Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The three broad levels of fair value hierarchy are as follows:

• Level 1 – Quoted prices in active markets are available for identical assets or liabilities as of the reported date.


•	Level 2 – Quoted prices in markets that are not active or other pricing inputs that are either directly or indirectly observable as of the reported date.


•	Level 3 – Prices or valuation techniques that are both significant to the fair value measurement and unobservable as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Valuation of our financial instruments by pricing observability levels as of September 30, 2016 and December 31, 2015 was as follows (in thousands):



	Level 1		Level 2		Level 3		Total
September 30, 2016:
Money markets	$	240,634	$	—	$	—	$	240,634
U.S. Treasury Bills	—		474,401		—		474,401
Available-for-sale
Equity securities	114		—		—		114
Fixed income securities	114		—		—		114
Trading
Equity securities	202,063		900		109		203,072
Fixed income securities	132,162		684		—		132,846
Long exchange-traded options	3,549		—		—		3,549
Derivatives	1,197		5,747		—		6,944
Private equity	—		—		4,831		4,831
Consolidated VIEs
Investments	28,751		173,512		2,759		205,022
Derivatives	87		3,791		—		3,878
Total assets measured at fair value	$	608,671	$	659,035	$	7,699	$	1,275,405

Securities sold not yet purchased
Short equities – corporate	$	24,895	$	—	$	—	$	24,895
Short exchange-traded options	4,321		—		—		4,321
Derivatives	600		6,450		—		7,050
Consolidated VIEs - derivatives	46		4,192		—		4,238
Contingent payment arrangements	—		—		18,017		18,017
Total liabilities measured at fair value	$	29,862	$	10,642	$	18,017	$	58,521

December 31, 2015:
Money markets	$	116,445	$	—	$	—	$	116,445
U.S. Treasury Bills	—		485,121		—		485,121
Available-for-sale
Equity securities	181		—		—		181
Fixed income securities	183		—		—		183
Trading
Equity securities	325,248		874		113		326,235
Fixed income securities	180,194		2,582		—		182,776
Long exchange-traded options	5,910		—		—		5,910
Derivatives	1,539		11,049		—		12,588
Private equity	14,305		—		16,035		30,340
Total assets measured at fair value	$	644,005	$	499,626	$	16,148	$	1,159,779

Securities sold not yet purchased
Short equities – corporate	$	15,254	$	—	$	—	$	15,254
Short exchange-traded options	843		—		—		843
Derivatives	2,651		9,570		—		12,221
Contingent payment arrangements	—		—		31,399		31,399
Total liabilities measured at fair value	$	18,748	$	9,570	$	31,399	$	59,717

Included in Note 8, Investments, but excluded in the above fair value table, are the following investments:

• Limited partnership hedge funds, which are recorded using the equity method of accounting;


•	One private equity investment ($10.2 million as of December 31, 2015; sold in the first quarter of 2016), which is recorded using the cost method of accounting;


•	Other investments, which primarily include miscellaneous investments recorded using the cost or equity method of accounting and long-term deposits; and


•	One private equity investment ($31.6 million and $32.0 million as of September 30, 2016 and December 31, 2015, respectively) which is measured at fair value using NAV (or its equivalent) as a practical expedient.

We provide below a description of the fair value methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:


•	Money markets: We invest excess cash in various money market funds that are valued based on quoted prices in active markets; these are included in Level 1 of the valuation hierarchy.


•	Treasury Bills: We hold U.S. Treasury Bills, which are primarily segregated in a special reserve bank custody account as required by Rule 15c3-3 of the Exchange Act. These securities are valued based on quoted yields in secondary markets and are included in Level 2 of the valuation hierarchy.

•

Equity and fixed income securities: Our equity and fixed income securities consist principally of company-sponsored mutual funds with NAVs and various separately-managed portfolios consisting primarily of equity and fixed income securities with quoted prices in active markets, which are included in Level 1 of the valuation hierarchy. In addition, some securities are valued based on observable inputs from recognized pricing vendors, which are included in Level 2 of the valuation hierarchy.

•

Derivatives: We hold exchange-traded futures with counterparties that are included in Level 1 of the valuation hierarchy. In addition, we also hold currency forward contracts, interest rate swaps, credit default swaps, option swaps and total return swaps with counterparties that are valued based on observable inputs from recognized pricing vendors, which are included in Level 2 of the valuation hierarchy.

• Options: We hold long exchange-traded options that are included in Level 1 of the valuation hierarchy.

•

Private equity: As of December 31, 2015, private equity investments include the investments of our consolidated venture capital fund and our investment in a private equity energy fund. As of September 30, 2016, the consolidated venture capital fund is classified as a consolidated VIE (see Note 2) and is discussed separately below; our investment in a private equity energy fund remains. Generally, the valuation of private equity investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments. Private equity investments are valued initially at cost. The carrying values of private equity investments are adjusted either up or down from cost to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing review in accordance with our valuation policies and procedures. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation, including current operating performance and future expectations of investee companies, industry valuations of comparable public companies, changes in market outlooks, and the third party financing environment over time. In determining valuation adjustments resulting from the investment review process, particular emphasis is placed on current company performance and market conditions. For these reasons, which make the fair value of private equity investments unobservable, equity investments are included in Level 3 of the valuation hierarchy. If private equity investments become publicly traded, they are included in Level 1 of the valuation hierarchy; provided, however, if they contain trading restrictions, publicly-traded equity investments are included in Level 2 of the valuation hierarchy until the trading restrictions expire.


•	Securities sold not yet purchased: Securities sold not yet purchased, primarily reflecting short positions in equities and exchange-traded options, are included in Level 1 of the valuation hierarchy.

•

Contingent payment arrangements: Contingent payment arrangements relate to contingent payment liabilities associated with acquisitions in 2010, 2013, 2014 and 2016. At each reporting date, we estimate the fair values of the contingent consideration expected to be paid based upon probability-weighted AUM and revenue projections, using unobservable market data inputs, which are included in Level 3 of the valuation hierarchy.

•

Consolidated VIEs: During the third quarter of 2016, we deconsolidated a VIE that was consolidated during the first six months of 2016 and consolidated two new VIEs. Currently, four of our consolidated VIEs are open-end Luxembourg funds investing in (i) high yield debt issued by U.S. corporations and related derivatives, (ii) fixed income securities issued by Asia-Pacific issuers and related derivatives, and (iii) equity securities, including common and preferred stocks, convertible securities, depositary receipts and securities of real estate investment trusts; currencies and currency-related instruments; pooled investment vehicles; and financial derivative instruments, such as options, futures, forwards, swaps and commodity index-related instruments. In addition, our venture capital fund, which is classified as a consolidated VIE effective January 1, 2016, holds both private equity investments as well as private equity investments that became publicly-traded. The investments and derivatives held by the consolidated VIEs are included in Levels 1, 2 and 3 of the valuation hierarchy. If private equity investments become publicly traded, they are included in Level 1 of the valuation hierarchy; provided, however, if they contain trading restrictions, publicly-traded equity investments are included in Level 2 of the valuation hierarchy until the trading restrictions expire. During the third quarter of 2016, one of our private securities went public and, due to a trading restriction period, $23.6 million was transferred from a Level 3 to a Level 2 classification.

The change in carrying value associated with Level 3 financial instruments carried at fair value, classified as private equity investments, trading equity securities and investments held by our consolidated VIEs, is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands)

Balance as of beginning of period	$	16,651		$	20,139		$	16,148		$	27,813
Transfer out	(23,566		)	—			(23,566		)	(26		)
Activity related to consolidated VIEs	14,611			—			16,790			—
Purchases	—			—			—			198
Sales	—			—			—			(14,178		)
Realized gains (losses), net	—			—			—			1,983
Unrealized gains (losses), net	3			(3,394		)	(1,673		)	955
Balance as of end of period	$	7,699		$	16,745		$	7,699		$	16,745

Transfers into and out of all levels of the fair value hierarchy are reflected at end-of-period fair values. Realized and unrealized gains and losses on Level 3 financial instruments are recorded in investment gains and losses in the condensed consolidated statements of income.

Also, as of September 30, 2016, our three consolidated VIEs that are open-end Luxembourg funds hold $2.8 million of investments that are classified as Level 3. They primarily consist of corporate bonds that are vendor priced with no ratings available, bank loans, non-agency collateralized mortgage obligations and asset-backed securities. The remainder of the activity related to consolidated VIEs pertains to our consolidated venture capital fund.

In addition, as of September 30, 2016 and December 31, 2015, we have an investment in a private equity fund focused exclusively on the energy sector (fair value of $4.8 million and $6.5 million, respectively) that is classified as Level 3. This investment’s valuation is based on a market approach, considering recent transactions in the fund and the industry.

Quantitative information about private equity Level 3 fair value measurements as of December 31, 2015 was as follows:



	Fair Value		Valuation Technique	Unobservable Input	Range
	(in thousands)

Private Equity as of December 31, 2015:
Technology, Media and Telecommunications	$	9,527	Market comparable transactions	Revenue multiple	2.5 - 4.8
				Marketability discount	30	%

The significant unobservable inputs used in the fair value measurement of the reporting entities’ venture capital securities in the Technology, Media and Telecommunications areas are enterprise value to revenue multiples and a discount to account for liquidity and various risk factors. Significant increases (decreases) in the enterprise value to revenue multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in the discount would result in a significantly lower (higher) fair value measurement.

The change in carrying value associated with Level 3 financial instruments carried at fair value, classified as contingent payment arrangements, is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands)

Balance as of beginning of period	$	30,861		$	42,032		$	31,399		$	42,436
Additions	11,893			—			11,893			—
Accretion	354			443			1,060			1,328
Changes in estimates	(21,483		)	—			(21,483		)	—
Payments	(3,608		)	(3,658		)	(4,852		)	(4,947		)
Balance as of end of period	$	18,017		$	38,817		$	18,017		$	38,817

During the third quarter of 2016, we recorded a change in estimate of the contingent consideration payable relating to our 2010 acquisition of $2.2 million. Additionally, we had recorded a contingent consideration payable for our 2013 acquisition relating to contingent value rights ("CVRs"). The CVRs would have entitled the shareholders to an additional $4 per share if the assets under management in the acquired investment services exceed $5 billion on or before the third anniversary of the acquisition date. As of September 30, 2016, management has determined the target will probably not be met and, as a result, reversed the contingent consideration payable of $19.3 million.

As of September 30, 2016, the three acquisition-related contingent consideration liabilities recorded have a combined fair value of $18.0 million and are valued using a projected AUM weighted average growth rate of 18% for one acquisition, and revenue growth rates and discount rates ranging from 4% to 31% and 1.4% to 6.4%, respectively, for the three acquisitions.

As of December 31, 2015, the three acquisition-related contingent consideration liabilities recorded had a combined fair value of $31.4 million and were valued using a projected AUM weighted average growth rate of 46%, a revenue growth rate of 43%, and discount rates ranging from 3.0% to 6.4%.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We did not have any material assets or liabilities that were measured at fair value for impairment on a nonrecurring basis during the nine months ended September 30, 2016 or during the year ended December 31, 2015.