Investment Company Act of 1940 - Section 7(d) and 12(d)(1)(E)
AIP Absolute Return Fund STS

July 10, 2006

Your letter dated July 7, 2006 requests our assurance that we would not recommend enforcement action to the Commission under section 7(d) of the Investment Company Act of 1940 (the "Act") against Alternative Investment Partners Absolute Return Fund STS (the "AIP Top-Tier Fund"), a closed-end investment company registered under the Act that proposes to make a registered public offering under the Securities Act of 1933, and AIP Absolute Return Fund LDC company (the "AIP Offshore Fund"), if AIP Offshore Fund offers and sells its securities to AIP Top-Tier Fund and to a limited number of Non-U.S. Investors (as defined in your letter) without registration of AIP Offshore Fund under the Act. In your letter, you describe a three-tier, master-feeder arrangement under which the AIP Top-Tier Fund will acquire securities issued by the AIP Offshore Fund that, in turn, will acquire securities issued by Alternative Investment Partners Absolute Return Fund (the "AIP Master Fund"), a closed-end investment company that is registered under the Act. Your letter also requests guidance concerning the application of section 12(d)(1)(E) of the Act to the proposed arrangement.

The proposed arrangement is very similar to the arrrangement described in a no-action letter that we issued on April 30, 2004 to Man-Glenwood Lexington TEI, LLC and Man-Glenwood Lexington TEI, LDC under sections 7(d) and 12(d)(1)(E) of the Act (the "Man-Glenwood Letter"). The Man-Glenwood Letter involved a three-tier master-feeder arrangement whereby the top-tier fund would control and be the sole investor in the offshore fund.¹ In the proposed arrangement described in your letter, however, Non-U.S. Investors may invest in the AIP Offshore Fund (to the limited extent described in your letter) although the AIP Top-Tier Fund will control the AIP Offshore Fund.

You contend that the limited offer and sale of securities by the AIP Offshore Fund to Non-U.S. Investors, as described in your letter, should not affect the analysis of whether the arrangement raises the concerns that section 7(d) was designed to address, or how the arrangement complies with section 12(d)(1)(E) of the Act. We agree.

Based on the facts and representations in your letter, we would not recommend enforcement action to the Commission under section 7(d) of the Act against the AIP Top-Tier Fund or the AIP Offshore Fund if the AIP Offshore Fund offers and sells its securities to the AIP Top-Tier Fund as described in your letter. Our position is based upon all of the facts and representations set forth in your letter, including your representations that:²

• The AIP Top-Tier Fund and the AIP Master Fund are registered investment companies under the Act. Morgan Stanley AIP GP LP, the investment adviser of the AIP Master Fund, is registered as an investment adviser with the Commission.
   
• The AIP Top-Tier Fund, and no other person, will control the AIP Offshore Fund;³ and the board of trustees of the AIP Top-Tier Fund will conduct the management and business of the AIP Offshore Fund and will not delegate those responsibilities to any other person, other than certain limited administrative activities.
   
• The AIP Top-Tier Fund will not in any way use the AIP Offshore Fund to evade the provisions of the Act.⁴
   
• The proposed arrangement results in the functional equivalent of a typical master-feeder relationship between the AIP Top-Tier Fund and the AIP Master Fund. The proposed arrangement will comply with section 12(d)(1)(E) of the Act as described below.
   
• The AIP Top-Tier Fund's assets will consist only of cash and securities issued by the AIP Offshore Fund; the AIP Offshore Fund's assets will consist only of cash and securities issued by the AIP Master Fund.
   
• The assets of the AIP Offshore Fund will be maintained at all times in the United States, and they will be maintained at all times in accordance with the requirements of section 17(f) of the Act.
   
• The AIP Offshore Fund will maintain duplicate copies of its books and records at an office located within the United States, and the Commission and its staff will have access to the books and records consistent with the requirements of section 31 of the Act and the rules thereunder.
   
• The AIP Offshore Fund will designate either the AIP Top-Tier Fund's custodian or the AIP Top-Tier Fund as agent in the United States for service of process in any suit, action or proceeding before the Commission or any appropriate court, and the AIP Offshore Fund will consent to the jurisdiction of the U.S. courts and the Commission over it.

You should note that any different facts and representations might require a different conclusion. Furthermore, this portion of our letter expresses our position on enforcement action only, and does not express any legal conclusions on the issues presented.

In addition, based on the facts and representations in your letter, we believe that the arrangement for compliance with section 12(d)(1)(E) of the Act that is set forth in the Man-Glenwood letter would apply equally to the proposed arrangement that is described in your letter. We believe that the arrangement would comply with section 12(d)(1)(E) if it operates in the following manner:

• Morgan Stanley Distribution Inc. is a broker or dealer registered as such with the Commission;
   
• the securities issued by the AIP Offshore Fund will be the only investment securities that are held by the AIP Top-Tier Fund and, in turn, the securities issued by the AIP Master Fund will be the only investment securities held by the AIP Offshore Fund;
   
• the AIP Offshore Fund's purchase of the AIP Master Fund's securities will be made pursuant to an arrangement among the AIP Top-Tier Fund, the AIP Offshore Fund and the AIP Master Fund, or its principal underwriter, whereby the AIP Offshore Fund is required to seek instructions from the shareholders of the Top-Tier Fund and the Non-U.S. Investors, with regard to the voting of all proxies with respect to the AIP Master Fund's securities that are held by the AIP Offshore Fund and to vote such proxies only in accordance with such instructions;
   
• the AIP Top-Tier Fund's purchase of the AIP Offshore Fund's securities will be made pursuant to an arrangement with the AIP Offshore Fund, whereby the AIP Top-Tier Fund will be required to seek instructions from its shareholders, with regard to the voting of all proxies with respect to the AIP Offshore Fund's securities held by the AIP Top-Tier Fund and to vote such proxies only in accordance with such instructions;⁵ and
   
• the AIP Offshore Fund shall refrain from substituting securities of the AIP Master Fund unless the Commission shall have approved such substitution in the manner provided in section 26 of the Act.

You should note that any different facts and representations might require a different conclusion.

Susan M. Olson
Senior Counsel

Endnotes

---

¹ See Man-Glenwood Letter at footnote 5.

² We also rely upon your representation that the proposed arrangement to prevent the receipt of 'unrelated business taxable income' by the Retirement Plans is consistent with the Internal Revenue Code and the regulations thereunder.

³ You represent that no single Non-U.S. Investor or group of related Non-U.S. Investors would own more than 25% of the outstanding voting securities of the AIP Offshore Fund. In addition, you represent that the organizational documents of the AIP Offshore Fund will allow the AIP Offshore Fund to redeem all or a portion of the shares held by one or more Non-U.S. Investors in order to ensure compliance with the Non-U.S. Investor Limitations (as defined in your letter). You also represent that those redemptions would be effected in a manner that is consistent with the requirements of the Act, as if the AIP Offshore Fund were registered as an investment company with the Commission.

⁴ You also represent that the AIP Master Fund will not in any way use the AIP Offshore Fund to evade the provisions of the Act or the Investment Advisers Act of 1940 (e.g., section 205 governing the imposition of performance fees).

⁵ You represent that no Non-U.S. Investor that meets the definition of investment company in section 3(a) of the Act, including any entity that is excluded from that definition by sections 3(c)(1) or 3(c)(7) of the Act, will be permitted to invest in the AIP Offshore Fund. You have not asked and we take no position regarding the application of section 12(d)(1)(E) of the Act to a three-tier master-feeder arrangement in which a Non-U.S. Investor that meets the definition of investment company (including any entity that is excluded from that definition by sections 3(c)(1) or 3(c)(7) of the Act) invests in the AIP Offshore Fund.

Incoming Letter

The Incoming Letter is in Acrobat format.

http://www.sec.gov/divisions/investment/noaction/2006/aip071006.htm