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)
Registrants Telephone Number, including Area Code: (610) 260-7600
Kara Fricke, Esq.
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
(Name and address of agent for service)
COPY TO:
Richard Horowitz, Esq.
DECHERT LLP
1095 Avenue of the Americas
New York, NY 10036-6797
(212) 698-3500
Date of fiscal year end: December 31
Date of reporting period: June 30, 2018
ITEM 1. | REPORTS TO STOCKHOLDERS. The Registrants semi-annual report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 is as follows: |
ALTERNATIVE INVESTMENT PARTNERS ABSOLUTE RETURN FUND STS
Consolidated Financial Statements (Unaudited)
For the Period from January 1, 2018 to June 30, 2018
Alternative Investment Partners Absolute Return Fund STS
Consolidated Financial Statements (Unaudited)
For the Period from January 1, 2018 to June 30, 2018
Consolidated Financial Statements (Unaudited) |
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1 | ||||
2 | ||||
3 | ||||
4 | ||||
5 | ||||
Proxy Voting Policies and Procedures and Proxy Voting Record |
11 | |||
11 |
Unaudited financial statements for Alternative Investment Partners Absolute Return Fund for the period from January 1, 2018 to June 30, 2018 are attached to these consolidated financial statements and are an integral part thereof.
Alternative Investment Partners Absolute Return Fund STS
Consolidated Statement of Assets and Liabilities (Unaudited)
June 30, 2018
Assets |
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Investment in Alternative Investment Partners Absolute Return Fund, at fair value |
$ | 274,334,946 | ||
Cash and cash equivalents |
349,610 | |||
Repurchases receivable from Alternative Investment Partners Absolute Return Fund |
4,801,672 | |||
Withholding tax credit |
88,393 | |||
Other assets |
593 | |||
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Total assets |
279,575,214 | |||
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Liabilities |
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Payable for share repurchases |
4,806,822 | |||
Subscriptions received in advance |
110,000 | |||
Accrued expenses and other liabilities |
155,522 | |||
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Total liabilities |
5,072,344 | |||
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Net assets |
$ | 274,502,870 | ||
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Net assets consist of: |
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Net capital |
$ | 198,603,429 | ||
Accumulated net investment income (loss) |
(4,027,703) | |||
Accumulated net realized gain (loss) from investments |
7,204,159 | |||
Net unrealized appreciation on investments |
72,722,985 | |||
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Net assets |
$ | 274,502,870 | ||
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Net asset value per share: |
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181,179.390 shares issued and outstanding, no par value, 1,000,000 registered shares |
$ | 1,515.09 | ||
Maximum offering price per share |
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($1,515.09 plus sales load of 3% of net asset value per share) |
$ | 1,560.54 |
See accompanying notes and attached unaudited financial statements for Alternative Investment Partners Absolute Return Fund.
1
Alternative Investment Partners Absolute Return Fund STS
Consolidated Statement of Operations (Unaudited)
For the Period from January 1, 2018 to June 30, 2018
Net investment income (loss) allocated from Alternative Investment Partners Absolute Return Fund |
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Dividend income |
$ | 39,535 | ||
Expenses |
(3,795,860) | |||
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Net investment income (loss) allocated from Alternative Investment Partners Absolute Return Fund |
(3,756,325) | |||
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Fund expenses |
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Transfer agent fees |
91,202 | |||
Professional fees |
82,965 | |||
Printing fees |
41,250 | |||
Withholding taxes |
35,492 | |||
Registration fees |
15,000 | |||
Trustees fees |
3,053 | |||
Custody fees |
347 | |||
Other |
2,069 | |||
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Total fund expenses |
271,378 | |||
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Net investment income (loss) |
(4,027,703) | |||
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Realized and unrealized gain (loss) from investments allocated from Alternative Investment Partners Absolute Return Fund |
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Net realized gain (loss) from investments in investment funds |
7,204,159 | |||
Net change in unrealized appreciation (depreciation) on investments |
824,962 | |||
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Net realized and unrealized gain (loss) from investments allocated from |
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Alternative Investment Partners Absolute Return Fund |
8,029,121 | |||
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Net increase (decrease) in net assets resulting from operations |
$ | 4,001,418 | ||
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See accompanying notes and attached unaudited financial statements for Alternative Investment Partners Absolute Return Fund.
2
Alternative Investment Partners Absolute Return Fund STS
Consolidated Statements of Changes in Net Assets (Unaudited)
For the year ended December 31, 2017 |
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Net increase (decrease) in net assets resulting from operations: |
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Net investment income (loss) |
$ | (8,811,692) | ||
Net realized gain (loss) from investments |
25,723,686 | |||
Net change in unrealized appreciation (depreciation) on investments |
(4,399,118) | |||
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Net increase (decrease) in net assets resulting from operations |
12,512,876 | |||
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Shareholder transactions |
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Subscriptions (representing 1,517.606 shares) |
2,231,825 | |||
Repurchases (representing 27,544.182 shares) |
(40,442,966) | |||
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Net increase (decrease) in net assets from shareholder transactions |
(38,211,141) | |||
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Total increase (decrease) in net assets |
(25,698,265) | |||
Net assets, beginning of year (representing 214,542.753 shares) |
307,223,092 | |||
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Net assets, end of year (representing 188,516.177 shares) |
$ | 281,524,827 | ||
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For the period from January 1, 2018 to June 30, 2018 |
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Net increase (decrease) in net assets resulting from operations: |
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Net investment income (loss) |
$ | (4,027,703) | ||
Net realized gain (loss) from investments |
7,204,159 | |||
Net change in unrealized appreciation (depreciation) on investments |
824,962 | |||
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Net increase (decrease) in net assets resulting from operations |
4,001,418 | |||
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Shareholder transactions |
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Subscriptions (representing 330.796 shares) |
495,621 | |||
Repurchases (representing 7,667.583 shares) |
(11,518,996) | |||
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Net increase (decrease) in net assets from shareholder transactions |
(11,023,375) | |||
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Total increase (decrease) in net assets |
(7,021,957) | |||
Net assets, beginning of period (representing 188,516.177 shares) |
281,524,827 | |||
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Net assets, end of period (representing 181,179.390 shares) |
$ | 274,502,870 | ||
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See accompanying notes and attached unaudited financial statements for Alternative Investment Partners Absolute Return Fund.
3
Alternative Investment Partners Absolute Return Fund STS
Consolidated Statement of Cash Flows (Unaudited)
For the Period from January 1, 2018 to June 30, 2018
Cash flows from operating activities |
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Net increase (decrease) in net assets resulting from operations |
$ | 4,001,418 | ||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: |
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Net investment (income) loss allocated from Alternative Investment Partners Absolute Return Fund |
3,756,325 | |||
Net realized (gain) loss from investments allocated from Alternative Investment Partners Absolute Return Fund |
(7,204,159) | |||
Net change in unrealized (appreciation) depreciation on investments allocated from Alternative Investment Partners Absolute Return Fund |
(824,962) | |||
Purchase of investments in Alternative Investment Partners Absolute Return Fund |
(618,531) | |||
Proceeds from sales of investments in Alternative Investment Partners Absolute Return Fund |
11,897,199 | |||
(Increase) decrease in repurchases receivable from Alternative Investment Partners Absolute Return Fund |
3,558,438 | |||
(Increase) decrease in prepaid investment in Alternative Investment Partners Absolute Return Fund |
100,000 | |||
(Increase) decrease in other assets |
(593) | |||
Increase (decrease) in accrued expenses and other liabilities |
23,331 | |||
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Net cash provided by (used in) operating activities |
14,688,466 | |||
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Cash flows from financing activities |
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Subscriptions (including net change in subscriptions received in advance) |
505,621 | |||
Repurchases (including net change in payable for share repurchase) |
(15,077,434) | |||
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Net cash provided by (used in) financing activities |
(14,571,813) | |||
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Net change in cash and cash equivalents |
116,653 | |||
Cash and cash equivalents at beginning of period |
232,957 | |||
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Cash and cash equivalents at end of period |
$ | 349,610 | ||
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Supplemental disclosure of cash flow information: |
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Conversion to shareholder subscriptions in 2018 of subscriptions received in advance during 2017 |
$ | 100,000 | ||
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See accompanying notes and attached unaudited financial statements for Alternative Investment Partners Absolute Return Fund.
4
Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2018
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 Funds 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 Funds investment adviser (the Investment Adviser) and Morgan Stanley Investment Management Limited serves as the Master Funds sub-adviser (the Sub-Adviser) (collectively with the Investment Adviser, the Adviser). Each of the Investment Adviser and Sub-Adviser is an affiliate of Morgan Stanley and is registered as an investment adviser under the U.S. Investment Advisers Act of 1940, as amended. The Master Fund has the same investment objective as the Fund and the Offshore Fund. The Master Funds 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 June 30, 2018, the Fund had a 62.34% 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 Funds consolidated financial statements.
The Fund has a Board of Trustees (the Board) that has overall responsibility for monitoring and overseeing the Funds 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, the Investment Adviser or the Sub-Adviser. The same Trustees also serve as the Master Funds Board of Trustees.
See attached unaudited financial statements for Alternative Investment Partners Absolute Return Fund.
5
Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements (Unaudited) (continued)
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 Funds 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 Funds 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 Funds 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 Shareholders 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.
See attached unaudited financial statements for Alternative Investment Partners Absolute Return Fund.
6
Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements (Unaudited) (continued)
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 offer 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 Funds audited consolidated financial statements. As of June 30, 2018, the total of all Shareholders Holdback Amounts was $194,460 which includes any Holdback Amount for repurchases as of June 30, 2018, 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 Funds proportionate indirect interest in the net assets of the Master Fund as of June 30, 2018. Valuation of Investment Funds and other investments held by the Master Fund, including the Master Funds disclosure of investments under the three-tier hierarchy, is discussed in the notes to the Master Funds financial statements. The Fund records its pro rata share of the Master Funds 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 June 30, 2018, the Fund did not hold any cash equivalents.
See attached unaudited financial statements for Alternative Investment Partners Absolute Return Fund.
7
Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements (Unaudited) (continued)
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 Funds 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 $1,406,550 and $1,040,500 which are the Funds proportionate share of management fees and shareholder servicing fees, respectively, incurred by the Master Fund for the period from January 1, 2018 to June 30, 2018.
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 Funds 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 Funds 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 Funds 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% (37% for non-corporate non-U.S. investors) U.S. tax from effectively connected income allocable to its non-U.S. Shareholders and to remit those amounts to the U.S. Internal Revenue Service on behalf of non-U.S. Shareholders. If the Master Fund incurs a withholding tax or other tax obligation with respect to the share of the Master Funds 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.
See attached unaudited financial statements for Alternative Investment Partners Absolute Return Fund.
8
Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements (Unaudited) (continued)
2. | Significant Accounting Policies (continued) |
Income and Withholding Taxes (continued)
For the period from January 1, 2018 to June 30, 2018, the Master Fund recorded an estimated tax withholding amount of $35,492 related to the Funds share of withholding taxes, which is included in the Funds Consolidated Statement of Operations.
The Fund has concluded there are no significant uncertain tax positions that would require recognition in the consolidated financial statements as of June 30, 2018. 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, 2017, remains subject to examination by major taxing authorities.
3. | Contractual Obligations |
The Fund enters into contracts that contain a variety of indemnifications. The Funds 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.
See attached unaudited financial statements for Alternative Investment Partners Absolute Return Fund.
9
Alternative Investment Partners Absolute Return Fund STS
Notes to Consolidated Financial Statements (Unaudited) (continued)
4. | Financial Highlights |
The following represents per Share data, ratios to average net assets and other financial highlights information for Shareholders. The calculations below are not annualized for periods less than one year.
For the Period From January 1, 2018 to June 30, 2018 |
For the Year Ended December 31, 2017 |
For the Year Ended December 31, 2016 |
For the Year Ended December 31, 2015 |
For the Year Ended December 31, 2014 |
For the Year Ended December 31, 2013 |
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For a Share outstanding throughout the period: |
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Net asset value, beginning of period |
$ | 1,493.37 | $ | 1,431.99 | $ | 1,450.79 | $ | 1,391.82 | $ | 1,282.89 | $ | 1,161.53 | ||||||||||||
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Net investment income (loss) (a) |
(21.60) | (43.09) | (41.35) | (37.78) | (36.69) | (34.37) | ||||||||||||||||||
Net realized and unrealized gain (loss) from investments |
43.32 | 104.47 | 22.55 | 96.75 | 145.62 | 155.73 | ||||||||||||||||||
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Net increase (decrease) resulting from operations |
21.72 | 61.38 | (18.80) | 58.97 | 108.93 | 121.36 | ||||||||||||||||||
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Net asset value, end of period |
$ | 1,515.09 | $ | 1,493.37 | $ | 1,431.99 | $ | 1,450.79 | $ | 1,391.82 | $ | 1,282.89 | ||||||||||||
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Total return (b) |
1.45% | 4.29% | (1.30%) | 4.24% | 8.49% | 10.45% | ||||||||||||||||||
Ratio of total expenses (c) |
1.45% | 2.96% | 2.94% | 2.64% | 2.76% | 2.82% | ||||||||||||||||||
Ratio of net investment income (loss) (d) |
(1.43%) | (2.94%) | (2.93%) | (2.64%) | (2.76%) | (2.82%) | ||||||||||||||||||
Portfolio turnover (e) |
6% | 14% | 21% | 20% | 17% | 24% | ||||||||||||||||||
Net assets, end of period (000s) |
$ | 274,503 | $ | 281,525 | $ | 307,223 | $ | 344,630 | $ | 347,330 | $ | 351,618 |
(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 period indicated and a repurchase of the Share on the last day of the period 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 Shareholders return and ratios may vary from these returns and ratios due to the timing of Share transactions and withholding tax allocation, as applicable.
5. | 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.
See attached unaudited financial statements for Alternative Investment Partners Absolute Return Fund.
10
Alternative Investment Partners Absolute Return Fund STS
Proxy Voting Policies and Procedures and Proxy Voting Record (Unaudited)
A copy of (1) the Master Funds policies and procedures with respect to the voting of proxies relating to the Investment Funds; and (2) how the Master Fund voted proxies relating to Investment Funds during the most recent 12-month period ended June 30 is available without charge, upon request, by calling the Master Fund at 1-888-322-4675. This information is also available on the Securities and Exchange Commissions 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 Funds first and third fiscal quarters on Form N-Q. The Funds Forms N-Q are available on the Securities and Exchange Commissions website at http://www.sec.gov. The Funds Forms N-Q may be reviewed and copied at the Securities and Exchange Commissions Public Reference Room in Washington, D.C. and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Once filed, the most recent Form N-Q will be available without charge, upon request, by calling the Fund at 1-888-322-4675.
11
Alternative Investment Partners Absolute Return Fund STS |
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100 Front Street, Suite 400 |
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West Conshohocken, PA 19428 |
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Trustees |
Legal Counsel | |
Michael Nugent, Chairperson of the Board and Trustee |
Dechert LLP | |
Frank L. Bowman |
1095 Avenue of the Americas | |
Kathleen A. Dennis |
New York, NY 10036 | |
Nancy C. Everett |
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Jakki L. Haussler |
Counsel to the Independent | |
Dr. Manuel H. Johnson |
Trustees | |
Joseph J. Kearns |
Perkins Coie LLP | |
Michael F. Klein |
30 Rockefeller Plaza | |
Patricia Maleski |
New York, New York 10112 | |
W. Allen Reed |
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Fergus Reid |
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Officers |
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John H. Gernon, President and Principal Executive Officer |
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Matthew Graver, Vice President |
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Michael J. Key, Vice President |
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Timothy Knierim, Chief Compliance Officer |
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Noel Langlois, Treasurer and Principal Financial Officer |
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Mary E. Mullin, Secretary |
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Master Funds Investment Adviser |
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Morgan Stanley AIP GP LP |
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100 Front Street, Suite 400 |
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West Conshohocken, PA 19428 |
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Master Funds Sub-Adviser |
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Morgan Stanley Investment Management Limited 25 Cabot Square |
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Canary Wharf |
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London E14-4QA, England |
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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 |
||
One Commerce Square 2005 Market Street, Suite 700 |
||
Philadelphia, PA 19103 |
12
ALTERNATIVE INVESTMENT PARTNERS ABSOLUTE RETURN FUND
Financial Statements (Unaudited)
For the Period from January 1, 2018 to June 30, 2018
Alternative Investment Partners Absolute Return Fund
Financial Statements (Unaudited)
For the Period from January 1, 2018 to June 30, 2018
Financial Statements (Unaudited) |
||||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
5 | ||||
10 | ||||
21 | ||||
Proxy Voting Policies and Procedures and Proxy Voting Record |
24 | |||
24 |
Alternative Investment Partners Absolute Return Fund
Statement of Assets and Liabilities (Unaudited)
June 30, 2018
Assets |
||||
Investment in investment funds, at fair value (cost $349,643,143) |
$ | 483,895,763 | ||
Cash and cash equivalents |
3,877,283 | |||
Receivable for investments sold |
58,109,503 | |||
Prepaid investments in investment funds |
13,700,000 | |||
Other assets |
42,331 | |||
|
|
|||
Total assets |
559,624,880 | |||
|
|
|||
Liabilities |
||||
Note payable |
100,793,671 | |||
Payable for share repurchases |
15,151,793 | |||
Withholding tax payable |
995,986 | |||
Management fee payable |
759,408 | |||
Shareholder servicing fee payable |
561,703 | |||
Subscriptions received in advance |
400,000 | |||
Transfer agent fee payable |
14,617 | |||
Accrued expenses and other liabilities |
909,146 | |||
|
|
|||
Total liabilities |
119,586,324 | |||
|
|
|||
Net assets |
$ | 440,038,556 | ||
|
|
|||
Net assets consist of: |
||||
Net capital |
$ | 300,207,939 | ||
Accumulated undistributed net investment income (loss) |
(6,104,657) | |||
Accumulated net realized gain (loss) from investments |
11,682,654 | |||
Net unrealized appreciation on investments |
134,252,620 | |||
|
|
|||
Net assets |
$ | 440,038,556 | ||
|
|
|||
Net asset value per share: |
||||
260,518.134 shares issued and outstanding, no par value, 1,500,000 registered shares |
$ | 1,689.09 | ||
Maximum offering price per share |
||||
($1,689.09 plus sales load of 3% of net asset value per share) |
$ | 1,739.76 |
The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
1
Alternative Investment Partners Absolute Return Fund
Statement of Operations (Unaudited)
For the Period from January 1, 2018 to June 30, 2018
Investment income |
||||
Dividend |
$ | 64,288 | ||
|
|
|||
Expenses |
||||
Management fees |
2,285,751 | |||
Shareholder servicing fees |
1,690,891 | |||
Interest expense |
1,677,140 | |||
Professional fees |
187,035 | |||
Accounting and administration fees |
143,032 | |||
Custody fees |
55,494 | |||
Transfer agent fees |
41,731 | |||
Registration fees |
35,189 | |||
Other |
52,682 | |||
|
|
|||
Total expenses |
6,168,945 | |||
|
|
|||
Net investment income (loss) |
(6,104,657) | |||
|
|
|||
Realized and unrealized gain (loss) from investments |
||||
Net realized gain (loss) from investments in investment funds |
11,682,654 | |||
Net change in unrealized appreciation (depreciation) on investments in investment funds |
1,389,081 | |||
|
|
|||
Net realized and unrealized gain (loss) from investments |
13,071,735 | |||
|
|
|||
Net increase (decrease) in net assets resulting from operations |
$ | 6,967,078 | ||
|
|
The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
2
Alternative Investment Partners Absolute Return Fund
Statements of Changes in Net Assets (Unaudited)
For the year ended December 31, 2017 |
||||
Net increase (decrease) in net assets resulting from operations: |
||||
Net investment income (loss) |
$ | (12,408,363) | ||
Net realized gain (loss) from investments |
42,010,269 | |||
Net change in unrealized appreciation/depreciation on investments |
(7,211,979) | |||
|
|
|||
Net increase (decrease) in net assets resulting from operations |
22,389,927 | |||
|
|
|||
Shareholder transactions |
||||
Subscriptions (representing 3,206.328 shares) |
5,257,829 | |||
Repurchases (representing 44,276.562 shares) |
(72,343,207) | |||
|
|
|||
Net increase (decrease) in net assets from shareholder transactions |
(67,085,378) | |||
|
|
|||
Total increase (decrease) in net assets |
(44,695,451) | |||
Net assets, beginning of year (representing 315,635.488 shares) |
501,361,640 | |||
|
|
|||
Net assets, end of year (representing 274,565.254 shares) |
$ | 456,666,189 | ||
|
|
|||
For the period from January 1, 2018 to June 30, 2018 |
||||
Net increase (decrease) in net assets resulting from operations: |
||||
Net investment income (loss) |
$ | (6,104,657) | ||
Net realized gain (loss) from investments |
11,682,654 | |||
Net change in unrealized appreciation (depreciation) on investments |
1,389,081 | |||
|
|
|||
Net increase (decrease) in net assets resulting from operations |
6,967,078 | |||
|
|
|||
Shareholder transactions |
||||
Subscriptions (representing 536.564 shares) |
893,532 | |||
Repurchases (representing 14,583.684 shares) |
(24,488,243) | |||
|
|
|||
Net increase (decrease) in net assets from shareholder transactions |
(23,594,711) | |||
|
|
|||
Total increase (decrease) in net assets |
(16,627,633) | |||
Net assets, beginning of period (representing 274,565.254 shares) |
456,666,189 | |||
|
|
|||
Net assets, end of period (representing 260,518.134 shares) |
$ | 440,038,556 | ||
|
|
The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
3
Alternative Investment Partners Absolute Return Fund
For the Period from January 1, 2018 to June 30, 2018
Cash flows from operating activities |
||||
Net increase (decrease) in net assets resulting from operations |
$ | 6,967,078 | ||
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 |
(11,682,654) | |||
Net change in unrealized (appreciation) depreciation on investments in investment funds |
(1,389,081) | |||
Purchase of investments in investment funds |
(30,161,635) | |||
Proceeds from sale of investments in investment funds |
94,157,640 | |||
(Increase) decrease in receivable for investments sold |
(33,372,729) | |||
(Increase) decrease in prepaid investments in investment funds |
(13,700,000) | |||
(Increase) decrease in other assets |
(7,035) | |||
Increase (decrease) in withholding tax payable |
35,492 | |||
Increase (decrease) in management fee payable |
(21,595) | |||
Increase (decrease) in shareholder servicing fee payable |
(16,314) | |||
Increase (decrease) in transfer agent fee payable |
2,118 | |||
Increase (decrease) in accrued expenses and other liabilities |
(116,614) | |||
|
|
|||
Net cash provided by (used in) operating activities |
10,694,671 | |||
|
|
|||
Cash flows from financing activities |
||||
Proceeds from issuance of note payable* |
28,648,672 | |||
Repayments of note payable |
(18,000,000) | |||
Subscriptions |
1,193,532 | |||
Repurchases |
(24,504,265) | |||
|
|
|||
Net cash provided by (used in) financing activities |
(12,662,061) | |||
|
|
|||
Net change in cash and cash equivalents |
(1,967,390) | |||
Cash and cash equivalents at beginning of period |
5,844,673 | |||
|
|
|||
Cash and cash equivalents at end of period |
$ | 3,877,283 | ||
|
|
* | Includes $1,677,140 of accrued interest expense that was rolled over into the note payable principal balance. See discussion in Note 8 to the financial statements. |
The accompanying notes are an integral part of these financial statements and should be used in conjunction herewith.
4
Alternative Investment Partners Absolute Return Fund
Schedule of Investments (Unaudited)
June 30, 2018
Description | First Acquisition Date |
Cost | Fair Value |
Percent of Net Assets |
Next Available Redemption Date* |
Liquidity** | ||||||||||||||||||||||
Investment Funds |
||||||||||||||||||||||||||||
Commodity Trading Advisors - Managed Futures |
||||||||||||||||||||||||||||
Teza Fund V LP |
2/1/2016 | $ | 13,299,789 | $ | 12,509,342 | 2.84 % | 7/31/2018 | Monthly | ||||||||||||||||||||
Two Sigma Absolute Return Macro Enhanced Fund, LP |
7/1/2014 | 11,315,464 | 13,515,467 | 3.07 | 7/31/2018 | Monthly | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Commodity Trading Advisors - Managed Futures |
24,615,253 | 26,024,809 | 5.91 | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Distressed |
||||||||||||||||||||||||||||
Cerberus Partners, L.P. |
11/1/2009 | 3,542,148 | 7,980,536 | 1.81 | (a) | (a) | ||||||||||||||||||||||
Cerberus SPV, LLC |
11/1/2009 | 2,175,494 | 5,383,641 | 1.22 | (a) | (a) | ||||||||||||||||||||||
Trend Capital Gaucho Fund LP |
11/1/2016 | 9,128,505 | 7,973,183 | 1.81 | 10/31/2019 | Annually | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Distressed |
14,846,147 | 21,337,360 | 4.84 | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Equity Long/Short - High Hedge |
||||||||||||||||||||||||||||
Citadel Tactical Trading LLC |
1/1/2008 | 4,939,276 | 38,569,634 | 8.77 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Holocene Advisors Fund LP |
4/1/2017 | 12,000,000 | 13,704,869 | 3.11 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Magnetar Equity Opportunities Fund LLC |
2/1/2011 | 759,917 | 3,038,943 | 0.69 | 7/31/2018 | Monthly | ||||||||||||||||||||||
Neuberger Berman Principal Strategies Fund L.P. |
8/1/2017 | 13,300,000 | 13,511,765 | 3.07 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
PivotBase Fund LP |
12/1/2017 | 10,500,000 | 10,679,883 | 2.43 | 8/31/2018 | Monthly | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Equity Long/Short - High Hedge |
41,499,193 | 79,505,094 | 18.07 | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Equity Long/Short - Opportunistic |
||||||||||||||||||||||||||||
Anchor Bolt Fund, LP |
2/1/2014 | 10,524,991 | 13,212,750 | 3.00 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Axon Partners, LP |
10/1/2007 | 4,384,156 | 1,783,900 | 0.41 | (a) | (a) | ||||||||||||||||||||||
Pelham Global Financials Fund LP |
6/1/2017 | 7,500,000 | 7,780,367 | 1.77 | 9/30/2018 | Monthly | ||||||||||||||||||||||
Pelham Long/Short Fund LP |
7/1/2013 | 7,298,930 | 11,036,313 | 2.51 | 9/30/2018 | Monthly | ||||||||||||||||||||||
Pelham Long/Short Small Cap Fund LP |
7/1/2015 | 7,452,523 | 12,414,179 | 2.82 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Pleiad Asia Onshore Feeder Fund |
2/1/2016 | 7,312,500 | 8,267,790 | 1.88 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Scopus Partners II, L.P. |
3/1/2018 | 10,000,000 | 9,749,766 | 2.22 | 12/31/2018 | Quarterly | ||||||||||||||||||||||
Turiya Fund LP |
10/1/2015 | 9,078,994 | 9,140,232 | 2.08 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Valinor Capital Partners, L.P. |
7/1/2011 | 8,192,908 | 11,324,961 | 2.57 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Equity Long/Short - Opportunistic |
71,745,002 | 84,710,258 | 19.26 | |||||||||||||||||||||||||
|
|
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
Schedule of Investments (Unaudited) (continued)
June 30, 2018
Description | First Acquisition Date |
Cost | Fair Value |
Percent of Net Assets |
Next Available Redemption Date* |
Liquidity** | ||||||||||||||||||||||
Investment Funds (continued) |
||||||||||||||||||||||||||||
Event Driven Equity |
||||||||||||||||||||||||||||
Sachem Head LP |
4/1/2015 | $ | 8,823,139 | $ | 10,320,826 | 2.35 % | 9/30/2018 | Quarterly | ||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Event Driven Equity |
8,823,139 | 10,320,826 | 2.35 | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Macro |
||||||||||||||||||||||||||||
Andurand Commodities Fund LP |
8/1/2016 | 5,758,963 | 7,467,048 | 1.70 | 8/31/2018 | Monthly | ||||||||||||||||||||||
Autonomy Global Macro Fund LP |
6/1/2013 | 10,440,598 | 14,833,816 | 3.37 | 8/31/2018 | Monthly | ||||||||||||||||||||||
D.E. Shaw Oculus Fund, L.L.C. |
11/1/2006 | 10,767,687 | 21,622,238 | 4.91 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Key Square Partners LP |
3/1/2016 | 13,274,175 | 13,996,412 | 3.18 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Rokos Global Macro Fund LP |
12/1/2015 | 9,425,000 | 11,484,256 | 2.61 | 9/30/2018 | Monthly | ||||||||||||||||||||||
X2 Opportunistic Debt Fund, LLC |
2/1/2017 | 13,000,000 | 13,818,492 | 3.14 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Trend Macro Onshore LP |
4/2/2018 | 12,500,000 | 11,485,037 | 2.61 | 7/31/2018 | Monthly | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Macro |
75,166,423 | 94,707,299 | 21.52 | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Merger/Risk Arbitrage |
||||||||||||||||||||||||||||
Castlerigg Merger Arbitrage Enhanced Fund, L.P. |
9/1/2017 | 11,000,000 | 11,143,737 | 2.53 | 8/31/2018 | Monthly | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Merger/Risk Arbitrage |
11,000,000 | 11,143,737 | 2.53 | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Mortgage Arbitrage |
||||||||||||||||||||||||||||
Cerberus CMBS Opportunities Fund, L.P. |
10/1/2014 | 10,304,671 | 12,037,799 | 2.74 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Cerberus Global Residential Mortgage Opportunity Fund L.P. |
2/1/2013 | 5,170,399 | 8,456,003 | 1.92 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Shelter Growth Opportunities Fund LP |
2/1/2016 | 14,710,597 | 17,908,376 | 4.07 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
Tilden Park Investment Fund LP |
3/1/2012 | 6,774,721 | 15,184,412 | 3.45 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Mortgage Arbitrage |
36,960,388 | 53,586,590 | 12.18 | |||||||||||||||||||||||||
|
|
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
Schedule of Investments (Unaudited) (continued)
June 30, 2018
Description | First Acquisition Date |
Cost | Fair Value |
Percent Assets |
Next Available Redemption Date* |
Liquidity** | ||||||||||||||||||||||
Investment Funds (continued) |
||||||||||||||||||||||||||||
Multi-Strategy |
||||||||||||||||||||||||||||
Citadel Wellington LLC |
8/1/2006 | $ | 6,966,161 | $ | 15,811,233 | 3.59 % | 9/30/2018 | Quarterly | ||||||||||||||||||||
D.E. Shaw Composite Fund, L.L.C. |
1/1/2006 | 1,142,160 | 1,224,350 | 0.28 | (a) | (a) | ||||||||||||||||||||||
Magnetar Capital Fund, LP |
1/1/2008 | 128,498 | 206,681 | 0.05 | (a) | (a) | ||||||||||||||||||||||
OZ Asia Domestic Partners, L.P. |
1/1/2006 | 17,704 | 864 | 0.00 | (a) | (a) | ||||||||||||||||||||||
OZ Europe Domestic Partners II, L.P. |
4/1/2007 | 191,819 | 33,870 | 0.01 | (a) | (a) | ||||||||||||||||||||||
Perry Partners, L.P. |
11/1/2006 | 6,364 | 22,085 | 0.01 | (a) | (a) | ||||||||||||||||||||||
QVT SLV Onshore Ltd. |
3/1/2012 | 641,783 | 1,068,166 | 0.24 | (a) | (a) | ||||||||||||||||||||||
QVT Special Investment Onshore Fund, Ltd. |
3/1/2012 | 110,373 | 319,263 | 0.07 | (a) | (a) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Multi-Strategy |
9,204,862 | 18,686,512 | 4.25 | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Other Directional |
||||||||||||||||||||||||||||
GKC Credit Opportunities, LP (b) |
10/1/2014 | 8,386,134 | 9,418,000 | 2.14 | (a) | (a) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Other Directional |
8,386,134 | 9,418,000 | 2.14 | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Private Placements |
||||||||||||||||||||||||||||
QVT Roiv Hldgs Onshore Ltd. |
1/1/2016 | 962,291 | 1,325,344 | 0.30 | (a) | (a) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Private Placements |
962,291 | 1,325,344 | 0.30 | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Statistical Arbitrage |
||||||||||||||||||||||||||||
D.E. Shaw Valence Fund, L.L.C. |
1/1/2015 | 9,025,000 | 13,779,899 | 3.13 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
GSA International Fund LP |
11/1/2012 | 5,611,589 | 8,468,503 | 1.92 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
GSA QMS Fund LP |
6/1/2011 | 15,975,703 | 21,811,872 | 4.96 | 8/31/2018 | Monthly | ||||||||||||||||||||||
Two Sigma Spectrum U.S. Fund, LP |
5/1/2011 | 15,822,019 | 29,069,660 | 6.61 | 9/30/2018 | Quarterly | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Statistical Arbitrage |
46,434,311 | 73,129,934 | 16.62 | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Investments in Investment Funds |
$ | 349,643,143 | 483,895,763 | 109.97 | ||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Liabilities in excess of Other Assets |
(43,857,207) | (9.97) | ||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total Net Assets |
$ | 440,038,556 | 100.00 % | |||||||||||||||||||||||||
|
|
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
Schedule of Investments (Unaudited) (continued)
June 30, 2018
Detailed information about all of the Investment Funds portfolios is not available. Investment Funds are non-income producing.
* | Investments in Investment Funds may be composed of multiple tranches. The Next Available Redemption Date relates to the earliest date after June 30, 2018 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 Funds 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. |
The following table summarizes the initial commitment and unfunded amounts of the Investment Funds as of June 30, 2018, aggregated by investment strategy:
Investment Funds | Commitments | Unfunded | ||||||
Other Directional |
||||||||
GKC Credit Opportunities, LP |
$ | 14,400,000 | $ | 6,013,866 |
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
Schedule of Investments (Unaudited) (continued)
June 30, 2018
Percent of | ||||
Net | ||||
Strategy Allocation | Assets | |||
|
||||
Macro |
21.52 % | |||
Equity Long/Short - Opportunistic |
19.26 | |||
Equity Long/Short - High Hedge |
18.07 | |||
Statistical Arbitrage |
16.62 | |||
Mortgage Arbitrage |
12.18 | |||
Commodity Trading Advisors - Managed Futures |
5.91 | |||
Distressed |
4.84 | |||
Multi-Strategy |
4.25 | |||
Merger/Risk Arbitrage |
2.53 | |||
Event Driven Equity |
2.35 | |||
Other Directional |
2.14 | |||
Private Placements |
0.30 | |||
|
||||
Total Investments in Investment Funds |
109.97 % | |||
|
|
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
Notes to Financial Statements (Unaudited)
June 30, 2018
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 Funds 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 Funds Special Shareholder. The Special Shareholder shall make such contributions to the capital of the Fund from time to time in an amount sufficient for it to serve as tax matters partner for the Fund, which is treated as a partnership for U.S. federal income tax purposes. Morgan Stanley AIP GP LP serves as the Funds investment adviser (the Investment Adviser) and Morgan Stanley Investment Management Limited serves as the Funds sub-adviser (the Sub-Adviser) (collectively with the Investment Adviser, the Adviser). The Adviser is responsible for providing day-to-day investment management services to the Fund, subject to the supervision of the Funds Board of Trustees (the Board). Each of the Investment Adviser and Sub-Adviser is an affiliate of Morgan Stanley and is registered as an investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the Advisers Act). The Funds 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 June 30, 2018, Alternative Investment Partners Absolute Return Fund STS, an indirect feeder fund to the Fund, represented 62.34% of the Funds net assets.
The Board has overall responsibility for monitoring and overseeing the Funds investment program and its management and operations. A majority of the members of the Board are not interested persons (as defined by the 1940 Act) of the Fund, the Investment Adviser or the Sub-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 Funds then current net asset value per Share, plus any applicable sales load. The Distributor may
10
Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (Unaudited) (continued)
1. | Organization (continued) |
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 Funds 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 offer 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 Funds audited financial statements. As of June 30, 2018, the Holdback Amount was $400,950, which includes any Holdback Amount for repurchases as of June 30, 2018, and is 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 Funds financial statements are stated in United States dollars.
11
Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (Unaudited) (continued)
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 June 30, 2018, 100% of the Funds portfolio was comprised of investments in Investment Funds.
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 Funds 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 Funds 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 Funds 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 Funds investment manager.
The Adviser has designed ongoing due diligence processes with respect to Investment Funds and their investment managers, which assist the Adviser in assessing the quality of information provided by, or on behalf of, each Investment Fund and in determining whether such information continues to be reliable or whether further investigation is necessary. Such investigation, as applicable, may or may not require the Adviser to forego its normal reliance on the value supplied by, or on behalf of, such Investment Fund and to determine independently the fair value of the Funds interest in such Investment Fund, consistent with the Funds fair valuation procedures.
Where no value is readily available from an Investment Fund or where a value supplied by an Investment Fund is deemed by the Adviser not to be indicative of its fair value, the Adviser will determine 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 Funds valuation policies and procedures, which have been adopted by the Board and are subject to Board supervision. The Valuation
12
Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (Unaudited) (continued)
2. | Significant Accounting Policies (continued) |
Portfolio Valuation (continued)
Committee consists of voting members from Morgan Stanleys 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 Funds investment manager, and available relevant information as it considers material. After consideration of the portfolio management teams 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 Funds 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. Cash equivalents are recorded at fair value and are categorized as Level 1 securities as described in Note 4. As of June 30, 2018, the Fund did not hold any cash equivalents.
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.
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 Funds 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.
13
Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (Unaudited) (continued)
2. | Significant Accounting Policies (continued) |
Income and Withholding Taxes (continued)
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. Shareholders and to remit those amounts to the U.S. Internal Revenue Service on behalf of non-U.S. Shareholders. 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 period from January 1, 2018 to June 30, 2018, the Fund recorded an estimated tax withholding amount of $35,492 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 June 30, 2018. 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, 2017, 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 Funds risk of loss in each Investment Fund is limited to the value of the Funds interest in each Investment Fund as reported by the Fund.
4. | Fair Value of Financial Instruments |
The fair value of the Funds assets and liabilities that qualify as financial instruments approximates the carrying amounts presented in the Statement of Assets and Liabilities. Fair value is defined as the price that the Fund would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market the most advantageous market for the investment or liability. The 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 (b) inputs that reflect the reporting entitys 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
14
Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (Unaudited) (continued)
4. | Fair Value of Financial Instruments (continued) |
Funds 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 Funds 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 Funds policy is to recognize transfers between Levels 1, 2, or 3 and transfers due to strategy reclassification, if any, as if they occurred as of the beginning of the reporting period. For the period from January 1, 2018 to June 30, 2018, the Fund did not have any transfers between Levels 1, 2, or 3.
As of June 30, 2018, all of the investments in Investment Funds are fair valued using the NAV as practical expedient and are therefore excluded from the fair value hierarchy.
15
Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
5. | Investments in Investment Funds |
The following table summarizes the fair value and liquidity terms of the Investment Funds as of June 30, 2018, aggregated by investment strategy:
Fair Value | Redemption Frequency |
Redemption Notice Period |
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Investment Funds | (if applicable) | (if applicable) | ||||||||||
Commodity Trading Advisors - Managed Futures (a) |
$ | 26,024,809 | Monthly | 15-30 days | ||||||||
Distressed (b) |
21,337,360 | Annually | 180 days | |||||||||
Equity Long/Short - High Hedge (c) |
79,505,094 | Monthly to Quarterly | 30-65 days | |||||||||
Equity Long/Short - Opportunistic (d) |
84,710,258 | Monthly to Quarterly | 45-180 days | |||||||||
Event Driven Equity (e) |
10,320,826 | Quarterly | 65 days | |||||||||
Macro (f) |
94,707,299 | Monthly to Quarterly | 30-90 days | |||||||||
Merger/Risk Arbitrage (g) |
11,143,737 | Monthly | 45 days | |||||||||
Mortgage Arbitrage (h) |
53,586,590 | Quarterly | 90 days | |||||||||
Multi-Strategy (i) |
18,686,512 | Quarterly | 45 days | |||||||||
Other Directional (j) |
9,418,000 | Not Applicable | Not Applicable | |||||||||
Private Placement (k) |
1,325,344 | Not Applicable | Not Applicable | |||||||||
Statistical Arbitrage (l) |
73,129,934 | Monthly to Quarterly | 55-75 days | |||||||||
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Total Investment Funds |
$ | 483,895,763 | ||||||||||
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(a) | Investment Funds in this strategy invest in a variety of futures contracts, including currencies, interest rates, stocks, stock market indexes, derivatives, and commodities. These Investment Funds build quantitative models to price futures and then take long and short positions in the futures. |
(b) | Investment Funds in this strategy invest in, and may sell short, the securities of companies where the securitys price has been, or is expected to be, affected by a distressed situation such as a bankruptcy or corporate restructuring. Investment Fund tranches representing 3.03% of the Funds net assets have restricted liquidity. The Fund estimates the remaining restriction period for such Investment Fund tranches to be 2 years. |
(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 0.41% of the Funds net assets has restricted liquidity. The Fund estimates the remaining restriction period for such Investment Fund tranches to be 6 years. |
(e) | Investment Funds in this strategy invest in restructuring companies that are undergoing significant corporate events such as spin-offs, recapitalizations, litigation events, strategic realignment, and other major changes. It also includes value investments in securities that are believed to be underpriced relative to their intrinsic or fundamental value or which are expected to appreciate in value if circumstances change or an anticipated event occurs. |
(f) | Investment Funds in this strategy invest by making leveraged bets on anticipated price movements of stock markets, interest rates, foreign exchange and physical commodities. |
16
Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (continued)
5. | Investments in Investment Funds (continued) |
(g) | Investment Funds in this strategy involves investing in securities of companies that are the subject of some form of extraordinary corporate transactions, including acquisition or merger proposals, exchange offers, cash tender offers and leveraged buy-outs. |
(h) | Investment Funds in this strategy seek to exploit pricing differentials between various issues of mortgage-related bonds. |
(i) | Investment Funds in this strategy tactically allocate capital to various hedge fund strategies based on their perceived risk and return profiles. Investment Fund tranches representing 0.66% of the Funds net assets have restricted liquidity. The Fund estimates the remaining restriction period for such Investment Fund tranches to range from 2 to 4 years. |
(j) | Portfolio Investments in this strategy invest in a broad group of directional strategies, often with little hedging. Investment Fund tranches representing 2.14% of the Funds net assets have restricted liquidity. The remaining restriction period for such Investment Fund tranches is unknown. |
(k) | Investment Funds in this strategy invest primarily in private (non-public) securities with limited liquidity. Investment Fund tranches representing 0.30% of the Funds net assets have restricted liquidity. The Fund estimates the remaining restriction period for such Investment Fund tranches to be 4 years. |
(l) | 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 June 30, 2018, 6.54% of the Funds net assets were invested in Investment Funds with restricted liquidity or with the next available redemption date extending beyond one year from June 30, 2018.
For the period from January 1, 2018 to June 30, 2018, aggregate purchases and proceeds from sales of investments in Investment Funds were $30,161,635 and $94,157,640, 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 period from January 1 to June 30, 2018 will be made once the Fund has received all 2016 Schedules K-1 from the Investment Funds.
6. | Investment Receivables and Prepaid Investments |
As of June 30, 2018, $58,109,503 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 period-end or holdback amounts that will be received from certain Investment Funds after completion of their audit. Substantially all of the receivable balance was collected subsequent to the balance sheet date.
Prepaid investments in Investment Funds represent amounts transferred to Investment Funds prior to period-end relating to investments to be made effective July 1, 2018, pursuant to each Investment Funds operating agreements. As of June 30, 2018, the Fund has $13,700,000 prepaid investments.
17
Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (Unaudited) (continued)
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 Funds 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 Funds month end net asset value. The management fee is an expense paid out of the Funds 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. The Investment Adviser pays the Sub-Adviser a portion of the net advisory fees the Investment Adviser receives from the Fund on a monthly basis. For the period from January 1, 2018 to June 30, 2018, the Fund incurred management fees of $2,285,751, of which $759,408 was payable to the Investment Adviser at June 30, 2018.
The Distributor and Selling Agents may charge Shareholders a sales load of up to 3% of the Shareholders 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 Agents 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 Funds 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 to clients. For the period from January 1, 2018 to June 30, 2018, the Fund incurred shareholder servicing fees of $1,690,891, of which $561,703 was payable to the Distributor at June 30, 2018.
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.
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Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (Unaudited) (continued)
7. | Management Fee, Related Party Transactions and Other (continued) |
State Street also serves as the Funds 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 June 30, 2018, the Funds proportionate share of assets attributable to the DC Plan was $20,413, which is included in the Statement of Assets and Liabilities under other assets and 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 Funds behalf.
8. | Note Payable |
Effective December 21, 2009, the Fund entered into a note payable agreement (the Note) with Credit Suisse International. The maximum availability under the Note is $115,000,000. The interest rate on the borrowings is 3-month USD LIBOR plus 1.625% per annum. The Fund is charged a minimum interest rate of 1.625% per annum on $69,000,000, less any drawdowns. The Fund has the option to reduce the minimum borrowing at any time. Under the terms of the Note, borrowings are repayable at any time by the maturity date, October 30, 2018. On the 15th day of each month, any unpaid accrued interest expense shall automatically be rolled over into the principal amount of the borrowings. At June 30, 2018, $100,793,671 was outstanding against the Note. For the period from January 1, 2018 to June 30, 2018, the Fund incurred interest expense of $1,677,140 in connection with the Note. Borrowings are secured by investments in Investment Funds. Detailed below is summary information concerning the borrowings:
# of Days Outstanding | Average Daily Balance | Annualized Weighted Average Rate | ||
181 | $89,967,274 | 3.65% |
19
Alternative Investment Partners Absolute Return Fund
Notes to Financial Statements (Unaudited) (continued)
9. | Contractual Obligations |
The Fund enters into contracts that contain a variety of indemnifications. The Funds 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.
10. | Financial Highlights |
The following represents per Share data, ratios to average net assets and other financial highlights information for Shareholders. The calculations below are not annualized for the periods less than one year.
For the Period from January 1, 2018 to June 30, 2018 |
For the Year Ended December 31, 2017 |
For the Year Ended December 31, 2016 |
For the Year Ended December 31, 2015 |
For the Year Ended December 31, 2014 |
For the Year Ended December 31, 2013 |
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For a Share outstanding throughout the period: |
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Net asset value, beginning of period |
$ | 1,663.23 | $ | 1,588.42 | $ | 1,601.67 | $ | 1,532.47 | $ | 1,406.39 | $ | 1,267.43 | ||||||||||||
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Net investment income (loss) (a) |
(22.43) | (41.33) | (38.37) | (37.42) | (33.91) | (31.45) | ||||||||||||||||||
Net realized and unrealized gain (loss) from investments |
48.29 | 116.14 | 25.12 | 106.62 | 159.99 | 170.41 | ||||||||||||||||||
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Net increase (decrease) resulting from operations |
25.86 | 74.81 | (13.25) | 69.20 | 126.08 | 138.96 | ||||||||||||||||||
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Net asset value, end of period |
$ | 1,689.09 | $ | 1,663.23 | $ | 1,588.42 | $ | 1,601.67 | $ | 1,532.47 | $ | 1,406.39 | ||||||||||||
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Total return (b) |
1.55% | 4.71% | (0.83%) | 4.52% | 8.96% | 10.96% | ||||||||||||||||||
Ratio of total expenses (c) |
1.35% | 2.56% | 2.47% | 2.37% | 2.32% | 2.36% | ||||||||||||||||||
Ratio of net investment income (loss) (d) |
(1.34%) | (2.53%) | (2.46%) | (2.37%) | (2.32%) | (2.36%) | ||||||||||||||||||
Portfolio turnover |
6% | 14% | 21% | 20% | 17% | 24% | ||||||||||||||||||
Net assets, end of period (000s) |
$ | 440,039 | $ | 456,666 | $ | 501,362 | $ | 574,921 | $ | 581,361 | $ | 597,061 |
(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 period indicated and a repurchase of the Share on the last day of the period, and does not reflect the impact of the sales load, if any, incurred when subscribing to the Fund. |
(c) | Ratio does not reflect the Funds proportionate share of the expenses of the Investment Funds. |
(d) | Ratio does not reflect the Funds proportionate share of the income and expenses of the Investment Funds. |
The above ratios and total returns have been calculated for the Shareholders taken as a whole. An individual Shareholders return and ratios may vary from these returns and ratios due to the timing of
Share transactions and withholding tax allocation, as applicable.
11. | 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.
20
Alternative Investment Partners Absolute Return Fund
Investment Advisory Agreement Approval (Unaudited)
Nature, Extent and Quality of Services
The Board reviewed and considered the nature and extent of the investment advisory services provided by the Adviser under the Funds investment advisory agreement, including selection of Investment Funds for investment of the Funds assets, allocation of the Funds assets among, and monitoring performance of, Investment Funds, evaluation of risk exposure of Investment Funds and reputation, experience and training of investment managers, management of short-term cash and operations of the Fund, day-to-day portfolio management and general due diligence examination of Investment Funds before and after committing assets of the Fund for investment. The Board reviewed similar information and factors regarding the Sub-Adviser, to the extent applicable. The Board also considered the Advisers investment in personnel and infrastructure that benefits the Fund. (The investment advisory and sub-advisory agreements together are referred to as the Advisory Agreement.) The Board also reviewed and considered the nature and extent of the non-advisory, administrative services that the Adviser provides, or arranges at its expense, under the Advisory Agreement, including among other things, providing to the Fund office facilities, equipment and personnel. The Board also considered that the Adviser serves a variety of other investment advisory clients and has experience overseeing service providers.
The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the advisory and administrative services to the Fund. The Board determined that the Advisers portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund and supported its decision to approve the Advisory Agreement.
Performance, Fees and Expenses of the Fund
The Board reviewed the performance of the Fund compared to an appropriate benchmark and its peers, as determined by the Adviser. The Board also reviewed the fees and expenses of the Fund compared to its peers, as prepared by Broadridge Financial Solutions, Inc. (Broadridge). The Board discussed with the Adviser the performance goals and the actual results achieved in managing the Fund. When considering a funds performance, the Board and the Adviser place emphasis on trends and longer-term returns (focusing on one-year, three-year and five-year performance, as of December 31, 2017, or since inception, as applicable). When a fund underperforms its benchmark and/or its peer group, the Board and the Adviser discuss the causes of such underperformance and, where necessary, they discuss specific changes to investment strategy or investment personnel. The Board noted that the Funds performance was below its benchmark for the one-year period but better than its benchmark for the three- and five-year periods. The Board discussed with the Adviser the level of the advisory fee for the Fund relative to comparable funds and/or other accounts advised by the Adviser and/or compared to its peers as prepared by Broadridge. In addition to the advisory fee, the Board also reviewed the Funds total expense ratio. The Board noted that while the Funds contractual advisory fee was lower than its peer group average, its actual advisory fee and total expense ratio were higher than but close to its peer group averages. After discussion, the Board concluded that the Funds (i) performance was competitive with its benchmark and (ii) advisory fee and total expense ratio were competitive with its peer group averages.
21
Alternative Investment Partners Absolute Return Fund
Investment Advisory Agreement Approval (Unaudited) (continued)
Economies of Scale
The Board considered the size and growth prospects of the Fund and how that relates to the Funds total expense ratio and particularly the Funds advisory fee rate, which does not include breakpoints. In conjunction with its review of the Advisers profitability, the Board discussed with the Adviser how a change in assets can affect the efficiency or effectiveness of managing the Fund and whether the advisory fee level is appropriate relative to current and projected asset levels and/or whether the advisory fee structure reflects economies of scale as asset levels change. The Board concluded that economies of scale for the Fund were not a factor that needed to be considered at the present time.
Profitability of the Adviser and Affiliates
The Board considered information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last year from their relationship with the Fund and during the last two years from their relationship with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost allocation methodology used to determine the profitability of the Adviser and affiliates. The Board has determined that its review of the analysis of the Advisers expenses and profitability supports its decision to approve the Advisory Agreement.
Other Benefits of the Relationship
The Board considered other direct and indirect benefits to the Adviser and/or its affiliates derived from their relationship with the Fund and other funds advised by the Adviser. These benefits may include, among other things, fees for trading, distribution and/or shareholder servicing and for transaction processing and reporting platforms used by securities lending agents, and research received by the Adviser generated from commission dollars spent on funds portfolio trading. The Board considered sales charges on shares of the Fund charged by a broker-dealer affiliate of the Adviser. The Board reviewed with the Adviser these arrangements and the reasonableness of the Advisers costs relative to the services performed. The Board has determined that its review of the other benefits received by the Adviser or its affiliates supports its decision to approve the Advisory Agreement.
Resources of the Adviser and Historical Relationship Between the Fund and the Adviser
The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Advisory Agreement. The Board also reviewed and considered the historical relationship between the Fund and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Funds operations and the Boards confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Advisory Agreement and that it is beneficial for the Fund to continue its relationship with the Adviser.
22
Alternative Investment Partners Absolute Return Fund
Investment Advisory Agreement Approval (Unaudited) (continued)
Other Factors and Current Trends
The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Funds Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Funds business.
General Conclusion
After considering and weighing all of the above factors, with various written materials and verbal information presented by the Adviser, the Board concluded that it would be in the best interest of the Fund and its Shareholders to approve renewal of the Advisory Agreement for another year. In reaching this conclusion the Board did not give particular weight to any single piece of information or factor referenced above. The Board considered these factors and information over the course of the year and in numerous meetings, some of which were in executive session with only the independent Board members and their counsel present. It is possible that individual Board members may have weighed these factors, and the information presented, differently in reaching their individual decisions to approve the Advisory Agreement.
23
Alternative Investment Partners Absolute Return Fund
Proxy Voting Policies and Procedures and Proxy Voting Record (Unaudited)
A copy of (1) the Funds policies and procedures with respect to the voting of proxies relating to the Investment Funds; and (2) how the Fund voted proxies relating to Investment Funds during the most recent 12-month period ended June 30 is available without charge, upon request, by calling the Fund at 1-888-322-4675. This information is also available on the Securities and Exchange Commissions 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 Funds first and third fiscal quarters on Form N-Q. The Funds Forms N-Q are available on the Securities and Exchange Commissions website at http://www.sec.gov. The Funds Forms N-Q may be reviewed and copied at the Securities and Exchange Commissions Public Reference Room in Washington, D.C. and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Once filed, the most recent Form N-Q will be available without charge, upon request, by calling the Fund at 1-888-322-4675.
24
Alternative Investment Partners Absolute Return Fund
100 Front Street, Suite 400
West Conshohocken, PA 19428
Trustees
Michael Nugent, Chairperson of the Board and Trustee
Frank L. Bowman
Kathleen A. Dennis
Nancy C. Everett
Jakki L. Haussler
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Patricia Maleski
W. Allen Reed
Fergus Reid
Officers
John H. Gernon, President and Principal Executive Officer
Matthew Graver, Vice President
Michael J. Key, Vice President
Timothy Knierim, Chief Compliance Officer
Noel Langlois, Treasurer and Chief Financial Officer
Mary E. Mullin, Secretary
Investment Adviser
Morgan Stanley AIP GP LP
100 Front Street, Suite 400
West Conshohocken, PA 19428
Sub-Adviser
Morgan Stanley Investment Management Limited
25 Cabot Square
Canary Wharf
London E14-4QA, England
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
One Commerce Square
2005 Market Street, Suite 700
Philadelphia, PA 19103
25
ITEM 2. | CODE OF ETHICS. Not applicable to a semi-annual report. |
ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable to a semi-annual report. |
ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable to a semi-annual report. |
ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to the Registrant. |
ITEM 6. | INVESTMENTS. |
(a) | Schedule of Investments. Refer to Item 1. |
(b) | Not applicable. |
ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to a semi-annual report. |
ITEM 8. | PORTFOLIO MANAGERS. Not applicable. |
ITEM 9. | PURCHASES OF EQUITY SECURITIES 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 Registrants principal executive officer and principal financial officer have concluded that the Registrants 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 Commissions 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 Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal half-year (the registrants second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting. |
ITEM 12. | DISCLOSURE OF SECURITIES LENDING ACTIVITIES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
ITEM 13. | EXHIBITS. |
(a) |
(1) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. Not applicable to a semi-annual report.
(2) Certifications of Principal Executive Officer and Principal Financial Officer are attached to this report as part of EX-99.CERT.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALTERNATIVE INVESTMENT PARTNERS ABSOLUTE RETURN FUND STS
By: |
/s/ John H. Gernon | |
Name: John H. Gernon | ||
Title: President | ||
Date: August 31, 2018 |
Pursuant to the requirements of the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: |
/s/ John H. Gernon | |
Name: John H. Gernon | ||
Title: Principal Executive Officer | ||
Date: August 31, 2018 | ||
By: |
/s/ Noel Langlois | |
Name: Noel Langlois | ||
Title: Principal Financial Officer | ||
Date: August 31, 2018 |
Exhibit (a)(2)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
CERTIFICATIONS
I, John H. Gernon, certify that:
1. | I have reviewed this report on Form N-CSR of Alternative Investment Partners Absolute Return Fund STS; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal half-year (the registrants second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting. |
Date: August 31, 2018
By: |
/s/ John H. Gernon | |
Title: Principal Executive Officer |
Exhibit(a)(2)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
CERTIFICATIONS
I, Noel Langlois, certify that:
1. | I have reviewed this report on Form N-CSR of Alternative Investment Partners Absolute Return Fund STS; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal half-year (the registrants second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting. |
Date: August 31, 2018
By: |
/s/ Noel Langlois | |
Title: Principal Financial Officer |
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