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 December 31, 2016 and 2015 was as follows (in thousands):



	Level 1		Level 2		Level 3		Total

December 31, 2016:
Money markets	$	107,250	$	—	$	—	$	107,250
U.S. Treasury Bills	—		922,126		—		922,126
Available-for-sale
Equity securities	23		—		—		23
Fixed income securities	22		—		—		22
Trading



Equity securities	158,316		17,785		110		176,211
Fixed income securities	80,473		11,107		—		91,580
Long exchange-traded options	3,106		—		—		3,106
Derivatives	1,224		7,189		—		8,413
Private equity	—		—		4,913		4,913
Consolidated VIEs
Investments	341,830		203,197		5,741		550,768
Derivatives	58		1,739		—		1,797
Total assets measured at fair value	$	692,302	$	1,163,143	$	10,764	$	1,866,209

Securities sold not yet purchased
Short equities – corporate	$	40,252	$	—	$	—	$	40,252
Short exchange-traded options	692		—		—		692
Derivatives	1,092		7,557		—		8,649
Consolidated VIEs
Short equities	248,419		—		—		248,419
Derivatives	48		2,033		—		2,081
Contingent payment arrangements	—		—		17,589		17,589
Total liabilities measured at fair value	$	290,503	$	9,590	$	17,589	$	317,682

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	170,244		12,532		—		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	$	634,055	$	509,576	$	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 6, 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 was 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 ($40.4 million and $32.0 million as of December 31, 2016 and 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 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 December 31, 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.


•	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 upon probability-weighted AUM and revenue projections, using observable market data inputs, which are included in Level 3 of the valuation hierarchy.

•

Investments of consolidated VIEs: During 2016, subsequent to the initial adoption of ASU 2015-02, we consolidated six additional investment funds that were classified as VIEs in which we have a controlling interest and deconsolidated a VIE of which we were no longer the primary beneficiary. Currently, seven 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. Also, we consolidated one hedge fund which invests in a wide range of U.S. and non-U.S. securities and other financial 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. During the third quarter of 2016, one of our private securities went public and $23.6 million was transferred from a Level 3 to a Level 1 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:



	December 31, 2016			December 31, 2015
	(in thousands)
Balance as of beginning of period	$	16,148		$	27,813
Transfers out	(23,566		)	(26		)
Activity related to consolidated VIEs	19,772			—
Purchases	—			195
Sales	—			(14,178		)
Realized gains, net	—			1,983
Unrealized (losses) gains, net	(1,590		)	361
Balance as of end of period	$	10,764		$	16,148

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 consolidated statements of income.

As of December 31, 2016 and 2015, we have an investment in a private equity fund focused exclusively on the energy sector (fair value of $4.9 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.

Our consolidated venture capital fund, which is classified as a consolidated VIE in 2016 and a private equity investment in 2015, holds no Level 3 investments as of December 31, 2016. Quantitative information about our consolidated venture capital fund Level 3 fair value measurements as of December 31, 2015 was as follows:



	Fair Value as of December 31, 2015		Valuation Technique	Unobservable Input	Range
	(in thousands)

Technology, Media and Telecommunications	$	9,527	Market comparable companies	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 rate 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 rate would result in a significantly lower (higher) fair value measurement.

As of December 31, 2016, five of our consolidated VIEs that are open-end Luxembourg funds hold $5.7 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 change in carrying value associated with Level 3 financial instruments carried at fair value, classified as contingent payment arrangements, is as follows:



	December 31, 2016			December 31, 2015
	(in thousands)
Balance as of beginning of period	$	31,399		$	42,436
Addition	11,893			—
Accretion	1,237			1,770
Changes in estimates	(21,482		)	(7,211		)
Payments	(5,458		)	(5,596		)
Balance as of end of period	$	17,589		$	31,399

During 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 exceeded $5 billion on or before the third anniversary of the acquisition date (December 12, 2016). The target was not met and, as a result, we reversed the contingent consideration payable of $19.3 million.

As of December 31, 2016, the three acquisition-related contingent consideration liabilities recorded have a combined fair value of $17.6 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%. During 2015, we recorded changes in estimates of the contingent consideration payable relating to recent acquisitions of $7.2 million.

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 years ended December 31, 2016 or 2015.