Fair Value

See Note 13, Consolidated Company-Sponsored Investment Funds, for disclosure of fair value of our consolidated company-sponsored investment funds.

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 March 31, 2017 and December 31, 2016 was as follows (in thousands):



	Level 1		Level 2		Level 3		Total
March 31, 2017:
Money markets	$	138,734	$	—	$	—	$	138,734
U.S. Treasury Bills	—		1,206,774		—		1,206,774
Trading
Equity securities	146,122		9,980		112		156,214
Fixed income securities	78,892		11,244		—		90,136
Long exchange-traded options	1,558		—		—		1,558
Derivatives	536		7,232		—		7,768
Private equity	—		—		4,914		4,914
Available-for-sale	64		—		—		64
Total assets measured at fair value	$	365,906	$	1,235,230	$	5,026	$	1,606,162

Securities sold not yet purchased
Short equities – corporate	$	14,921	$	—	$	—	$	14,921
Short exchange-traded options	916		—		—		916
Derivatives	1,909		8,438		—		10,347
Contingent payment arrangements	—		—		17,177		17,177
Total liabilities measured at fair value	$	17,746	$	8,438	$	17,177	$	43,361

December 31, 2016:
Money markets	$	107,250	$	—	$	—	$	107,250
U.S. Treasury Bills	—		922,126		—		922,126
Trading
Equity securities	148,128		5,724		110		153,962
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
Available-for-sale	45		—		—		45
Total assets measured at fair value	$	340,226	$	946,146	$	5,023	$	1,291,395

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
Contingent payment arrangements	—		—		17,589		17,589
Total liabilities measured at fair value	$	42,036	$	7,557	$	17,589	$	67,182

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;


•	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 ($39.5 million and $40.4 million as of March 31, 2017 and December 31, 2016, respectively) which is measured at fair value using net asset value ("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: 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 various acquisitions. 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.

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



		Three Months Ended March 31,
		2017		2016
	(in thousands)

Balance as of beginning of period		$	5,023	$	16,148
Reclassification (see below)		—		(9,532		)
Purchases		—		—
Sales		—		—
Realized gains (losses), net		—		—
Unrealized gains (losses), net		3		(11		)
Balance as of end of period		$	5,026	$	6,605

Transfers into and out of all levels of the fair value hierarchy are reflected at end-of-period fair values. We reclassified the investments of our consolidated private equity fund from investments to investments of consolidated company-sponsored investment funds on our condensed consolidated statement of financial condition (see Note 13, Consolidated Company-Sponsored Investment Funds). 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.

As of March 31, 2017 and December 31, 2016, we have an investment in a private equity fund focused exclusively on the energy sector (fair value of $4.9 million for both periods) 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.

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 March 31,
		2017			2016
	(in thousands)

Balance as of beginning of period		$	17,589		$	31,399
Accretion		178			353
Payments		(590		)	(633		)
Balance as of end of period		$	17,177		$	31,119

As of March 31, 2017 and December 31, 2016, the three acquisition-related contingent consideration liabilities recorded have a combined fair value of $17.2 million and $17.6 million, respectively, 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.

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 three months ended March 31, 2017 or during the year ended December 31, 2016.