funds January 1, 2023 into Level 3 out of Level 3 Purchases Distributions gain (loss) appreciation/depreciation December 31, 2023
Multi-Strategy $ 326,310 $ – $ – $ – $ (98,955) $ 50,692 $ (12,491) $ 265,556
Private Placement 2,985,286 – – – (451,141) 375,907 927,885 3,837,937
Total Investment Funds $ 3,311,596 $ – $ – $ – $ (550,096) $ 426,599 $ 915,394 $ 4,103,493
The following is a summary of quantitative information about significant unobservable valuation inputs
for Level 3 investments held as of December 31, 2023.
Fair Value at
12/31/2023 Valuation technique(s) Unobservable input Range (weighted average)
Investment Funds
Multi-Strategy $ 265,556 Market approach Discount for lack of marketability 6%
Private Placement 3,837,937 Market approach Discount for lack of marketability 17%
Total Investment Funds $ 4,103,493
5. Investments in Investment Funds
The following table summarizes the fair value and liquidity terms of the Investment Funds as of
December 31, 2023, aggregated by investment strategy:
Redemption Redemption
Frequency Notice Period
Investment Funds (if applicable) (if applicable)
Commodity Trading Advisors
– Managed Futures (a) $ 34,927,680 Monthly 30-65 days
Distressed (b) 12,745,079 Not Applicable Not Applicable
Equity Long/Short – High Hedge (c) 59,736,058 Monthly to Quarterly 30-90 days
Equity Long/Short – Opportunistic (d) 15,375,528 Annually 45 days
Event Driven Credit (e) 25,305,948 Quarterly 65-90 days
Fixed Income Arbitrage (f) 16,275,661 Monthly to Quarterly 45-90 days
Macro (g) 40,011,325 Quarterly 75-90 days
Multi-Strategy (h) 393,858 Not Applicable Not Applicable
Other Directional (i) 8,220,575 Not Applicable Not Applicable
Private Placement (j) 3,837,937 Not Applicable Not Applicable
Statistical Arbitrage (k) 111,958,427 Monthly to Quarterly 30-90 days
Total Investment Funds $ 328,788,076
Fair Value
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
21
5. Investments in Investment Funds (continued)
(a) Investment Funds in this strategy invest in a variety of futures contracts, including currencies, interest rates, stocks, stock market indexes,
derivatives, and commodities. These Investment Funds build quantitative models to price futures and then take long and short positions in
the futures.
(b) Investment Funds in this strategy invest in, and may sell short, the securities of companies where the security’s price have been, or is
expected to be, affected by a distressed situation such as a bankruptcy or corporate restructuring. Investment Fund tranches representing
4.37% of the Fund’s net assets have restricted liquidity. The remaining restriction period for such Investment Fund tranches is uncertain.
(c) Investment Funds in this strategy seek to profit by exploiting pricing inefficiencies between related equity securities, neutralizing exposure
to market risk by combining long and short positions.
(d) Investment Funds in this strategy consist of a core holding of long equities hedged at all times with short sales of stocks or stock index
options. Some of the Investment Funds’ respective investment managers maintain a substantial portion of assets within a hedged structure
and commonly employ leverage. Investment Fund tranches representing 0.44% of the Fund’s net assets have restricted liquidity. The
remaining restriction period for such Investment Fund tranches is uncertain.
(e) Investment Funds in this strategy invest in debt securities created by significant transactional events, such as spin-offs, mergers and
acquisitions, bankruptcy reorganizations, and recapitalizations.
(f) The Investment Funds in this strategy seek to profit by exploiting pricing differences between related fixed income securities and their
derivatives, neutralizing exposure to market risk by combining long and short positions.
(g) Investment Funds in this strategy invest by making leveraged bets on anticipated price movements of stock markets, interest rates, foreign
exchange and physical commodities
(h) Investment Funds in this strategy seek to exploit pricing differentials between various issues of mortgage-related bonds. Investment Fund
tranches representing 0.13% of the Fund’s net assets have restricted liquidity. The remaining restriction period for such Investment Fund
tranches is uncertain.
(i) Investment Funds in this strategy invest in a broad group of directional strategies, often with little hedging. Investment Fund tranches
representing 2.82% of the Fund’s net assets have restricted liquidity. The remaining restriction period for such Investment Fund tranches is
uncertain.
(j) The Investment Fund in this strategy invest primarily in private (non-public) securities with limited liquidity. Investment Fund tranches
representing 1.32% of the Fund’s net assets have restricted liquidity. The remaining restriction period for such Investment Fund tranches is
uncertain.
(k) Investment Funds in this strategy profit from temporary pricing discrepancies between related securities. This irregularity offers an
opportunity to go long the cheaper security and to short the more expensive one in an attempt to profit as the prices of the two revert to
their norm, or mean.
As of December 31, 2023, 9.08% of the Fund’s net assets were invested in Investment Funds with
restricted liquidity or with the next available redemption date extending beyond one year from December
31, 2023.
For the year ended December 31, 2023, aggregate purchases and proceeds from sales of investments in
Investment Funds were $66,931,932 and $112,326,779 respectively.
The cost of investments for federal income tax purposes is adjusted for items of taxable income or loss
allocated to the Fund from the Investment Funds. The allocated taxable income or loss is reported to the
Fund by the Investment Funds on Schedules K-1. Such tax adjustments for the year ended December 31,
2023 will be made once the Fund has received all 2019 Schedules K-1 from the Investment Funds.
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
22
6. Investment Receivables and Prepaid Investments
As of December 31, 2023, $23,871,596 was due to the Fund from Investment Funds. The receivable
amount represents the fair value of certain Investment Fund tranches, net of management fees and
incentive fees/allocations, that were redeemed by the Fund at year-end or holdback amounts that will be
received from certain Investment Funds. Substantially all of the receivable balance was collected
subsequent to the balance sheet date.
Prepaid investments in Investment Funds represent amounts transferred to Investment Funds prior to
year-end relating to investments to be made effective January 1, 2024, pursuant to each Investment
Fund’s operating agreements. As of December 31, 2023, the Fund had no prepaid investments in
Investment Funds.
7. Management Fee, Related Party Transactions and Other
The Fund bears all expenses related to its investment program, including, but not limited to, expenses
borne indirectly through the Fund’s investments in the underlying Investment Funds.
In consideration of the advisory and other services provided by the Investment Adviser to the Fund, the
Fund pays the Investment Adviser a monthly management fee of 0.083% (1.00% on an annualized basis)
of the Fund’s month end net asset value. The management fee is an expense paid out of the Fund’s assets
and is computed based on the value of the net assets of the Fund as of the close of business on the last
business day of each month, before adjustments for any repurchases effective on that day. The
management fee is in addition to the asset-based fees and incentive fees or allocations charged by the
underlying Investment Funds and indirectly borne by Shareholders in the Fund. For the year ended
December 31, 2023, the Fund incurred management fees of $2,941,798, of which $738,567 was payable
to the Investment Adviser at December 31, 2023.
The Distributor and Selling Agents may charge Shareholders a sales load of up to 3% of the
Shareholder’s purchase. The Distributor or a Selling Agent may, in its discretion, waive the sales load for
certain investors. In addition, purchasers of Shares in conjunction with certain “wrap” fee, asset allocation
or other managed asset programs sponsored by a RIA, including an affiliate of the Adviser, or Morgan
Stanley and its affiliates (including the Adviser) and the directors, partners, principals, officers and
employees of any such RIA or any of the Adviser and its affiliates may not be charged a sales load.
The Fund pays the Distributor, and the Distributor pays each financial institution, broker-dealer and other
industry professional (collectively, “Service Agents”) that enters into a Distribution and Shareholder
Servicing Agreement with the Distributor, a monthly shareholder servicing fee of up to 0.0625% (0.75%
on an annualized basis) of the net asset value of the outstanding Shares attributable to the clients of the
Service Agent who are invested in the Fund through the Service Agent. In exchange for this fee, the
Service Agent provides distribution, marketing and/or sales support services, including making the Fund
available as an investment option to the Service Agent’s clients, offering the Fund as an option on any
distribution “platform” the Service Agent administers, making information about the Fund available to
clients, including the Fund’s Prospectus, statement of additional information and sales literature, engaging
in education or marketing activities about the Fund and its characteristics and retaining or utilizing the
services of sales professionals, consultants and other personnel to assist in marketing shares of the Fund
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
23
7. Management Fee, Related Party Transactions and Other (continued)
to clients. For the year ended December 31, 2023, the Fund incurred shareholder servicing fees of
$2,187,137, of which $547,762 was payable to the Distributor at December 31, 2023.
State Street Bank and Trust Company (“State Street”) provides accounting and administrative services to
the Fund. Under an administrative services agreement, State Street is paid an administrative fee,
computed and payable monthly at an annual rate ranging from 0.045% to 0.075%, based on the aggregate
monthly net assets of certain Morgan Stanley products, including the Fund, for which State Street serves
as the administrator.
State Street also serves as the Fund’s custodian. Under a custody services agreement, State Street is paid a
custody fee monthly at an annual rate of 0.020%, based on (i) the aggregate monthly net assets of certain
Morgan Stanley products, including the Fund, for which State Street serves as the custodian, and (ii)
investment purchases and sales activity related to the Fund.
The Fund is charged directly for certain reasonable out-of-pocket expenses related to the accounting,
administrative and custodial services provided by State Street to the Fund.
The Fund has a deferred compensation plan (the “DC Plan”) that allows each member of the Board that is
not an affiliate of Morgan Stanley to defer payment of all, or a portion, of the fees he or she receives for
serving on the Board throughout the year. Each eligible member of the Board generally may elect to have
the deferred amounts invested in the DC Plan in order to earn a return equal to the total return on one or
more of the Morgan Stanley products that are offered as investment options under the DC Plan.
Investments in the DC Plan, unrealized appreciation/depreciation on such investments and distributions
received from these investments are recorded with an offsetting increase/decrease in the deferred
compensation obligation and do not affect the net asset value of the Fund. At December 31, 2023, the
Fund’s proportionate share of assets attributable to the DC Plan was $15,842, which is included in the
Statement of Assets and Liabilities under other assets and the deferred compensation obligation under
accrued expenses and other liabilities.
UMB Fund Services, Inc. serves as the Funds transfer agent. Transfer agent fees are payable monthly
based on an annual Fund base fee, annual per Shareholder account charges, and out-of-pocket expenses
incurred by the transfer agent on the Fund’s behalf.
8. Borrowings
Effective October 22, 2018, the Fund entered into a committed credit agreement with Bank of America,
N.A. for a revolving line of credit (the “Facility”). The maximum availability under the Facility is the
lesser of $85,000,000 commitment amount (“Commitment Amount”) or 30% of the Fund’s adjusted net
assets, as defined in the credit agreement, subject to specific asset-based covenants. The Fund will pay a
minimum utilization fee when the borrowings are less than 60% of the Commitment Amount. Prior to
September 29, 2023, the interest rate on borrowings was the Daily Simple SOFR rate plus 1.40%.
Effective September 29, 2023, the interest rate is the Daily Simple SOFR rate plus 1.50%. Under the
terms of the Facility, borrowings are repayable no later than September 26, 2025, the termination date of
the Facility. At December 31, 2023, there was $55,521,267 outstanding against the Facility. For the year
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
24
8. Borrowings (continued)
ended December 31, 2023, the Fund incurred interest expense of $3,892,366 in connection with the
Facility. Borrowings are secured by the Fund’s investments in Investment Funds. Detailed below is
summary information concerning the borrowings:
# of Days Outstanding Average Daily Balance Annualized Weighted Average Rate
365 $60,234,418 6.47%
9. Market Risk
The value of an investment in the Fund is based on the values of the Fund’s investments, which change
due to economic and other events that affect markets generally, as well as those that affect particular
regions, countries, industries, companies or governments. The risks associated with these developments
may be magnified if certain social, political, economic and other conditions and events adversely interrupt
the global economy and financial markets. Securities in the Fund’s portfolio may underperform due to
inflation (or expectations for inflation), interest rates, global demand for particular products or resources,
natural disasters and extreme weather events, health emergencies (such as epidemics and pandemics),
terrorism, regulatory events and governmental or quasi-governmental actions. The occurrence of global
events similar to those in recent years, such as terrorist attacks around the world, natural disasters, health
emergencies, social and political (including geopolitical) discord and tensions or debt crises and
downgrades, among others, may result in market volatility and may have long term effects on both the
U.S. and global financial markets. It is difficult to predict when events affecting the U.S. or global
financial markets may occur, the effects that such events may have and the duration of those effects
(which may last for extended periods). These events may negatively impact broad segments of businesses
and populations and have a significant and rapid negative impact on the performance of the Fund’s
investments, and exacerbate pre-existing risks to the Fund. The occurrence, duration and extent of these
or other types of adverse economic and market conditions and uncertainty over the long term cannot be
reasonably projected or estimated at this time. The ultimate impact of public health emergencies or other
adverse economic or market developments and the extent to which the associated conditions impact the
Fund and its investments will also depend on other future developments, which are highly uncertain,
difficult to accurately predict and subject to change at any time. The financial performance of the Fund’s
investments (and, in turn, the Fund’s investment results) as well as their liquidity may be adversely
affected because of these and similar types of factors and developments, which may in turn impact
valuation, the Fund’s ability to sell securities and/or its ability to meet redemptions.
10. LIBOR Discontinuance or Unavailability Risk
The Fund’s investments, payment obligations and financing terms may be based on floating rates, such as
the London Interbank Offered Rates (collectively, “LIBOR”), Euro Interbank Offered Rate, Secured
Overnight Financing Rate (“SOFR”) and other similar types of reference rates (each, a “Reference Rate”).
These Reference Rates are generally intended to represent the rate at which contributing banks may
obtain short-term borrowings from each other within certain financial markets. London Interbank Offered
Rate (“LIBOR”) was the basic rate of interest used in lending transactions between banks on the London
interbank market and has been widely used as a reference for setting the interest rate on loans globally. As
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
25
10. LIBOR Discontinuance or Unavailability Risk (continued)
a result of benchmark reforms, publication of most LIBOR settings has ceased. Various financial industry
groups have been planning for the transition from LIBOR and certain regulators and industry groups have
taken actions to establish alternative reference rates (e.g., the SOFR, which measures the cost of overnight
borrowings through repurchase agreement transactions collateralized with U.S. Treasury securities and is
intended to replace U.S. dollar LIBORs with certain adjustments). These developments could negatively
impact financial markets in general and present heightened risks, including with respect to the Fund’s
investments. As a result of the uncertainty and developments relating to the transition process,
performance, price volatility, liquidity and value of the Fund and its assets may be adversely affected.
11. Contractual Obligations
The Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure
under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to
these contracts and expects the risk of loss to be remote.
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
26
12. Financial Highlights
The following represents per Share data, ratios to average net assets, and other financial highlights
information for Shareholders.
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
2023 2022 2021 2020 2019
For a Share outstanding throughout the year:
Net asset value, beginning of year $ 2,143.29 $ 2,022.78 $ 1,912.34 $ 1,737.31 $ 1,634.99
Net investment income (loss) (a)
(72.43) (57.30) (45.28) (42.07) (44.21)
Net realized and unrealized gain (loss)
from investments 212.44 177.81 155.72 217.10 146.53
Net increase (decrease) resulting
from operations 140.01 120.51 110.44 175.03 102.32
Net asset value, end of year $ 2,283.30 $ 2,143.29 $ 2,022.78 $ 1,912.34 $ 1,737.31
Total return (b) 6.53% 5.96% 5.78% 10.07% 6.26%
Ratio of total expenses (c) 3.37% 2.79% 2.33% 2.41% 2.70%
Ratio of net investment income (loss) (d) (3.29%) (2.77%) (2.32%) (2.40%) (2.61%)
Portfolio turnover 19% 25% 11% 23% 33%
Senior security, end of year (000s) $ 55,521 $ 66,721 $ 68,896 $ 74,996 $ 77,246
$ 6,255 $ 5,409 $ 5,268 $ 5,300 $ 5,512
Net assets, end of year (000s) $ 291,744 $ 294,172 $ 294,068 $ 322,500 $ 348,561
Asset coverage per $1,000 of senior security
principal amount (e)
(a) Calculated based on the average shares outstanding methodology.
(b) Total return assumes a subscription of a Share in the Fund at the beginning of the year indicated and a repurchase of the Share on the last
day of the year, and does not reflect the impact of the sales load, if any, incurred when subscribing to the Fund.
(c) Ratio does not reflect the Fund’s proportionate share of the expenses of the Investment Funds.
(d) Ratio does not reflect the Fund’s proportionate share of the income and expenses of the Investment Funds.
(e) Represents asset coverage per $1,000 of indebtedness calculated by subtracting the Fund’s liabilities and indebtedness not represented by
senior securities from the Fund’s total assets, then the result divided by the aggregate amount of the Fund’s senior securities representing
indebtedness, and multiplying the result by 1,000.
The above ratios and total returns have been calculated for the Shareholders taken as a whole. An
individual Shareholder’s return and ratios may vary from these returns and ratios due to the timing of
Share transactions and withholding tax allocation, as applicable.
13. Subsequent Events
Unless otherwise stated throughout the Notes to Financial Statements, the Fund noted no subsequent
events that require disclosure in or adjustment to the financial statements through the date that the
financial statements were available to be issued.
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Alternative Investment Partners Absolute Return Fund
27
Proxy Voting Policies and Procedures and Proxy Voting Record (Unaudited)
If applicable, a copy of (1) the Fund’s policies and procedures with respect to the voting of proxies
relating to the Fund’s investments; and (2) how the Fund voted proxies relating to Fund investments
during the most recent 12 months period ended December 31, is available without charge, upon request,
by calling the Fund at 1-888-322-4675. This information is also available on the Securities and Exchange
Commission’s website at http://www.sec.gov.
Quarterly Portfolio Schedule (Unaudited)
The Fund also files a complete schedule of portfolio holdings with the Securities and Exchange
Commission for the Fund’s first and third fiscal quarters on Form N-PORT. The Fund’s Forms N-PORT
are available on the Securities and Exchange Commission’s website at http://www.sec.gov. and Morgan
Stanley’s public website, www.morganstanley.com/im/shareholderreports. Once filed, the most recent
Form N-PORT will be available without charge, upon request, by calling the Fund at
1-888-322-4675.
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Alternative Investment Partners Absolute Return Fund
An Important Notice Concerning Our U.S. Privacy Policy (Unaudited)
28
WHAT DOES MSIM DO WITH YOUR PERSONAL INFORMATION?
Why? Financial companies choose how they share your personal information. Federal law gives
consumers the right to limit some but not all sharing. Federal law also requires us to tell you
how we collect, share, and protect your personal information. Please read this notice
carefully to understand what we do.
What? The types of personal information we collect and share depend on the product or service you
have with us. This information can include:
▪ Social Security number and income
▪ investment experience and risk tolerance
▪ checking account number and wire transfer instructions
How? All financial companies need to share customers’ personal information to run their everyday
business. In the section below, we list the reasons financial companies can share their
customers’ personal information; the reasons MSIM chooses to share; and whether you
can limit this sharing.
Reasons we can share your personal
information Does MSIM
share?
Can you limit this
sharing?
For our everyday business purposes— such as to
process your transactions, maintain your account(s),
respond to court orders and legal investigations, or
report to credit bureaus
Yes No
For our marketing purposes—
to offer our products and services to you
Yes No
For joint marketing with other financial
companies
No We don’t share
For our affiliates’ everyday business
purposes—
information about your transactions and
experiences
Yes No
For our affiliates’ everyday business
purposes—
information about your creditworthiness
No We don’t share
For our affiliates to market to you No We don’t share
For nonaffiliates to market to you No We don’t share
Questions? Call toll-free (844) 312-6327 or email:
[email protected]
FACTS
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29
An Important Notice Concerning Our U.S. Privacy Policy (Unaudited)
(continued)
Who we are
Who is providing this
notice?
Morgan Stanley Investment Management, Inc. and its affiliated registered
investment advisers, registered broker-dealers, and registered and
unregistered funds (“MSIM”)
What we do
How does MSIM
protect my
personal
information?
To protect your personal information from unauthorized access and use, we use
security measures that comply with federal law. These measures include
computer safeguards and secured files and buildings. We have policies
governing the proper handling of customer information by personnel and
requiring third parties that provide support to adhere to appropriate security
standards with respect to such information.
How does MSIM
collect my
personal
information?
We collect your personal information, for example, when you
▪ open an account or make deposits or withdrawals from your account
▪ buy securities from us or make a wire transfer
▪ give us your contact information
We also collect your personal information from others, such as credit bureaus,
affiliates, or other companies.
Why can’t I limit all
sharing?
Federal law gives you the right to limit only
▪ sharing for affiliates’ everyday business purposes—information about your
creditworthiness
▪ affiliates from using your information to market to you
▪ sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit
sharing. See below for more on your rights under state law.
Definitions
Affiliates Companies related by common ownership or control. They can be financial and
nonfinancial companies.
▪ Our affiliates include companies with a Morgan Stanley name and financial
companies such as Morgan Stanley Smith Barney LLC and Morgan Stanley
& Co.
Nonaffiliates Companies not related by common ownership or control. They can be financial
and nonfinancial companies.
▪ MSIM does not share with nonaffiliates so they can market to you.
Joint marketing A formal agreement between nonaffiliated financial companies that together
market financial products or services to you.
▪ MSIM doesn’t jointly market
Other important information
Vermont: Except as permitted by law, we will not share personal information we collect about Vermont residents
with Nonaffiliates unless you provide us with your written consent to share such information.
California: Except as permitted by law, we will not share personal information we collect about
California residents with Nonaffiliates and we will limit sharing such personal information with our Affiliates to
comply with California privacy laws that apply to us.
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30
Information Concerning Trustees and Officers (Unaudited)
Name, Address and
Birth Year of
Independent
Trustee
Position(s)
Held with
Registrant
Length of
Time
Served*
Principal Occupation(s) During
Past 5 Years and Other Relevant
Professional Experience
Number of
Funds
in Fund
Complex
Overseen by
Independent
Trustee
Other Directorships Held by
Independent Trustee**
Frank L. Bowman
c/o Perkins Coie
LLP
Counsel to the
Independent Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1944
Trustee Since
August
2006
President, Strategic Decisions, LLC
(consulting) (since February 2009);
Director or Trustee of various
Morgan Stanley Funds (since August
2006); Chairperson of the
Compliance and Insurance
Committee (since October 2015);
formerly, Chairperson of the
Insurance Sub-Committee of the
Compliance and Insurance
Committee (2007-2015); served as
President and Chief Executive
Officer of the Nuclear Energy
Institute (policy organization)
(February 2005-November 2008);
retired as Admiral, U.S. Navy after
serving over 38 years on active duty
including 8 years as Director of the
Naval Nuclear Propulsion Program
in the Department of the Navy and
the U.S. Department of Energy
(1996- 2004); served as Chief of
Naval Personnel (July 1994-
September 1996) and on the Joint
Staff as Director of Political Military
Affairs (June 1992-July 1994);
knighted as Honorary Knight
Commander of the Most Excellent
Order of the British Empire;
awarded the Officier de l’Orde
National du Mérite by the French
Government; elected to the National
Academy of Engineering (2009).
87 Director of Naval and Nuclear
Technologies LLP; Director
Emeritus of the Armed Services
YMCA; Member of the
National Security Advisory
Council of the Center for U.S.
Global Engagement and a
former member of the CNA
Military Advisory Board;
Chairman of the Board of
Trustees of Fairhaven United
Methodist Church; Member of
the Board of Advisors of the
Dolphin Scholarship
Foundation; Director of other
various nonprofit organizations;
formerly, Director of BP, plc
(November 2010-May 2019).
Kathleen A. Dennis
c/o Perkins Coie
LLP
Counsel to the
Independent Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1953
Trustee Since
August
2006
Chairperson of the Governance
Committee (since January 2021),
Chairperson of the Liquidity and
Alternatives Sub-Committee of the
Investment Committee (2006-2020)
and Director or Trustee of various
Morgan Stanley Funds (since
August 2006); President,
Cedarwood Associates (mutual fund
and investment management
consulting) (since July 2006);
formerly, Senior Managing Director
of Victory Capital Management
(1993- 2006); Senior Vice President,
Chase Bank (1984-1993).
87 Board Member, University of
Albany Foundation (2012-
present); Board Member,
Mutual Funds Directors Forum
(2014- present); Director of
various non-profit
organizations.
Nancy C. Everett
c/o Perkins Coie
LLP
Counsel to the
Independent Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1955
Trustee Since
January
2015
Chairperson of the Equity
Investment Committee (since
January 2021); Director or Trustee
of various Morgan Stanley Funds
(since January 2015); Chief
Executive Officer, Virginia
Commonwealth University
Investment Company (since
November 2015); Owner, OBIR,
LLC (institutional investment
management consulting) (since June
2014); formerly, Managing Director,
BlackRock, Inc. (February 2011-
December 2013) and Chief
Executive Officer, General Motors
Asset Management (a/k/a Promark
Global Advisors, Inc.) (June 2005-
May 2010).
88 Formerly, Member of Virginia
Commonwealth University
School of Business Foundation
(2005-2016); Member of
Virginia Commonwealth
University Board of Visitors
(2013-2015); Member of
Committee on Directors for
Emerging Markets Growth
Fund, Inc. (2007-2010);
Chairperson of Performance
Equity Management, LLC
(2006-2010); and Chairperson,
GMAM Absolute Return
Strategies Fund, LLC (2006-
2010).
|
|
31
Information Concerning Trustees and Officers (Unaudited) (continued)
Name, Address
and Birth Year of
Independent
Trustee
Position(s)
Held with
Registrant
Length of
Time
Served*
Principal Occupation(s) During
Past 5 Years and Other Relevant
Professional Experience
Number of
Funds
in Fund
Complex
Overseen by
Independent
Trustee
Other Directorships Held by
Independent Trustee**
Jakki L. Haussler
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1957
Trustee Since
January
2015
Chairman, Opus Capital Group
(since 1996); formerly, CEO, Opus
Capital Group (1996-2019);
Director, Capvest Venture Fund, LP
(May 2000-December 2011);
Partner, Adena Ventures, LP (July
1999-December 2010); Director,
The Victory Funds (February 2005-
July 2008).
88 Vertiv Holding Co. (VRT)
(August 2022); Director of
Cincinnati Bell Inc. and
Member, Audit Committee and
Chairman, Governance and
Nominating Committee (2008-
2021); Director of Service
Corporation International and
Member, Audit Committee and
Investment Committee;
Director, Barnes Group Inc.
(Since July 2021); Member of
Chase College of Law Centre
for Law and Entrepreneurship;
Board of Advisors; Director of
Best Transport (2005-2019);
Director of Chase College of
Law Board of Visitors;
formerly, Member, University
of Cincinnati Foundation
Investment Committee.
Dr. Manuel H.
Johnson
c/o Johnson Smick
International, Inc.
220 I Street, NE
Suite 200
Washington, D.C.
20002
Birth Year: 1949
Trustee Since July
1991
Senior Partner, Johnson Smick
International, Inc. (consulting firm);
Chairperson of the Fixed Income,
Liquidity and Alternatives
Investment Committee (since
January 2021), Chairperson of the
Investment Committee (2006-2020)
and Director or Trustee of various
Morgan Stanley Funds (since July
1991); Co- Chairman and a founder
of the Group of Seven Council
(G7C) (international economic
commission); formerly,
Chairperson of the Audit
Committee (July 1991- September
2006); Vice Chairman of the Board
of Governors of the Federal
Reserve System and Assistant
Secretary of the U.S. Treasury.
87 Director of NVR, Inc. (home
construction).
Joseph J. Kearns
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1942
Trustee Since
August
1994
(Retired
December
31, 2023)
Senior Adviser, Kearns &
Associates LLC (investment
consulting); Chairperson of the
Audit Committee (2006-2022) and
Director or Trustee of various
Morgan Stanley Funds (since
August 1994); formerly, Deputy
Chairperson of the Audit
Committee (July 2003-September
2006); CFO of the J. Paul Getty
Trust (1982-1999).
88 Director, Rubicon Investments
(since February 2019); Prior to
August 2016, Director of
Electro Rent Corporation
(equipment leasing). Prior to
December 31, 2013, Director
of The Ford Family
Foundation.
|
|
32
Information Concerning Trustees and Officers (Unaudited) (continued)
Name, Address
and Birth Year of
Independent
Trustee
Position(s)
Held with
Registrant
Length of
Time
Served*
Principal Occupation(s) During
Past 5 Years and Other Relevant
Professional Experience
Number of
Funds
in Fund
Complex
Overseen by
Independent
Trustee
Other Directorships Held
by Independent Trustee**
Michael F. Klein
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1958
Trustee Since
August
2006
Chairperson of the Risk Committee
(since January 2021); Managing
Director, Aetos Alternatives
Management, LP (since March
2000); Co-President, Aetos
Alternatives Management, LP
(since January 2004) and Co-Chief
Executive Officer of Aetos
Alternatives Management, LP
(since August 2013); Chairperson
of the Fixed Income Sub-Committee of the Investment
Committee (2006-2020) and
Director or Trustee of various
Morgan Stanley Funds (since
August 2006); formerly, Managing
Director, Morgan Stanley & Co.
Inc. and Morgan Stanley Dean
Witter Investment Management and
President, various Morgan Stanley
Funds (June 1998-March 2000);
Principal, Morgan Stanley & Co.
Inc. and Morgan Stanley Dean
Witter Investment Management
(August 1997-December 1999).
87 Director of certain
investment funds managed or
sponsored by Aetos
Alternatives Management,
LP; Director of Sanitized AG
and Sanitized Marketing AG
(specialty chemicals).
Patricia A. Maleski
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1960
Trustee Since
January
2017
Director or Trustee of various
Morgan Stanley Funds (since
January 2017); Managing Director,
JPMorgan Asset Management
(2004-2016); Oversight and Control
Head of Fiduciary and Conflicts of
Interest Program (2015-2016);
Chief Control Officer—Global
Asset Management (2013-2015);
President, JPMorgan Funds (2010-
2013); Chief Administrative Officer
(2004-2013); various other
positions including Treasurer and
Board Liaison (since 2001).
88 Formerly, Trustee (January
2022 to March 2023),
Treasurer (January 2023 to
March 2023), and Finance
Committee (January 2022 to
March 2023).
W. Allen Reed
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of
the Americas
22nd Floor
New York, NY
10036
Birth Year: 1947
Chair of the
Board and
Trustee
Chair of the
Boards
since
August
2020 and
Trustee
since
August
2006
Chair of the Boards of various
Morgan Stanley Funds (since
August 2020); Director or Trustee
of various Morgan Stanley Funds
(since August 2006); formerly,
Vice Chairperson of the Boards of
various Morgan Stanley Funds
(January 2020-August 2020);
President and Chief Executive
Officer of General Motors Asset
Management; Chairman and Chief
Executive Officer of the GM Trust
Bank and Corporate Vice President
of General Motors Corporation
(August 1994-December 2005).
87 Formerly, Director of Legg
Mason, Inc. (2006-2019);
and Director of the Auburn
University Foundation
(2010-2015).
|
|
33
Information Concerning Trustees and Officers (Unaudited) (continued)
Name, Address
and Birth Year of
Independent
Trustee
Position(s)
Held with
Registrant
Length of
Time
Served*
Principal Occupation(s) During
Past 5 Years and Other
Relevant Professional
Experience
Number of
Funds
in Fund
Complex
Overseen by
Independent
Trustee**
Other Directorships Held
by Independent
Trustee***
Frances L.
Cashman
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of
the
Americas
22nd Floor
New York, NY
10036
Birth Year: 1961
Trustee Trustee
Since
March
2022
Chief Executive Officer, Asset
Management
Portfolio, Delinian Ltd. (financial
information) (May 2021-Present);
Executive Vice President and
various other roles,
Legg Mason & Co. (asset
management)
(2010-2020); Managing Director,
Stifel Nicola (2005-2010).
88 Formerly, Trustee and
Investment Committee
Member, GeorgiaTech
Foundation
(since June 2019); Trustee,
Member of Investment
Committee and Chair
of Marketing Committee,
and Member of Investment
Committee, Loyola
Blakefield (2017-2023);
Trustee, MMI Gateway
Foundation (2017-2023);
Director and
Investment Committee
Member,
Catholic Community
Foundation
Board (2012-2018);
Director and
Investment Committee
Member,
St. Ignatius Loyola
Academy (2011-2017).
Eddie A. Grier
c/o Perkins Coie
LLP
Counsel to the
Independent
Trustees
1155 Avenue of
the
Americas
22nd Floor
New York, NY
10036Birth Year:
1955
Trustee Trustee
Since
February
2022
Dean, Santa Clara University
Leavey School of 78 Business
(since July 2021); Dean, Virginia
Commonwealth University School
of Business (2010-2021); President
and various other roles,
Walt Disney Company
(entertainment and media)
(1981-2010)..
88 Director, Witt/Keiffer, Inc.
(executive
search) (since 2016);
Director, NuStar GP, LLC
(energy) (since August
2021); Director,
Sonida Senior Living, Inc.
(residential
community operator) (2016-
2021);
Director, NVR, Inc.
(homebuilding)
(2013-2020); Director,
Middleburg
Trust Company (wealth
management)
(2014-2019); Director,
Colonial
Williamsburg Company
(2012-2021);
Regent, University of
Massachusetts
Global (since 2021);
Director and Chair
ChildFund International
(2012-2021);
Trustee, Brandman
University
(2010-2021); Director,
Richmond Forum (2013-
2019).
* This is the earliest date the Director began serving the Morgan Stanley Funds. Each Director serves an indefinite term, until his or her successor is elected.
** The Fund Complex includes (as of December 31, 2023) all open-end and closed-end funds (including all of their portfolios) advised by Morgan Stanley
Investment Management Inc. (the “Adviser”) and any funds that have an adviser that is an affiliated person of the Adviser (including, but not limited to, Morgan
Stanley AIP GP LP).
*** This includes any directorships at public companies and registered investment companies held by the Director at any time during the past five years.
|
|
34
Information Concerning Trustees and Officers (Unaudited) (continued)
Position(s) Length of
Name, Address and Birth Held with Time Principal Occupation(s)
Year of Executive Officer Registrant Served** During Past 5 Years
John H. Gernon
522 Fifth Avenue
New York, NY 10036
Birth Year: 1963
President and
Principal
Executive
Officer
Since September
2013
President and Principal Executive Officer of the Equity and Fixed Income Funds and the
Morgan Stanley AIP Funds (since September 2013) and the Liquidity Funds and various
money market funds (since May 2014) in the Fund Complex; Managing Director of the
Adviser.
Deidre A. Downes
1633 Broadway
New York, NY 10019
Birth Year: 1977
Chief
Compliance
Officer
Since November
2021
Executive Director of the Adviser (since January 2021) and Chief Compliance officer of
various Morgan Stanley Funds (since November 2021). Formerly, Vice President and
Corporate Counsel at PGIM and Prudential Financial (October 2016-December 2020).
Christopher Auffenberg
100 Front Street, Suite 400
West Conshohocken, PA
19428
Birth Year: 1984
Vice
President
Since May
2022
Chief Operating Officer of the Morgan Stanley Alternative Investment Partners Hedge Fund
team and Executive Director of Morgan Stanley Investment Management Inc.
Mary E. Mullin
522 Fifth Avenue
New York, NY 10036
Birth Year: 1967
Secretary Since June
1999
Managing Director of the Adviser and various entities affiliated with the Adviser; Secretary
of various Morgan Stanley Funds (since June 1999).
Michael J. Key
522 Fifth Avenue
New York, NY 10036
Birth Year: 1979
Vice President Since June 2017 Vice President of the Equity and Fixed Income Funds, Liquidity Funds, various money
market funds and the Morgan Stanley AIP Funds in the Fund Complex (since June 2017);
Managing Director of the Adviser; Head of Product Development for Equity and Fixed
Income Funds (since August 2013).
Francis J. Smith
522 Fifth Avenue
New York, NY 10036
Birth Year: 1965`
Treasurer and
Principal
Financial
Officer
Treasurer since
July 2003 and
Principal
Financial Officer
since September
2002
Managing Director of the Adviser and various entities affiliated with the Adviser; Treasurer
(since July 2003) and Principal Financial Officer of various Morgan Stanley Funds (since
September 2002).
* This is the earliest date the officer began serving the Morgan Stanley Funds. Each officer serves an indefinite term, until his or her successor is elected.
In addition, the following individuals who are officers of the Adviser or its affiliates serve as assistant secretaries of the Trust: Princess Kludjeson, Kristina B.
Magolis, Francesca Mead and Jill R. Whitelaw.
The Fund’s statement of additional information includes further information about the Fund’s Trustees and Officers, and is available without charge by visiting
www.morganstanley.com/im/shareholderreports or upon request by calling 1 (888) 322-4675.
|
|
35
Alternative Investment Partners Absolute Return Fund
100 Front Street, Suite 400
West Conshohocken, PA 19428
Trustees
W. Allen Reed, Chair of the Board and Trustee
Frank L. Bowman
Frances L. Cashman
Kathleen A. Dennis
Nancy C. Everett
Eddie A. Grier
Jakki L. Haussler
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Patricia A. Maleski
Officers
John H. Gernon, President and Principal Executive Officer
Christopher Auffenberg, Vice President
Michael J. Key, Vice President
Deidre A. Downes, Chief Compliance Officer
Francis J.Smith, Treasurer and Principal Financial Officer
Mary E. Mullin, Secretary
Investment Adviser
Morgan Stanley AIP GP LP
100 Front Street, Suite 400
West Conshohocken, PA 19428
Administrator, Custodian, Fund Accounting Agent and Escrow Agent
State Street Bank and Trust Company
One Lincoln Street
Boston, MA 02111
Transfer Agent
UMB Fund Services, Inc.
235 W. Galena Street
Milwaukee, WI 53212
Independent Registered Public Accounting Firm
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
Legal Counsel
Dechert LLP
1095 Avenue of the Americas
New York, NY 10036
Counsel to the Independent
Trustees
Perkins Coie LLP
1155 Avenue of the Americas
New York, New York 10036
|
|
(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. |
|
(1) |
The
Registrant’s Code of Ethics is attached hereto as Exhibit (a)(1) pursuant to Item 12(a)(1). |
ITEM 3. |
AUDIT
COMMITTEE FINANCIAL EXPERT. |
The Registrant’s Board of Trustees has determined that it has
one “audit committee financial expert” serving on its audit committee, who is an “independent” Trustee:
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 Trustees in the absence
of such designation or identification.
|
ITEM 4. |
PRINCIPAL
ACCOUNTANT FEES AND SERVICES. |
(a)(b)(c)(d)
and (g). Based on fees billed for the periods shown:
2023
|
|
Registrant |
|
|
Covered
Entities(1) |
|
Audit Fees |
|
$ |
45,000 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
Non-Audit Fees |
|
|
|
|
|
|
|
|
Audit-Related
Fees |
|
$ |
0 |
|
|
$ |
0 |
(2) |
Tax Fees |
|
$ |
0 |
(3) |
|
$ |
0 |
(4) |
All Other
Fees |
|
$ |
0 |
|
|
$ |
1,585,212 |
(5) |
Total Non-Audit Fees |
|
$ |
0 |
|
|
$ |
1,585,212 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
45,000 |
|
|
$ |
1,585,212 |
|
2022
|
|
Registrant |
|
|
Covered
Entities(1) |
|
Audit Fees |
|
$ |
45,000 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
Non-Audit Fees |
|
|
|
|
|
|
|
|
Audit-Related Fees |
|
$ |
0 |
|
|
$ |
0 |
(2) |
Tax Fees |
|
$ |
0 |
(3) |
|
$ |
0 |
(4) |
All Other Fees |
|
$ |
0 |
|
|
$ |
5,766,372 |
(5) |
Total Non-Audit Fees |
|
$ |
0 |
|
|
$ |
5,766,372 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
45,000 |
|
|
$ |
5,766,372 |
|
|
N/A- Not applicable, as not required by Item
4. |
|
(1) |
Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling,
controlled by or under common control with the Adviser that provides ongoing services to the Registrant. |
|
(2) |
Audit-Related Fees represent assurance and related services provided that are reasonably
related to the performance of the audit of the financial statements of the Covered Entities and funds advised by the Adviser or its affiliates,
specifically data verification and agreed upon procedures related to asset securitizations and agreed-upon procedures engagements. |
|
(3) |
Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and review of the Registrant’s tax returns. |
|
(4) |
Tax Fees represent tax compliance, tax planning and tax advice services provided in connection
with the review of Covered Entities’ tax returns. |
|
(5) |
The fees included under “All Other Fees” are for services provided by Ernst
& Young LLP related to surprise examinations for certain investment accounts to satisfy SEC Custody Rules and consulting services
related to merger integration for sister entity to the Adviser. |
(e)(1)
The audit committee’s pre-approval policies and procedures are as follows:
AUDIT COMMITTEE
AUDIT AND NON-AUDIT
SERVICES
PRE-APPROVAL
POLICY AND PROCEDURES
OF THE
MORGAN STANLEY
FUNDS
AS ADOPTED AND
AMENDED JULY 23, 2004 AND JUNE 12 AND 13, 20193
|
A. |
Statement
of Principles |
The Audit Committee
of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors
to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor’s
independence from the Fund.
The SEC has issued
rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee’s
administration of the engagement of the independent auditor. The SEC’s rules establish two different approaches to pre-approving
services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific
case-by-case services by the Audit Committee (“general pre-approval”); or require the specific pre-approval of the
Audit Committee or its delegate (“specific pre-approval”). The Audit Committee believes that the combination of these
two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent
Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval
by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided
by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific
pre-approval by the Audit Committee.
The appendices
to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee.
The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides
a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by
the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract
from the list of general pre-approved services from time to time, based on subsequent determinations.
The purpose of
this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee’s responsibilities to pre-approve services performed by the Independent Auditors to management.
The Fund’s
Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent
Auditors’ independence.
|
3 |
This
Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the “Policy”),
adopted as of the date above, supersedes and replaces all prior versions that may have been
adopted from time to time. |
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.
The annual Audit
services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual
financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on
the Fund’s financial statements. These other procedures include information systems and procedural reviews and testing performed
in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee
will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other
items.
In addition to
the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory
audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents
filed with the SEC or other documents issued in connection with securities offerings.
The Audit Committee
has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved
by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
Audit-related services
are assurance and related services that are reasonably related to the performance of the audit or review of the Fund’s financial
statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent
Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor
and is consistent with the SEC’s rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related
services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure
matters not classified as “Audit services”; assistance with understanding and implementing new accounting and financial reporting
guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required
to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements
under Forms N-SAR and/or N-CSR.
The Audit Committee
has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
The Audit Committee
believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing the auditor’s independence, and the SEC has stated
that the Independent Auditors may provide such services.
Pursuant to the
preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
The Audit Committee
believes, based on the SEC’s rules prohibiting the Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible
non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence
of the auditor and are consistent with the SEC’s rules on auditor independence.
The Audit Committee
has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).
|
G. |
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.
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 Principal Financial and Accounting Officer and must include a detailed description of the services to
be rendered. The Fund’s Principal Financial and Accounting Officer will determine whether such services are included within the
list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely
basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval
by the Audit Committee or Chairman of the Audit Committee will be submitted to the Audit Committee by the Fund’s Principal Financial
and Accounting Officer, who, after consultation with the Independent Auditors, will discuss whether the request or application is consistent
with the SEC’s rules on auditor independence.
The Audit Committee
has designated the Fund’s Principal Financial and Accounting 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 Principal Financial
and Accounting Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund’s
Principal Financial and Accounting 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 Principal Financial and Accounting Officer or any member of management.
|
I. |
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 the PCAOB’s Ethics and Independence
Rule 3526, and discussing with the Independent Auditors its methods and procedures for ensuring independence.
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 Funds
Morgan
Stanley & Co. LLC
Morgan
Stanley Investment Management Inc.
Morgan
Stanley Investment Management Limited
Morgan
Stanley Investment Management Private Limited
Morgan
Stanley Asset & Investment Trust Management Co., Limited
Morgan
Stanley Investment Management Company
Morgan
Stanley Services Company, Inc.
Morgan
Stanley Distribution, Inc.
Morgan
Stanley AIP GP LP
Morgan
Stanley Alternative Investment Partners LP
Morgan
Stanley Smith Barney LLC
Morgan
Stanley Capital Management LLC
Morgan
Stanley Asia Limited
Morgan
Stanley Services Group
|
(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). |
|
(h) |
The
audit committee of the Board of Trustees 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. |
APPENDIX A
Pre-Approved
Audit Services
Service
Range of
Fees
|
|
The Fund(s) |
Covered
Entities |
Statutory audits
or financial audits for the Funds
|
For a complete
list of fees, please contact the legal department
**
|
N/A
|
Services associated
with SEC registration statements (including new fund filings/seed audits), 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)
|
*
|
*
|
Pre-Approved
Audit-Related Services
Service
Range of
Fees
|
|
The
Fund(s) |
Covered Entities |
Attest
procedures not required by statute or regulation |
*
|
* |
Due diligence
services pertaining to potential fund mergers
|
*
|
*
|
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)
|
*
|
*
|
General assistance
with implementation of the requirements of SEC rules or listing standards promulgated pursuant to the Sarbanes-Oxley Act
|
*
|
*
|
Pre-Approved
Tax Services
Service
Range of
Fees
|
|
The
Fund(s) |
Covered Entities |
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
|
$450,000
PwC
|
N/A
|
Identification
of Passive Foreign Investment Companies
|
$175,000
PwC
|
*
|
PwC
ITV Tool – assist in determining which Fund holdings have foreign capital gains tax exposure |
$125,000 PwC |
* |
Foreign
Tax Services – Preparation of local foreign tax returns and assistance with local tax compliance issues (including maintenance of
transaction schedules, assistance in periodic tax remittances, tax registration, representing funds before foreign revenue authorities
and assistance with assessment orders) |
$500,000
PwC/EY
|
* |
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)
|
*
|
*
|
Pre-Approved
All Other Services
Service
Range of
Fees
|
|
The
Fund(s) |
Covered Entities |
Risk management
advisory services, e.g., assessment and testing of security infrastructure controls
|
*
|
*
|
*Aggregate fees
related to the pre-approved services will be limited to 10% of the 2023/2024 annual fees for audit and tax services (see fee schedule
distributed by the Auditors).
** Audit and tax
services for new funds/portfolios will be subject to the maximum audit and tax fee for a fund/portfolio on fee schedule distributed by
the Auditors.
Prohibited Non-Audit
Services
|
· |
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 |
|
· |
Internal
audit outsourcing services |
|
· |
Broker-dealer,
investment adviser or investment banking services |
|
· |
Expert
services unrelated to the audit |
|
ITEM 5. |
AUDIT
COMMITTEE OF LISTED REGISTRANTS. Not applicable to the Registrant. |
|
(a) |
Schedule
of Investments. Refer to Item 1. |
|
ITEM 7. |
DISCLOSURE
OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Morgan Stanley
Investment Management Equity Proxy Voting Policy and Procedures
1.
Policy Statement
Morgan
Stanley Investment Management’s policy and procedures for voting proxies, the Equity Proxy Voting Policy and Procedures (the “Policy”),
with respect to securities held in the accounts of clients applies to those Morgan Stanley Investment Management (“MSIM”)
entities that provide discretionary investment management services and for which an MSIM entity has authority to vote proxies.1
For purposes of this Policy, clients shall include: Morgan Stanley U.S. registered investment companies, other Morgan Stanley
pooled investment vehicles, and MSIM separately managed accounts (including accounts for Employee Retirement Income Security (“ERISA”)
clients and ERISA-equivalent clients). This Policy is reviewed and updated as necessary to address new and evolving proxy voting issues
and standards.
The
MSIM entities covered by this Policy currently include the following: Morgan Stanley AIP GP LP, Morgan Stanley Investment Management
Inc., Morgan Stanley Investment Management Limited, Morgan Stanley Investment Management Company, Morgan Stanley Saudi Arabia, MSIM Fund
Management (Ireland) Limited, Morgan Stanley Asia Limited, Morgan Stanley Investment Management (Japan) Co. Limited, Morgan Stanley
Investment Management Private Limited, Morgan Stanley Eaton Vance CLO Manager LLC, and Morgan Stanley Eaton Vance CLO CM LLC
(each an “MSIM Affiliate” and collectively referred to as the “MSIM Affiliates” or as “we” below).
Each
MSIM Affiliate will use its best efforts to vote proxies as part of its authority to manage, acquire and dispose of account assets.
|
– |
With
respect to the U.S. registered investment companies sponsored, managed or advised by any
MSIM Affiliate (the “MS Funds”), each MSIM Affiliate will vote proxies under
this Policy pursuant to authority granted under its applicable investment advisory agreement
or, in the absence of such authority, as authorized by the Board of Directors/Trustees of
the MS Funds. |
|
– |
For
other pooled investment vehicles (e.g., UCITS), each MSIM Affiliate will vote proxies under
this Policy pursuant to authority granted under its applicable investment advisory agreement
or, in the absence of such authority, as authorized by the relevant governing board. |
1This Policy does not apply to MSIM’s authority to exercise certain decision-making rights associated with investments in loans
and other fixed income instruments (collectively, for purposes hereof, “Fixed Income Instruments”).
|
– |
For
separately managed accounts (including ERISA and ERISA-equivalent clients), each MSIM Affiliate
will vote proxies under this Policy pursuant to authority granted under the applicable investment
advisory agreement or investment management agreement. Where an MSIM Affiliate has the authority
to vote proxies on behalf of ERISA and ERISA-equivalent clients, the MSIM Affiliate must
do so in accordance with its fiduciary duties under ERISA (and the Internal Revenue Code). |
|
– |
In
certain situations, a client or its fiduciary may reserve the authority to vote proxies for
itself or an outside party or may provide an MSIM Affiliate with a statement of proxy voting
policy. The MSIM Affiliate will comply with the client’s policy. |
An
MSIM Affiliate will not vote proxies unless the investment management agreement, investment advisory agreement or other authority explicitly
authorizes the MSIM Affiliate to vote proxies.
MSIM
Affiliates will vote proxies in a prudent and diligent manner and in the best interests of clients, including beneficiaries of and participants
in a client’s benefit plan(s) for which the MSIM Affiliates manage assets, consistent with the objective of maximizing long-term
investment returns (“Client Proxy Standard”) and this Policy. In addition to voting proxies of portfolio companies, MSIM
routinely engages with, or, in some cases, may engage a third party to engage with, the management or board of companies in which we
invest on a range of environmental, social and governance issues. Governance is a window into or proxy for management and board quality.
MSIM engages with companies where we have larger positions, voting issues are material or where we believe we can make a positive impact
on the governance structure. MSIM’s engagement process, through private communication with companies, allows us to understand the
governance structures at investee companies and better inform our voting decisions.
Retention
and Oversight of Outsourced Proxy Voting
Certain
MSIM exchange-traded funds (“ETFs”) will follow Calvert Research and Management’s (“Calvert”) Proxy Voting
Policies and Procedures and the Global Proxy Voting Guidelines set forth in Appendix A of the Calvert Proxy Voting Policies and Procedures.
MSIM’s oversight of Calvert’s proxy voting engagement is ongoing pursuant to the 40 Act Fund Service Provider and Vendor
Oversight Policy.
Retention
and Oversight of Proxy Advisory Firms
Institutional
Shareholder Services (“ISS”) and Glass Lewis (together with other proxy research providers as we may retain from time to
time, the “Research Providers”) are independent advisers that specialize in providing a variety of fiduciary-level proxy-related
services to institutional investment managers, plan sponsors, custodians, consultants, and other institutional investors. The services
provided include in-depth research, global issuer analysis, record retention, ballot processing and voting recommendations.
To
facilitate proxy voting MSIM has retained Research Providers to provide company level reports that summarize key data elements contained
within an issuer’s proxy statement. Although we are aware of the voting recommendations included in the Research Providers’
company level reports, these recommendations are not an input into our vote nor is any potential vote prepopulated based on a Research
Provider’s research. MSIM votes all proxies based on its own proxy voting policies, consultation with the investment teams, and
in the best interests of each client. In addition to research, MSIM retains ISS to provide vote execution, reporting, and recordkeeping
services.
As
part of MSIM’s ongoing oversight of the Research Providers, MSIM performs periodic due diligence on the Research Providers. Topics
of the reviews include, but are not limited to, conflicts of interest, methodologies for developing their policies and vote recommendations,
and resources.
Voting
Proxies for Certain Non-U.S. Companies
Voting
proxies of companies located in some jurisdictions may involve several problems that can restrict or prevent the ability to vote such
proxies or entail significant costs. These problems include, but are not limited to: (i) proxy statements and ballots being written in
a language other than English; (ii) untimely and/or inadequate notice of shareholder meetings; (iii) restrictions on the ability of holders
outside the issuer’s jurisdiction of organization to exercise votes; (iv) requirements to vote proxies in person; (v) the imposition
of restrictions on the sale of the securities for a period of time in proximity to the shareholder meeting; and (vi) requirements to
provide local agents with power of attorney to facilitate our voting instructions. As a result, we vote clients’ non-U.S. proxies
on a best efforts basis only, after weighing the costs and benefits of voting such proxies, consistent with the Client Proxy Standard.
ISS has been retained to provide assistance in connection with voting non-U.S. proxies.
Securities Lending
MS
Funds or any other investment vehicle sponsored, managed or advised by an MSIM affiliate may participate in a securities lending program
through a third party provider. The voting rights for shares that are out on loan are transferred to the borrower and therefore, the
lender (i.e., an MS Fund or another investment vehicle sponsored, managed or advised by an MSIM affiliate) is not entitled to
vote the lent shares at the company meeting. In general, MSIM believes the revenue received from the lending program outweighs the ability
to vote and we will not recall shares for the purpose of voting. However, in cases in which MSIM believes the right to vote outweighs
the revenue received, we reserve the right to recall the shares on loan on a best efforts basis.
2. General
Proxy Voting Guidelines
To
promote consistency in voting proxies on behalf of our clients, we follow this Policy (subject to any exception set forth herein). As
noted above, certain ETFs will follow Calvert’s Global Proxy Voting Guidelines set forth in Appendix A of Calvert’s Proxy
Voting Policies and Procedures and the proxy voting guidelines discussed in this section do not apply to such ETFs. See Appendix A of
Calvert’s Proxy Voting Policies and Procedures for a general discussion of the proxy voting guidelines to which these ETFs will
be subject.
The
Policy addresses a broad range of issues, and provides general voting parameters on proposals that arise most frequently. However, details
of specific proposals vary, and those details affect particular voting decisions, as do factors specific to a given company. Pursuant
to the procedures set forth herein, we may vote in a manner that is not in accordance with the following general guidelines, provided
the vote is approved by the Proxy Review Committee (see Section 3) and is consistent with the Client Proxy Standard. Morgan Stanley AIP
GP LP (Morgan Stanley AIP”) will follow the procedures as described in Appendix A.
We
endeavor to integrate governance and proxy voting policy with investment goals, using the vote to encourage portfolio companies to enhance
long-term shareholder value and to provide a high standard of transparency such that equity markets can value corporate assets appropriately.
We
seek to follow the Client Proxy Standard for each client. At times, this may result in split votes, for example when different clients
have varying economic interests and / or priorities reflected in their mandates with respect to the outcome of a particular voting
matter (such as a case in which varied ownership interests in two companies involved in a merger result in different stakes in the outcome).
We also may split votes at times based on differing views of portfolio managers.
We
may abstain from or vote against matters for which disclosure is inadequate.
A. Routine
Matters
We
generally support routine management proposals. The following are examples of routine management proposals:
|
– |
Approval
of financial statements and auditor reports if delivered with an unqualified auditor’s
opinion. |
|
– |
General
updating/corrective amendments to the charter, articles of association or bylaws, unless
we believe that such amendments would diminish shareholder rights. |
Most
proposals related to the conduct of the annual meeting, with the following exceptions. We generally oppose proposals that relate to “the
transaction of such other business which may come before the meeting,” and open-ended requests for adjournment. However, where
management specifically states the reason for requesting an adjournment and the requested adjournment would facilitate passage of a proposal
that would otherwise be supported under this Policy (i.e., an uncontested corporate transaction), the adjournment request will be supported.
We do not support proposals that allow companies to call a special meeting with a short (generally two weeks or less) time frame for
review.
We
generally support shareholder proposals advocating confidential voting procedures and independent tabulation of voting results.
MSIM is supportive of the use of technology to conduct
virtual shareholder meetings in parallel with physical meetings, for increased investor participation. However, adoption of a ‘virtual-only’
approach would restrict meaningful exchange between the company and shareholders. Therefore, MSIM is generally not supportive of proposals
seeking authority to conduct virtual-only shareholder meetings.
B. Board
of Directors
Votes
on board nominees can involve balancing a variety of considerations. In vote decisions, we may take into consideration whether the company
has a majority voting policy in place that we believe makes the director vote more meaningful. In the absence of a proxy contest, we
generally support the board’s nominees for director except as follows:
|
§ |
We
consider withholding support from or voting against a nominee if we believe a direct conflict
exists between the interests of the nominee and the public shareholders, including failure
to meet fiduciary standards of care and/or loyalty. We may oppose directors where we conclude
that actions of directors are unlawful, unethical or negligent. We consider opposing individual
board members or an entire slate if we believe the board is entrenched and/or dealing inadequately
with performance problems; if we believe the board is acting with insufficient independence
between the board and management; or if we believe the board has not been sufficiently forthcoming
with information on key governance or other material matters. |
|
§ |
We
consider withholding support from or voting against interested directors if the company’s
board does not meet market standards for director independence, or if otherwise we believe
board independence is insufficient. We refer to prevalent market standards as promulgated
by a stock exchange or other authority within a given market (e.g., New York Stock Exchange
or Nasdaq rules for most U.S. companies, and The Combined Code on Corporate Governance in
the United Kingdom). Thus, for an NYSE company with no controlling shareholder, we would
expect that at a minimum a majority of directors should be independent as defined by NYSE.
Where we view market standards as inadequate, we may withhold votes based on stronger independence
standards. Market standards notwithstanding, we generally do not view long board tenure alone
as a basis to classify a director as non-independent. |
|
1. |
At
a company with a shareholder or group that controls the company by virtue of a majority economic
interest in the company, we have a reduced expectation for board independence, although we
believe the presence of independent directors can be helpful, particularly in staffing the
audit committee, and at times we may withhold support from or vote against a nominee on the
view the board or its committees are not sufficiently independent. In markets where board
independence is not the norm (e.g. Japan), however, we consider factors including whether
a board of a controlled company includes independent members who can be expected to look
out for interests of minority holders. |
|
2. |
We
consider withholding support from or voting against a nominee if he or she is affiliated
with a major shareholder that has representation on a board disproportionate to its economic
interest. |
|
§ |
Depending
on market standards, we consider withholding support from or voting against a nominee who
is interested and who is standing for election as a member of the company’s compensation/remuneration,
nominating/governance or audit committee. |
|
§ |
We
consider withholding support from or voting against nominees if the term for which they are
nominated is excessive. We consider this issue on a market-specific basis. |
|
§ |
We
consider withholding support from or voting against nominees if in our view there has been
insufficient board renewal (turnover), particularly in the context of extended poor company
performance. Also, if the board has failed to consider diversity, including but not limited
to, gender and ethnicity, in its board composition. |
|
§ |
We
consider withholding support from or voting against a nominee standing for election if the
board has not taken action to implement generally accepted governance practices for which
there is a “bright line” test. For example, in the context of the U.S. market,
failure to eliminate a dead hand or slow hand poison pill would be seen as a basis for opposing
one or more incumbent nominees. |
|
§ |
In
markets that encourage designated audit committee financial experts, we consider voting against
members of an audit committee if no members are designated as such. We also consider voting
against the audit committee members if the company has faced financial reporting issues and/or
does not put the auditor up for ratification by shareholders. |
|
§ |
We
believe investors should have the ability to vote on individual nominees, and may abstain
or vote against a slate of nominees where we are not given the opportunity to vote on individual
nominees. |
|
§ |
We
consider withholding support from or voting against a nominee who has failed to attend at
least 75% of the nominee’s board and board committee meetings within a given year without
a reasonable excuse. We also consider opposing nominees if the company does not meet market
standards for disclosure on attendance. |
|
§ |
We
consider withholding support from or voting against a nominee who appears overcommitted,
particularly through service on an excessive number of boards. Market expectations are incorporated
into this analysis; for U.S. boards, we generally oppose election of a nominee who serves
on more than five public company boards (excluding investment companies), or public company
CEOs that serve on more than two outside boards given level of time commitment required in
their primary job. |
|
§ |
We
consider withholding support from or voting against a nominee where we believe executive
remuneration practices are poor, particularly if the company does not offer shareholders
a separate “say-on-pay” advisory vote on pay. |
|
b. |
Discharge
of Directors’ Duties |
In
markets where an annual discharge of directors’ responsibility is a routine agenda item, we generally support such discharge. However,
we may vote against discharge or abstain from voting where there are serious findings of fraud or other unethical behavior for which
the individual bears responsibility. The annual discharge of responsibility represents shareholder approval of disclosed actions taken
by the board during the year and may make future shareholder action against the board difficult to pursue.
We
generally support U.S. shareholder proposals requiring that a certain percentage (up to 66⅔%) of the company’s board members
be independent directors, and promoting all-independent audit, compensation and nominating/governance committees.
We
generally support shareholder proposals urging diversity of board membership with respect to gender, race or other factors where we believe
the board has failed to take these factors into account. We will also consider not supporting the re-election of the nomination
committee and / or chair (or other resolutions when the nomination chair is not up for re-election) where we perceive limited progress
in gender diversity, with the expectation where feasible and with consideration of any idiosyncrasies of individual markets, that female directors represent
not less than a third of the board, unless there is evidence that the company has made significant progress in this area. In markets where
information on director ethnicity is available, and it is legal to obtain it, and where it is relevant, we will generally also consider
not supporting the re-election of the nomination committee chair (or other resolutions when the nomination chair is not up for re-election)
if the board lacks ethnic diversity and has not outlined a credible diversity strategy.
We
generally support proposals requesting or requiring majority voting policies in election of directors, so long as there is a carve-out
for plurality voting in the case of contested elections.
We
consider proposals on procedures for inclusion of shareholder nominees and to have those nominees included in the company’s proxy
statement and on the company’s proxy ballot on a case-by-case basis. Considerations include ownership thresholds, holding periods,
the number of directors that shareholders may nominate and any restrictions on forming a group.
|
g. |
Reimbursement
for Dissident Nominees |
We
generally support well-crafted U.S. shareholder proposals that would provide for reimbursement of dissident nominees elected to a board,
as the cost to shareholders in electing such nominees can be factored into the voting decision on those nominees.
|
h. |
Proposals
to Elect Directors More Frequently |
In
the U.S. public company context, we usually support shareholder and management proposals to elect all directors annually (to “declassify”
the board), although we make an exception to this policy where we believe that long-term shareholder value may be harmed by this change
given particular circumstances at the company at the time of the vote on such proposal. As indicated above, outside the United States
we generally support greater accountability to shareholders that comes through more frequent director elections, but recognize that many
markets embrace longer term lengths, sometimes for valid reasons given other aspects of the legal context in electing boards.
We
generally support proposals to eliminate cumulative voting in the U.S. market context. (Cumulative voting provides that shareholders
may concentrate their votes for one or a handful of candidates, a system that can enable a minority bloc to place representation on a
board.) U.S. proposals to establish cumulative voting in the election of directors generally will not be supported.
|
j. |
Separation
of Chairman and CEO Positions |
We
vote on shareholder proposals to separate the Chairman and CEO positions and/or to appoint an independent Chairman based in part on prevailing
practice in particular markets, since the context for such a practice varies. In many non-U.S. markets, we view separation of the roles
as a market standard practice, and support division of the roles in that context. In the United States, we consider such proposals on
a case-by-case basis, considering, among other things, the existing board leadership structure, company performance, and any evidence
of entrenchment or perceived risk that power is overly concentrated in a single individual.
|
k. |
Director
Retirement Age and Term Limits |
Proposals
setting or recommending director retirement ages or director term limits are voted on a case-by-case basis that includes consideration
of company performance, the rate of board renewal, evidence of effective individual director evaluation processes, and any indications
of entrenchment.
|
l. |
Proposals
to Limit Directors’ Liability and/or Broaden Indemnification of Officers and Directors |
Generally,
we will support such proposals provided that an individual is eligible only if he or she has not acted in bad faith, with gross negligence
or with reckless disregard of their duties.
C. Statutory
Auditor Boards
The
statutory auditor board, which is separate from the main board of directors, plays a role in corporate governance in several markets.
These boards are elected by shareholders to provide assurance on compliance with legal and accounting standards and the company’s
articles of association. We generally vote for statutory auditor nominees if they meet independence standards. In markets that require
disclosure on attendance by internal statutory auditors, however, we consider voting against nominees for these positions who failed
to attend at least 75% of meetings in the previous year. We also consider opposing nominees if the company does not meet market standards
for disclosure on attendance.
D. Corporate
Transactions and Proxy Fights
We
examine proposals relating to mergers, acquisitions and other special corporate transactions (i.e., takeovers, spin-offs, sales of assets,
reorganizations, restructurings and recapitalizations) on a case-by-case basis in the interests of each fund or other account. Proposals
for mergers or other significant transactions that are friendly and approved by the Research Providers usually are supported if there
is no portfolio manager objection. We also analyze proxy contests on a case-by-case basis.
E. Changes
in Capital Structure
We
generally support the following:
|
– |
Management
and shareholder proposals aimed at eliminating unequal voting rights, assuming fair economic
treatment of classes of shares we hold. |
|
– |
U.S.
management proposals to increase the authorization of existing classes of common stock (or
securities convertible into common stock) if: (i) a clear business purpose is stated that
we can support and the number of shares requested is reasonable in relation to the purpose
for which authorization is requested; and/or (ii) the authorization does not exceed 100%
of shares currently authorized and at least 30% of the total new authorization will be outstanding.
(We consider proposals that do not meet these criteria on a case-by-case basis.) |
|
– |
U.S.
management proposals to create a new class of preferred stock or for issuances of preferred
stock up to 50% of issued capital, unless we have concerns about use of the authority for
anti-takeover purposes. |
|
– |
Proposals
in non-U.S. markets that in our view appropriately limit potential dilution of existing shareholders.
A major consideration is whether existing shareholders would have preemptive rights for any
issuance under a proposal for standing share issuance authority. We generally consider market-specific
guidance in making these decisions; for example, in the U.K. market we usually follow Association
of British Insurers’ (“ABI”) guidance, although company-specific factors
may be considered and for example, may sometimes lead us to voting against share authorization
proposals even if they meet ABI guidance. |
|
– |
Management
proposals to authorize share repurchase plans, except in some cases in which we believe there
are insufficient protections against use of an authorization for anti-takeover purposes. |
|
– |
Management
proposals to reduce the number of authorized shares of common or preferred stock, or to eliminate
classes of preferred stock. |
|
– |
Management
proposals to effect stock splits. |
|
– |
Management
proposals to effect reverse stock splits if management proportionately reduces the authorized
share amount set forth in the corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount generally will be approved if the resulting
increase in authorized shares coincides with the proxy guidelines set forth above for common
stock increases. |
|
– |
Management
dividend payout proposals, except where we perceive company payouts to shareholders as inadequate. |
We
generally oppose the following (notwithstanding management support):
|
– |
Proposals
to add classes of stock that would substantially dilute the voting interests of existing
shareholders. |
|
– |
Proposals
to increase the authorized or issued number of shares of existing classes of stock that are
unreasonably dilutive, particularly if there are no preemptive rights for existing shareholders.
However, depending on market practices, we consider voting for proposals giving general authorization
for issuance of shares not subject to pre-emptive rights if the authority is limited. |
|
– |
Proposals
that authorize share issuance at a discount to market rates, except where authority for such
issuance is de minimis, or if there is a special situation that we believe justifies such
authorization (as may be the case, for example, at a company under severe stress and risk
of bankruptcy). |
|
– |
Proposals
relating to changes in capitalization by 100% or more. |
We
consider on a case-by-case basis shareholder proposals to increase dividend payout ratios, in light of market practice and perceived
market weaknesses, as well as individual company payout history and current circumstances. For example, currently we perceive low payouts
to shareholders as a concern at some Japanese companies, but may deem a low payout ratio as appropriate for a growth company making good
use of its cash, notwithstanding the broader market concern.
F. Takeover
Defenses and Shareholder Rights
|
– |
Shareholder
Rights Plans |
We
generally support proposals to require shareholder approval or ratification of shareholder rights plans (poison pills). In voting on
rights plans or similar takeover defenses, we consider on a case-by-case basis whether the company has demonstrated a need for the defense
in the context of promoting long-term share value; whether provisions of the defense are in line with generally accepted governance principles
in the market (and specifically the presence of an adequate qualified offer provision that would exempt offers meeting certain conditions
from the pill); and the specific context if the proposal is made in the midst of a takeover bid or contest for control.
|
– |
Supermajority Voting
Requirements |
We
generally oppose requirements for supermajority votes to amend the charter or bylaws, unless the provisions protect minority shareholders
where there is a large shareholder. In line with this view, in the absence of a large shareholder we support reasonable shareholder proposals
to limit such supermajority voting requirements. Also, we oppose provisions that do not allow shareholders any right to amend the charter
of bylaws.
|
– |
Shareholders
Right to Call a Special Meeting |
We
consider proposals to enhance a shareholder’s rights to call meetings on a case-by-case basis. At large-cap U.S. companies, we
generally support efforts to establish the right of holders of 10% or more of shares to call special meetings, unless the board or state
law has set a policy or law establishing such rights at a threshold that we believe to be acceptable.
In
the U.S. context, we examine proposals for shareholder written consent rights on a case-by-case basis.
We
consider management and shareholder proposals to reincorporate to a different jurisdiction on a case-by-case basis. We oppose such proposals
if we believe the main purpose is to take advantage of laws or judicial precedents that reduce shareholder rights.
|
– |
Anti-greenmail
Provisions |
Proposals
relating to the adoption of anti-greenmail provisions will be supported, provided that the proposal: (i) defines greenmail; (ii) prohibits
buyback offers to large block holders (holders of at least 1% of the outstanding shares and in certain cases, a greater amount) not made
to all shareholders or not approved by disinterested shareholders; and (iii) contains no anti-takeover measures or other provisions restricting
the rights of shareholders.
We
may consider opposing or abstaining on proposals if disparate issues are “bundled” and presented for a single vote.
G. Auditors
We
generally support management proposals for selection or ratification of independent auditors. However, we may consider opposing such
proposals with reference to incumbent audit firms if the company has suffered from serious accounting irregularities and we believe rotation
of the audit firm is appropriate, or if fees paid to the auditor for non-audit-related services are excessive. Generally, to determine
if non-audit fees are excessive, a 50% test will be applied (i.e., non-audit-related fees should be less than 50% of the total fees paid
to the auditor). We generally vote against proposals to indemnify auditors.
H. Executive and
Director Remuneration
We generally support the
following:
|
– |
Proposals
for employee equity compensation plans and other employee ownership plans, provided that
our research does not indicate that approval of the plan would be against shareholder interest.
Such approval may be against shareholder interest if it authorizes excessive dilution and
shareholder cost, particularly in the context of high usage (“run rate”) of equity
compensation in the recent past; or if there are objectionable plan design and provisions. |
|
– |
Proposals
relating to fees to outside directors, provided the amounts are not excessive relative to
other companies in the country or industry, and provided that the structure is appropriate
within the market context. While stock-based compensation to outside directors is positive
if moderate and appropriately structured, we are wary of significant stock option awards
or other performance-based awards for outside directors, as well as provisions that could
result in significant forfeiture of value on a director’s decision to resign from a
board (such forfeiture can undercut director independence). |
|
– |
Proposals
for employee stock purchase plans that permit discounts, but only for grants that are part
of a broad-based employee plan, including all non-executive employees, and only if the discounts
are limited to a reasonable market standard or less. |
|
– |
Proposals
for the establishment of employee retirement and severance plans, provided that our research
does not indicate that approval of the plan would be against shareholder interest. |
We
generally oppose retirement plans and bonuses for non-executive directors and independent statutory auditors.
In
the U.S. context, we generally vote against shareholder proposals requiring shareholder approval of all severance agreements, but we
generally support proposals that require shareholder approval for agreements in excess of three times the annual compensation (salary
and bonus) or proposals that require companies to adopt a provision requiring an executive to receive accelerated vesting of equity awards
if there is a change of control and the executive is terminated. We generally oppose shareholder proposals that would establish
arbitrary caps on pay. We consider on a case-by-case basis shareholder proposals that seek to limit Supplemental Executive Retirement
Plans (SERPs), but support such shareholder proposals where we consider SERPs excessive.
Shareholder
proposals advocating stronger and/or particular pay-for-performance models will be evaluated on a case-by-case basis, with consideration
of the merits of the individual proposal within the context of the particular company and its labor markets, and the company’s
current and past practices. While we generally support emphasis on long-term components of senior executive pay and strong linkage of
pay to performance, we consider factors including whether a proposal may be overly prescriptive, and the impact of the proposal, if implemented
as written, on recruitment and retention.
We
generally support proposals advocating reasonable senior executive and director stock ownership guidelines and holding requirements for
shares gained in executive equity compensation programs.
We
generally support shareholder proposals for reasonable “claw-back” provisions that provide for company recovery of senior
executive bonuses to the extent they were based on achieving financial benchmarks that were not actually met in light of subsequent restatements.
Management
proposals effectively to re-price stock options are considered on a case-by-case basis. Considerations include the company’s reasons
and justifications for a re-pricing, the company’s competitive position, whether senior executives and outside directors are excluded,
potential cost to shareholders, whether the re-pricing or share exchange is on a value-for-value basis, and whether vesting requirements
are extended.
Say-on-Pay
We
consider proposals relating to an advisory vote on remuneration on a case-by-case basis. Considerations include a review of the relationship between
executive remuneration and performance based on operating trends and total shareholder return over multiple performance periods. In addition,
we review remuneration structures and potential poor pay practices, including relative magnitude of pay, discretionary bonus
awards, tax gross ups, change-in-control features, internal pay equity and peer group construction. As long-term investors,
we support remuneration policies that align with long-term shareholder returns.
I. Social and Environmental
Issues
Shareholders
in the United States and certain other markets submit proposals encouraging changes in company disclosure and practices related to particular
social and environmental matters. MSIM believes that relevant social and environmental issues, including principal adverse sustainability
impacts, can influence risk and return. Consequently, we consider how to vote on proposals related to social and environmental issues
on a case-by-case basis by determining the relevance of social and environmental issues identified in the proposal and their likely impacts
on shareholder value. In reviewing proposals on social and environmental issues, we consider a company’s current disclosures and
our understanding of the company’s management of material social and environmental issues in comparison to peers. We seek to balance
concerns on reputational and other risks that lie behind a proposal against costs of implementation, while considering appropriate shareholder
and management prerogatives. We may abstain from voting on proposals that do not have a readily determinable financial impact on shareholder
value and we may oppose proposals that intrude excessively on management prerogatives and/or board discretion. We generally vote
against proposals requesting reports or actions that we believe are duplicative, related to matters not material to the business, or
that would impose unnecessary or excessive costs. We consider proposals on these sustainability risks, opportunities and impacts
on a case-by-case basis but generally support proposals that seek to enhance useful disclosure. We focus on understanding the company’s
business and commercial context and recognise that there is no one size fits all that can apply to all companies. In assessing and prioritising
proposals, we carefully reflect on the materiality of the issues as well as the sector and geography in which the company operates. We
also consider the explanation companies provide where they may depart from best practice to assess the adequacy and appropriateness
of measures that are in place.
Environmental
Issues:
We
generally support proposals that, if implemented, would enhance useful disclosure on climate, biodiversity, and other environmental
risks, such as disclosures aligned with SASB (Sustainability Accounting Standards Board) and the TCFD (Task Force on Climate-related
Financial Disclosures). We also generally support proposals that aim to meaningfully reduce or mitigate a company’s impact on the global
climate and encourage companies to use independently verified Science Based Targets to ensure emissions are in line with the Paris
Agreement on Climate Change, which should ultimately help companies manage long-term climate-related risks. We generally will support
reasonable proposals to reduce negative environmental impacts and ameliorate a company’s overall environmental footprint, including
any threats to biodiversity in ecologically sensitive areas. We generally will also support proposals asking companies to report on their
environmental practices, policies and impacts, including environmental damage and health risks resulting from operations, and the impact
of environmental liabilities on shareholder value.
Social Issues:
We
generally support proposals that, if implemented, would enhance useful disclosure on employee and board diversity, including gender,
race, and other factors. We consider proposals on other social issues on a case-by-case basis but generally support proposals that:
|
· |
Seek
to enhance useful disclosure or improvements on material issues such as human rights
risks, supply chain management. workplace safety, human capital management and
pay equity. |
|
· |
Encourage
policies to eliminate gender-based violence and other forms of harassment from the workplace. |
|
· |
Seek
disclosure of relevant diversity policies and meaningful workforce diversity data, including
EEO-1 data. |
We
may consider withholding support where we have material concerns in relation to a company’s involvement/remediation of a breach
of global conventions such as UN Global Compact Principles on Human Rights, Labour Standards, Environment and Business Malpractice.
J. Funds
of Funds
Certain
MS Funds advised by an MSIM Affiliate invest only in other MS Funds. If an underlying fund has a shareholder meeting, in order to avoid
any potential conflict of interest, such proposals will be voted in the same proportion as the votes of the other shareholders of the
underlying fund, unless otherwise determined by the Proxy Review Committee. In markets where proportional voting is not available we
will not vote at the meeting, unless otherwise determined by the Proxy Review Committee. Other MS Funds invest in unaffiliated funds.
If an unaffiliated underlying fund has a shareholder meeting and the MS Fund owns more than 25% of the voting shares of the underlying
fund, the MS Fund will vote its shares in the unaffiliated underlying fund in the same proportion as the votes of the other shareholders
of the underlying fund to the extent possible.
Voting
Conditions Triggered Under Rule 12d1-4
Rule
12d1-4 sets forth the conditions under which a registered fund (“acquiring fund”) may invest in excess of the statutory limits
of Section 12(d)(1) of the 1940 Act (for example by owning more than 3% of the total outstanding voting stock) in another registered
fund (“acquired fund”). In the event that a Morgan Stanley “acquiring fund” invests in an “acquired
fund” in reliance on Rule 12d1-4 under the 1940 Act, and the MS Fund and its “advisory group” (as defined in Rule 12d1-4)
hold more than (i) 25% of the total outstanding voting stock of a particular open-end fund (including ETFs) or (ii) 10% of the total
outstanding voting stock of a particular closed-end fund, the Morgan Stanley “acquiring fund” and its “advisory group”
will be required to vote all shares of the open- or closed-end fund held by the fund and its “advisory group” in the same
proportion as the votes of the other shareholders of the open- or closed-end fund.
Because
MSIM and Eaton Vance are generally considered part of the same “advisory group,” an Eaton Vance “acquiring fund”
that is required to comply with the voting conditions set forth in Rule 12d1-4 could potentially implicate voting conditions for a MS
Fund invested in the same open- or closed-end fund as the Eaton Vance “acquiring fund.” The Committee will be notified by
Compliance if the conditions are triggered for a particular open- or closed-end fund holding in an MS Fund. In the event that the
voting conditions in Rule 12d1-4 are triggered, please refer to the Morgan Stanley Funds Fund of Funds Investment Policy for specific
information on Rule 12d1-4 voting requirements and exceptions.
3. Administration of the
Policy
The
MSIM Proxy Review Committee (the “Committee”) has overall responsibility for the Policy. The Committee consists of investment
professionals who represent the different investment disciplines and geographic locations of MSIM, and is chaired by the director of
the Global Stewardship Team (“GST”). Because proxy voting is an investment responsibility and may affect shareholder value,
and because of their knowledge of companies and markets as well as their understanding of their clients’ objectives, portfolio managers
and other members of investment staff play a key role in proxy voting, individual investment teams are responsible for determining decisions
on proxy votes with consultation from the GST. The GST administers and implements the Policy, as well as monitoring services
provided by the proxy advisory firms, third-party proxy engagements and other research providers used in the proxy voting process. As
noted above, certain ETFs will follow Calvert’s Proxy Voting Policy and Procedures, which is administered by Calvert’s Proxy
Voting and Engagement Department and overseen by Calvert’s Proxy Voting and Engagement Committee. The GST periodically monitors
Calvert’s proxy voting with respect to securities held by the ETFs.
The GST
Director is responsible for identifying issues that require Committee deliberation or ratification. The GST, working with advice
of investment teams and the Committee, is responsible for voting on routine items and on matters that can be addressed in line with these
Policy guidelines. The GST has responsibility for voting case-by-case where guidelines and precedent provide adequate guidance.
The
Committee may periodically review and has the authority to amend, as necessary, the Policy and establish and direct voting positions
consistent with the Client Proxy Standard.
GST
and members of the Committee may take into account Research Providers’ recommendations and research as well as any other relevant
information they may request or receive, including portfolio manager and/or analyst comments and research, as applicable. Generally,
proxies related to securities held in client accounts that are managed pursuant to quantitative, index or index-like strategies (“Index
Strategies”) will be voted in the same manner as those held in actively managed accounts, unless economic interests or investment
guidelines of the accounts differ. Because accounts managed using Index Strategies are passively managed accounts, research from
portfolio managers and/or analysts related to securities held in these accounts may not be available. If the affected securities are
held only in accounts that are managed pursuant to Index Strategies, and the proxy relates to a matter that is not described in this
Policy, the GST will consider all available information from the Research Providers, and to the extent that the holdings are significant,
from the portfolio managers and/or analysts.
A. Committee Procedures
The Committee meets at least quarterly,
and reviews and considers changes to the Policy at least annually. The Committee will review developing issues and approve upcoming votes,
as appropriate, for matters as requested by GST.
The Committee reserves the right to
review voting decisions at any time and to make voting decisions as necessary to ensure the independence and integrity of the votes.
B. Material
Conflicts of Interest
In
addition to the procedures discussed above, if the GST Director determines that an issue raises a material conflict of interest, the
GST Director may request a special committee (“Special Committee”) to review, and recommend a course of action with respect
to, the conflict(s) in question.
A
potential material conflict of interest could exist in the following situations, among others:
|
· |
The
issuer soliciting the vote is a client of MSIM or an affiliate of MSIM and the vote is on
a matter that materially affects the issuer. |
|
· |
The
proxy relates to Morgan Stanley common stock or any other security issued by Morgan Stanley
or its affiliates except if echo voting is used, as with MS Funds, as described herein. |
|
· |
Morgan
Stanley has a material pecuniary interest in the matter submitted for a vote (e.g., acting
as a financial advisor to a party to a merger or acquisition for which Morgan Stanley will
be paid a success fee if completed). |
|
· |
One
of Morgan Stanley’s independent directors or one of MS Funds’ directors also
serves on the board of directors or is a nominee for election to the board of directors of
a company held by an MS Fund or affiliate. |
If
the GST Director determines that an issue raises a potential material conflict of interest, depending on the facts and circumstances,
the issue will be addressed as follows:
|
· |
If
the matter relates to a topic that is discussed in this Policy, the proposal will be voted
as per the Policy. |
|
· |
If
the matter is not discussed in this Policy or the Policy indicates that the issue is to be
decided case-by-case, the proposal will be voted in a manner consistent with the Research
Providers, provided that all the Research Providers consulted have the same recommendation,
no portfolio manager objects to that vote, and the vote is consistent with MSIM’s Client
Proxy Standard. |
|
· |
If
the Research Providers’ recommendations differ, the GST Director will refer the matter
to a Special Committee to vote on the proposal, as appropriate. |
Any
Special Committee shall be comprised of the GST Director, and at least two portfolio managers (preferably members of the Committee),
as approved by the Committee. The GST Director may request non-voting participation by MSIM’s General Counsel or his/her designee
and the Chief Compliance Officer or his/her designee. In addition to the research provided by Research Providers, the Special Committee
may request analysis from MSIM Affiliate investment professionals and outside sources to the extent it deems appropriate.
C. Proxy
Voting Reporting
The
CGT will document in writing all Committee and Special Committee decisions and actions, which documentation will be maintained by the
GST for a period of at least six years. To the extent these decisions relate to a security held by an MS Fund, the GST will report the
decisions to each applicable Board of Trustees/Directors of those MS Funds (the “Board”) at each Board’s next regularly
scheduled Board meeting. The report will contain information concerning decisions made during the most recently ended calendar quarter
immediately preceding the Board meeting.
In
addition, to the extent that Committee and Special Committee decisions and actions relate to a security held by other pooled investment
vehicles, the GST will report the decisions to the relevant governing board of the pooled investment vehicle. MSIM will promptly provide
a copy of this Policy to any client requesting it.
MSIM
will also, upon client request, promptly provide a report indicating how each proxy was voted with respect to securities held in that
client’s account.
MSIM’s
Legal Department, in conjunction with GST and GST IT for MS Fund reporting and with the AIP investment team for AIP Closed-End 40 Act
Fund reporting, is responsible for filing an annual Form N-PX on behalf of each MS Fund and AIP Closed-End 40 Act Fund for which such
filing is required, indicating how all proxies were voted with respect to each such fund’s holdings.
Also,
MSIM maintains voting records of individual agenda items a company meetings in a searchable database on its website on a rolling 12-month
basis.
In
addition, ISS provides vote execution, reporting and recordkeeping services to MSIM.
4. Recordkeeping
Records
are retained in accordance with Morgan Stanley’s Global Information Management Policy, which establishes general Firm-wide
standards and procedures regarding the retention, handling, and destruction of official books and records and other information of legal
or operational significance. The Global Information Management Policy incorporates Morgan Stanley’s Master Retention
Schedule, which lists various record classes and associated retention periods on a global basis.
5. Policy Governance
|
Effective: |
March
2023
|
|
Owner: |
MSIM Policies and Procedures
Group Head |
|
Approver: |
MSIM CCO |
|
Contact Information: |
Corporate Governance (Rob Walker); Compliance Policies
(Elise Clark); AIP Compliance (Carol Fitzer); Legal (Michael Keane, Nick DiLorenzo) |
|
Risk Addressed: |
Proxies are not voted
according to agreed guidelines; proxies are not voted in the best interest of clients |
|
Relevant Law and Other Sources: |
Rule 206(4)-6 and Rule
204-2, as amended, under the Advisers Act; Supplemental Guidance Regarding Proxy Voting Responsibilities of Investment Advisers; Form
N1-A. Item 12; Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “Code”). |
|
Intranet Location: |
https://policy.webfarm.ms.com/policies/portal/#/document-preview/1999684?sectionid=1c0f603e-199a-430b-89d0-d65b21826650 |
Approved
by the Board September 2015, September 27–28, 2016, September 27–28, 2017, October 3–4, 2018, September 24–25,2019,
September 30 – October 1, 2020, March 1-2, 2022, December 7-8, 2022, and March 1-2, 2023.
Appendix
A
Appendix
A applies to the following accounts managed by Morgan Stanley AIP GP LP (i) closed-end funds registered under the Investment Company
Act of 1940, as amended; (ii) discretionary separate accounts; (iii) unregistered funds; and (iv) non-discretionary accounts offered
in connection with AIP’s Custom Advisory Portfolio Solutions service. Generally, AIP will follow the guidelines set forth in Section
II of MSIM’s Proxy Voting Policy and Procedures. To the extent that such guidelines do not provide specific direction, or AIP determines
that consistent with the Client Proxy Standard, the guidelines should not be followed, the Proxy Review Committee has delegated the voting
authority to vote securities held by accounts managed by AIP to the Fund of Hedge Funds investment team, the Private Markets investment
team or the Portfolio Solutions team of AIP. A summary of decisions made by the applicable investment teams will be made available to
the Proxy Review Committee for its information at the next scheduled meeting of the Proxy Review Committee.
In
certain cases, AIP may determine to abstain from determining (or recommending) how a proxy should be voted (and therefore abstain from
voting such proxy or recommending how such proxy should be voted), such as where the expected cost of giving due consideration to the
proxy does not justify the potential benefits to the affected account(s) that might result from adopting or rejecting (as the case may
be) the measure in question.
Waiver
of Voting Rights
For
regulatory reasons, AIP may either 1) invest in a class of securities of an underlying fund (the “Fund”) that does not provide
for voting rights; or 2) waive 100% of its voting rights with respect to the following:
|
1. |
Any
rights with respect to the removal or replacement of a director, general partner, managing
member or other person acting in a similar capacity for or on behalf of the Fund (each individually
a “Designated Person,” and collectively, the “Designated Persons”),
which may include, but are not limited to, voting on the election or removal of a Designated
Person in the event of such Designated Person’s death, disability, insolvency, bankruptcy,
incapacity, or other event requiring a vote of interest holders of the Fund to remove or
replace a Designated Person; and |
|
2. |
Any
rights in connection with a determination to renew, dissolve, liquidate, or otherwise terminate
or continue the Fund, which may include, but are not limited to, voting on the renewal, dissolution,
liquidation, termination or continuance of the Fund upon the occurrence of an event described
in the Fund’s organizational documents; provided, however, that, if the
Fund’s organizational documents require the consent of the Fund’s general partner
or manager, as the case may be, for any such termination or continuation of the Fund to be
effective, then AIP may exercise its voting rights with respect to such matter. |
|
ITEM 8. |
PORTFOLIO
MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
(a)(1)
This Information is as of March 8, 2024
Mark L.W. van
der Zwan, CFA. Mr. van der Zwan is a Managing Director of MSIM. Effective July 2016, Mr. van der Zwan began serving as Chief Investment
Officer and Head of the Morgan Stanley AIP Hedge Fund team and, since 2006, he has been a portfolio manager for several Morgan Stanley
AIP Hedge Fund team portfolios, including the Fund since its inception. Mr. van der Zwan has more than 20 years of relevant industry
experience. He is also a member of the Investment Committee. Prior to joining MSIM, he was a senior consultant with Alan D. Biller &
Associates, Inc., an institutional investment consulting firm with approximately $70 billion in assets under advisory. He has also held
various positions at the National Research Council of Canada where he conducted advanced computational modeling research. Mr. van der
Zwan received both a B.Sc. with honors in chemistry and an M.B.A. in finance from Queen’s University in Ontario, Canada. Mr. van
der Zwan holds the Chartered Financial Analyst designation.
Jarrod Quigley. Mr. Quigley is a Managing
Director of MSIM and a portfolio manager for several Morgan Stanley AIP Fund of Hedge Fund team portfolios, including the Fund since
2010. He focuses on credit, secondary & co-investment strategies. He joined MSIM in 2004 and has more than 20 years of industry experience.
He is also a member of the Investment Committee. Prior to joining the firm, Mr. Quigley was an investment banking analyst in the financial
institutions group of A.G. Edwards & Sons. Mr. Quigley received a B.S. summa cum laude in finance from Babson College where he was
also valedictorian. He holds the Chartered Financial Analyst designation.
Eban Cucinotta. Mr. Cucinotta is a Managing
Director of MSIM and the head of quantitative analytics for the Morgan Stanley AIP Hedge Fund group, focusing on evaluating and monitoring
hedge fund investments from a quantitative and risk management perspective. Mr. Cucinotta is also the chair of the Morgan Stanley AIP
hedge fund team Risk Monitoring Group which is responsible for consistent oversight of risk levels within Morgan Stanley AIP portfolios
and comprises the senior most members of the hedge fund team and all investment committee members. He is a part of MSIM’s Risk
Management Committee, and in this role is responsible for reporting any Morgan Stanley AIP level risk upward to MSIM risk management.
Mr. Cucinotta joined Morgan Stanley in 2002 and has more than 20 years of industry experience. He and his team lead the development of
the hedge fund team’s trading, allocation and liquidity management tools. He is also a member of the Investment Committee. Prior
to his current role, Mr. Cucinotta was a client group associate for Morgan Stanley Investment Management, where he supported both AIP’s
Hedge Fund and Private Equity Fund groups as well as MSIM’s emerging markets debt and high-yield products. Mr. Cucinotta received
a B.S. in industrial management from Carnegie Mellon University and an M.B.A. from the Yale School of Management.
Robert Rafter. Mr. Rafter is an Executive
Director at MSIM and serves as a portfolio manager and head of research for the Morgan Stanley AIP Hedge Funds group. He joined Morgan
Stanley AIP in 2011 and has 19 years of professional experience. He is also a member of the Investment Committee. Prior to joining the
firm, Mr. Rafter served as vice president responsible for hedge fund investments at Colchis Capital Management, a boutique alternative
investment manager. Previously, he was a segment producer at CNBC Business News and an analyst at Lehman Brothers, where he worked on
the central funding desk within the Fixed Income Division. Mr. Rafter received a B.A. in government from Georgetown University. He is
a member of the Bond Club of Philadelphia and the CFA Society of Philadelphia. Mr. Rafter holds the Chartered Financial Analyst designation.
Jeff Scott. Mr. Scott is an Executive
Director of MSIM, focusing on credit strategies. He joined the firm in 2012 and has 15 years of industry experience. He is also a member
of the Investment Committee. Prior to joining the firm, Mr. Scott was an Analyst at Veritable, L.P., an investment consulting firm. Mr.
Scott earned a B.S. in Business Administration, cum laude, from Drexel University. He holds the Chartered Alternative Investment Analyst
designation and the Chartered Financial Analyst designation.
David Damsgaard. Mr. Damsgaard is an Executive
Director of MSIM and serves as the strategy head for Global Macro, Emerging Markets, and Sovereign Relative Value strategies within the
Morgan Stanley AIP Hedge Fund team. He joined the firm in 2019 and has 15 years of investment experience. Prior to joining the firm,
Mr. Damsgaard was a proprietary commodities trader at Marex Spectron. Previously, he was an Associate Portfolio Manager at Caxton Associates
and an Associate Director for Macquarie Bank Limited managing a derivatives portfolio providing hedging solutions within agricultural
products. Mr. Damsgaard received a B.A. in economics from Yale University.
Farhan Karim. Mr. Karim is an Executive
Director for the Morgan Stanley AIP Hedge Fund team at MSIM and serves as the strategy head for long/short equity research. Mr. Karim
joined the firm in 2022 bringing more than 18 years’ industry experience and 10 years as a fundamental equity long/short portfolio
manager and analyst. Prior to joining the firm, he was a portfolio manager at North Rock Capital managing a market neutral long/short
portfolio and has also held roles at Millennium, Citadel (Surveyor Capital), George Weiss, UBS and Trafelet. Mr. Karim began his career
at Citigroup in the investment banking division. He received a BBA in finance and accounting from the Ross School of Business at the
University of Michigan.
Yury Rojek. Mr. Rojek is an Executive
Director for the Morgan Stanley AIP Hedge Fund team at MSIM and serves as the strategy head for Systematic Strategies within the Morgan
Stanley AIP Hedge Fund group. Mr. Rojek joined the firm in 2024 bringing more than 14 years of industry experience including 7 years
in an asset management role and 6 years as a sell-side quantitative analyst. Prior to joining the firm, he was a Senior Investment Officer
at UBS Hedge Fund Solutions. Mr. Rojek holds a PhD degree in Mathematics from Voronezh State University (Russia).
|
(a)(2)(i-iii) |
Other
Accounts Managed by the Portfolio Managers |
Because the portfolio
managers manage assets for other investment companies, pooled investment vehicles, and/or other accounts (including institutional clients,
pension plans and certain high net worth individuals), there may be an incentive to favor one client over another resulting in conflicts
of interest. For instance, the Adviser may receive fees from certain accounts that are higher than the fee it receives from the Fund,
or it may receive a performance-based fee on certain accounts. In those instances, the portfolio managers may have an incentive to favor
the higher and/or performance-based fee accounts over the Fund. In addition, a conflict of interest could exist to the extent the Adviser
has proprietary investments in certain accounts, where portfolio managers have personal investments in certain accounts or when certain
accounts are investment options in the Adviser’s employee benefits and/or deferred compensation plans. The portfolio manager may
have an incentive to favor these accounts over others. If the Adviser manages accounts that engage in short sales of securities of the
type in which the Fund invests, the Adviser could be seen as harming the performance of the Fund for the benefit of the accounts engaging
in short sales if the short sales cause the market value of the securities to fall. The Adviser has adopted trade allocation and other
policies and procedures that it believes are reasonably designed to address these and other conflicts of interest.
The following tables
show information regarding accounts (other than the Fund) managed by each named portfolio manager as of December 31, 2023:
Mark
L. W. van der Zwan
Jarrod
Quigley
Eban
Cucinotta
Robert
Rafter
Jeff
Scott
David
Damsgaard
Farhan
Karim
Yury
Rojek
|
|
Number
of Accounts |
|
|
Total
Assets in Accounts ($ billion) |
|
Registered Investment Companies |
|
2 |
|
|
1.90 |
|
Other Pooled Investment Vehicles1 |
|
16 |
|
|
2.27 |
|
Other Accounts1 |
|
98 |
|
|
9.07 |
|
1Of
these other accounts, 61 accounts with a total of approximately $6.09 billion in assets had performance-based fees.
(a)(2)(iv) |
Conflicts
of Interest |
The Adviser
and the Investment Managers
The Adviser also
provides investment advisory and other services, directly and through affiliates, to various entities and accounts other than the Fund
or the Master Fund (“Adviser Accounts”). Neither the Fund nor the Master Fund has any interest in these activities. The Adviser
and the investment professionals who, on behalf of the Adviser, provide investment advisory services to the Master Fund are engaged in
substantial activities other than on behalf of the Master Fund, may have differing economic interests in respect of such activities,
and may have conflicts of interest in allocating their time and activity between the Master Fund and the Adviser Accounts. Such persons
devote only so much time to the affairs of the Master Fund as in their judgment is necessary and appropriate.
Set out below are
practices that the Adviser will follow. An Investment Manager may provide investment advisory and other services, directly or through
affiliates, to various entities and accounts other than the Investment Funds. Although the Adviser anticipates that Investment Managers
will follow practices similar to those described below, no guarantee or assurances can be made that similar practices will be followed
or that an Investment Manager will adhere to, and comply with, its stated practices.
Participation
in Investment Opportunities
The Adviser expects
to employ an investment program for the Master Fund that is substantially similar to the investment program (or, in some cases, to portions
of the investment program) employed by it for certain Adviser Accounts. As a general matter, the Adviser will consider participation
by the Master Fund in all appropriate investment opportunities that are under consideration for those Adviser Accounts. There may be
circumstances, however, under which the Adviser will cause one or more Adviser Accounts to commit a larger percentage of their respective
assets to an investment opportunity than that to which the Adviser will commit the Master Fund’s assets. There also may be circumstances
under which the Adviser will consider participation by Adviser Accounts in investment opportunities in which the Adviser does not intend
to invest on behalf of the Master Fund, or vice versa.
The Adviser evaluates
for the Master Fund and for the Adviser Accounts a variety of factors that may be relevant in determining whether a particular investment
opportunity or strategy is appropriate and feasible for the Master Fund or an Adviser Account at a particular time, including, but not
limited to, the following: (1) the nature of the investment opportunity taken in the context of the other investments at the time; (2)
the liquidity of the investment relative to the needs of the particular entity or account; (3) the availability of the opportunity (i.e.,
size of obtainable position); (4) the transaction costs involved; and (5) the investment or regulatory limitations applicable to the
particular entity or account. Because these considerations may differ for the Master Fund and the Adviser Accounts in the context of
any particular investment opportunity, the investment activities of the Master Fund and the Adviser Accounts may differ from time to
time. In addition, the fees and expenses of the Master Fund differ from those of the Adviser Accounts. Accordingly, the future performance
of the Master Fund (and, therefore, the Fund) and the Adviser Accounts will vary.
When the Adviser
determines that it would be appropriate for the Master Fund and one or more Adviser Accounts to participate in an investment transaction
in the same Investment Fund or other investment at the same time, it will attempt to aggregate, place and allocate orders on a basis
that the Adviser believes to be fair and equitable, consistent with its responsibilities under applicable law. Decisions in this regard
are necessarily subjective and there is no requirement that the Master Fund participate, or participate to the same extent as the Adviser
Accounts, in all investments or trades. However, no participating entity or account will receive preferential treatment over any other
and the Adviser will take steps to ensure that no participating entity or account will be systematically disadvantaged by the aggregation,
placement and allocation of orders and investments.
Situations may
occur, however, where the Master Fund could be disadvantaged because of the investment activities conducted by the Adviser for the Adviser
Accounts. Such situations may be based on, among other things, the following: (1) legal restrictions or other limitations (including
limitations imposed by Investment Managers with respect to Investment Funds) on the combined size of positions that may be taken for
the Master Fund and/or the Adviser Accounts, thereby limiting the size of the Master Fund’s position or the availability of the
investment opportunity; (2) the difficulty of liquidating an investment for the Master Fund and the Adviser Accounts where the market
cannot absorb the sale of the combined positions; and (3) the determination that a particular investment is warranted only if hedged
with an option or other instrument and there is a limited availability of such options or other instruments. In particular, the Master
Fund may be legally restricted from entering into a “joint transaction” (as defined in the 1940 Act) with the Adviser Accounts
with respect to the securities of an issuer without first obtaining exemptive relief from the SEC. See “Other Matters”, below.
Directors, principals,
officers, employees and affiliates of the Adviser and each Investment Manager may buy and sell securities or other investments for their
own accounts and may have actual or potential conflicts of interest with respect to investments made on behalf of the Master Fund or
an Investment Fund in which the Master Fund invests. As a result of differing trading and investment strategies or constraints, positions
may be taken by directors, principals, officers, employees and affiliates of the Adviser or an Investment Manager, or by the Adviser
for the Adviser Accounts, or by an Investment Manager on behalf of its own other accounts (“Investment Manager Accounts”)
that are the same as, different from or made at a different time than, positions taken for the Master Fund or an Investment Fund.
Investment Managers
or their affiliates may from time to time provide investment advisory or other services to private investment funds and other entities
or accounts managed by the Adviser or its affiliates. In addition, Investment Managers or their affiliates may from time to time receive
research products and services in connection with the brokerage services that affiliates of the Adviser may provide to one or more Investment
Manager Accounts.
Other Matters
An Investment Manager
may from time to time cause an Investment Fund to effect certain principal transactions in securities with one or more Investment Manager
Accounts, subject to certain conditions. For example, these transactions may be made in circumstances in which the Investment Manager
determined it was appropriate for the Investment Fund to purchase and an Investment Manager Account to sell, or the Investment Fund to
sell and an Investment Manager Account to purchase, the same security or instrument on the same day. Future investment activities of
the Investment Managers, or their affiliates, and the principals, partners, directors, officers or employees of the foregoing, may give
rise to additional conflicts of interest.
The Adviser and
its affiliates will not purchase securities or other property from, or sell securities or other property to, the Master Fund, except
that the Master Fund may in accordance with rules under the 1940 Act engage in transactions with accounts that are affiliated with the
Master Fund as a result of common officers, directors, advisers or managing general partners. These transactions would be effected in
circumstances in which the Adviser determined that it would be appropriate for the Master Fund to purchase and another client to sell,
or the Master Fund to sell and another client to purchase, the same security or instrument on the same day.
Future investment
activities of the Adviser and its affiliates and their principals, partners, directors, officers or employees may give rise to conflicts
of interest other than those described above.
|
(a)(3) |
Portfolio
Manager Compensation Structure |
Morgan Stanley’s
compensation structure is based on a total reward system of base salary and incentive compensation, which is paid either in the form
of cash bonus, or for employees meeting the specified deferred compensation eligibility threshold, partially as a cash bonus and partially
as mandatory deferred compensation. Deferred compensation granted to Investment Management employees are generally granted as a mix of
deferred cash awards under the Investment Management Alignment Plan (IMAP and equity-based awards in the form of stock units. The portion
of incentive compensation granted in the form of a deferred compensation award and the terms of such awards are determined annually by
the Compensation, Management Development and Succession Committee of the Morgan Stanley Board of Directors.
Base salary
compensation. Generally, portfolio managers receive base salary compensation based on the level of their position with the Adviser.
Incentive
compensation. In addition to base compensation, portfolio managers may receive discretionary year-end compensation.
Incentive compensation
may include:
·
Cash Bonus.
·
Deferred Compensation:
|
· |
A
mandatory program that defers a portion of incentive compensation into restricted stock units
or other awards based on Morgan Stanley common stock or other plans that are subject to vesting
and other conditions. |
|
· |
IMAP
is a cash-based deferred compensation plan designed to increase the alignment of participants’
interests with the interests of the Advisor’s clients. For eligible employees, a portion
of their deferred compensation is mandatorily deferred into IMAP on an annual basis. Awards
granted under IMAP are notionally invested in referenced funds available pursuant to the
plan, which are funds advised by MSIM and its affiliates that are investment advisers. Portfolio
managers are required to notionally invest a minimum of 40% of their account balance in the
designated funds that they manage and are included in the IMAP notional investment fund menu. |
|
· |
Deferred
compensation awards are typically subject to vesting over a multi-year period and are subject
to cancellation through the payment date for competition, cause (i.e., any act or omission
that constitutes a breach of obligation to the Company, including failure to comply with
internal compliance, ethics or risk management standards, and failure or refusal to perform
duties satisfactorily, including supervisory and management duties), disclosure of proprietary
information, and solicitation of employees or clients. Awards are also subject to clawback
through the payment date if an employee’s act or omission (including with respect to
direct supervisory responsibilities) causes a restatement of the Firm’s consolidated
financial results, constitutes a violation of the Firm’s global risk management principles,
policies and standards, or causes a loss of revenue associated with a position on which the
employee was paid and the employee operated outside of internal control policies. |
MSIM compensates employees based on principles
of pay-for-performance, market competitiveness and risk management. Eligibility for, and the amount of any, discretionary compensation
is subject to a multi-dimensional process. Specifically, consideration is given to one or more of the following factors, which can vary
by portfolio management team and circumstances:
|
· |
Revenue
and profitability of the business and/or each fund/accounts managed by the portfolio manager |
|
· |
Revenue
and profitability of the Firm |
|
· |
Return
on equity and risk factors of both the business units and Morgan Stanley |
|
· |
Assets
managed by the portfolio manager |
|
· |
External
market conditions |
|
· |
New
business development and business sustainability |
|
· |
Contribution
to client objectives |
|
· |
Team,
product and/or MSIM and its affiliates that are investment advisers (including Parametric)
performance |
|
· |
The
pre-tax investment performance of the funds/accounts managed by the portfolio manager (which
may, in certain cases, be measured against the applicable benchmark(s) and/or peer group(s)
over one, three and five-year periods) |
|
· |
Individual
contribution and performance |
Further, the Firm’s
Global Incentive Compensation Discretion Policy requires compensation managers to consider only legitimate, business related factors
when exercising discretion in determining variable incentive compensation, including adherence to Morgan Stanley’s core values,
conduct, disciplinary actions in the current performance year, risk management and risk outcomes.
|
(a)(4) |
Securities
Ownership of Portfolio Managers |
As of December 31, 2023, the dollar range of securities beneficially
owned (or held notionally through IMAP) by each portfolio manager in the Fund is shown below:
Mark L. W. van der Zwan: |
None |
Jarrod Quigley: |
None |
Eban Cucinotta: |
None |
Robert Rafter: |
None |
Jeff Scott: |
None |
David Damsgaar: |
None |
Farhan Karim: |
None |
Yury Rojek: |
None |
|
ITEM 9. |
PURCHASES
OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not
applicable to the Registrant.
|
ITEM 10. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not
applicable.
|
ITEM 11. |
CONTROLS
AND PROCEDURES. |
|
(a) |
The
Registrant’s principal executive officer and principal financial officer have concluded
that the Registrant’s disclosure controls and procedures are sufficient to ensure that
information required to be disclosed by the Registrant in this Form N-CSR was recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, based upon such officers’ evaluation of these controls
and procedures as of a date within 90 days of the filing date of the report. |
|
(b) |
There
were no changes in the Registrant’s internal control over financial reporting that
occurred during the Registrant’s most recent fiscal half-year (the registrant’s
second fiscal half-year in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the Registrant’s internal control over financial
reporting. |
|
ITEM 12. |
DISCLOSURE
OF SECURITIES LENDING ACTIVITIES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not
applicable.
(a)
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.
ALTERNATIVE INVESTMENT PARTNERS ABSOLUTE RETURN FUND STS
By: |
/s/
John H. Gernon |
|
|
Name: John H. Gernon |
|
|
Title: President |
|
|
Date: March 8, 2024 |
|
Pursuant to the
requirements of the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
By: |
/s/
John H. Gernon |
|
|
Name: John H. Gernon |
|
|
Title: Principal Executive
Officer |
|
|
Date: March 8, 2024 |
|
By: |
/s/
Francis J. Smith |
|
|
Name: Francis J. Smith |
|
|
Title: Principal Financial
Officer |
|
|
Date: March 8, 2024 |
|
ATTACHMENTS / EXHIBITS
EXHIBIT 99.CODE ETH
EXHIBIT 99.CERT