Consolidated Company-Sponsored Investment Funds

We regularly provide seed capital to new company-sponsored investment funds. As such, we may consolidate or de-consolidate a variety of company-sponsored investment funds each quarter. Due to the similarity of risks related to our involvement with each company-sponsored investment fund, disclosures required under the VIE model are aggregated, such as those disclosures regarding the carrying amount and classification of assets.

We are not required to provide financial support to company-sponsored investment funds and only the assets of such funds are available to settle its own liabilities. Our exposure to loss in regard to consolidated company-sponsored investment funds is limited to our investment in, and our management fee earned from, such funds. Equity and debt holders of such funds have no recourse to AB’s assets or to the general credit of AB.

The balances of consolidated VIEs and VOEs included in our condensed consolidated statements of financial condition were as follows:



	March 31, 2017						December 31, 2016
	(in thousands)

	VIEs		VOEs		Total		VIEs		VOEs		Total
Cash and cash equivalents	326,324		319		326,643		337,525		—		337,525
Investments	730,533		23,889		754,422		550,850		23,226		574,076
Other assets	13,571		265		13,836		44,570		—		44,570
Total assets	$	1,070,428	$	24,473	$	1,094,901	$	932,945	$	23,226	$	956,171

Liabilities	398,108		29		398,137		292,800		—		292,800
Redeemable non-controlling interest	394,937		7		394,944		384,294		—		384,294
Partners' capital attributable to AB Unitholders	244,413		24,437		268,850		221,229		23,226		244,455
Non-redeemable non-controlling interests in consolidated entities	32,970		—		32,970		34,622		—		34,622
Total liabilities, redeemable non-controlling interest and partners' capital	$	1,070,428	$	24,473	$	1,094,901	$	932,945	$	23,226	$	956,171

Fair Value

Cash and cash equivalents include cash on hand, demand deposits, overnight commercial paper and highly liquid investments with original maturities of three months or less. Due to the short-term nature of these instruments, the recorded value has been determined to approximate fair value.

Valuation of consolidated company-sponsored investment funds' 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:
Investments - VIEs	$	494,620	$	225,560	$	10,273	$	730,453
Investments - VOEs	11,357		11,719		—		23,076
Derivatives - VIEs	39		4,319		—		4,358
Derivatives - VOEs	$	—	$	13	$	—	$	13
Total assets measured at fair value	$	506,016	$	241,611	$	10,273	$	757,900

Short equities - VIEs	$	381,632	$	—	$	—	$	381,632
Derivatives - VIEs	20		4,848		—		4,868
Derivatives - VOEs	$	—	$	—	$	—	$	—
Total liabilities measured at fair value	$	381,652	$	4,848	$	—	$	386,500

December 31, 2016:
Investments - VIEs	$	341,830	$	203,197	$	5,741	$	550,768
Investments - VOEs	10,188		12,061		—		22,249
Derivatives - VIEs	58		1,739		—		1,797
Total assets measured at fair value	$	352,076	$	216,997	$	5,741	$	574,814

Short equities - VIEs	$	248,419	$	—	$	—	$	248,419
Derivatives - VIEs	48		2,033		—		2,081
Total liabilities measured at fair value	$	248,467	$	2,033	$	—	$	250,500

See Note 11 for 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.

The change in carrying value associated with Level 3 financial instruments carried at fair value within consolidated company-sponsored investment funds was as follows:



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

Balance as of beginning of period		$	5,741		$	—
Impact of adoption of ASU 2015-02		—			14,740
Transfers in		749			—
Purchases		4,577			6
Sales		(1,073		)	(53		)
Realized (losses), net		(12		)	—
Unrealized gains, net		271			715
Accrued discounts		20			18
Balance as of end of period		$	10,273		$	15,426

The level 3 securities primarily consist of corporate bonds that are vendor priced with no ratings available, bank loans, non-agency collateralized mortgage obligations and asset-backed securities.

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.

Derivative Instruments

As of March 31, 2017 and December 31, 2016, the VIEs held $20.4 million and $2.9 million (net), respectively, of futures, forwards and swaps within their portfolios (including $20.9 million and $3.2 million, respectively, of derivatives included in their investments balance on the condensed consolidated statements of financial condition. For the three months ended March 31, 2017 and 2016, we recognized $7.2 million and $3.0 million, respectively, of gains on these derivative positions. These gains are recognized in investment gains (losses) in the condensed consolidated statements of income. As of March 31, 2017 and December 31, 2016, the VIEs held $0.7 million and $0.5 million, respectively, of cash collateral payable to trade counterparties. This obligation to return cash is reported in the liabilities of consolidated company-sponsored investment funds in our condensed consolidated statements of financial condition. As of March 31, 2017 and December 31, 2016, the VIEs delivered $5.6 million and $3.3 million, respectively, of cash collateral into brokerage accounts. The VIEs report this cash collateral in the consolidated company-sponsored investment funds cash and cash equivalents in our condensed consolidated statements of financial condition.

As of March 31, 2017, the VOEs held $43,105 (net) of futures, forwards and swaps within their portfolios. For the three months ended March 31, 2017, we recognized $0.4 million of losses on these derivative positions. These gains are recognized in investments gains (losses) in the condensed consolidated statements of income. As of March 31, 2017, the VOEs had no cash collateral payable to trade counterparties. As of March 31, 2017, the VOEs delivered $0.3 million of cash collateral into brokerage accounts. The VOEs report this cash collateral in the consolidated company-sponsored investment funds cash and cash equivalents in our condensed consolidated statements of financial condition.

Offsetting Assets and Liabilities

Offsetting of derivative assets of consolidated company-sponsored investment funds as of March 31, 2017 and December 31, 2016 was as follows:



	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets Presented in the Statement of Financial Position		Financial Instruments		Collateral Received			Net Amount
	(in thousands)
March 31, 2017:
Derivatives - VIEs	$	25,255	$	—	$	25,255	$	—	$	(652	)	$	24,603
Derivatives - VOEs	$	43	$	—	$	43	$	—	$	—		$	43
December 31, 2016:
Derivatives - VIEs	$	4,997	$	—	$	4,997	$	—	$	(461	)	$	4,536

Offsetting of derivative liabilities of consolidated company-sponsored investment funds as of March 31, 2017 and December 31, 2016 was as follows:



	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities Presented in the Statement of Financial Position		Financial Instruments		Collateral Pledged			Net Amount
	(in thousands)
March 31, 2017:
Derivatives - VIEs	$	4,868	$	—	$	4,868	$	—	$	(4,868	)	$	—
Derivatives - VOEs	$	—	$	—	$	—	$	—	$	—		$	—
December 31, 2016:
Derivatives - VIEs	$	2,081	$	—	$	2,081	$	—	$	(2,081	)	$	—

Cash collateral, whether pledged or received on derivative instruments, is not considered material and, accordingly, is not disclosed by counterparty.

Non-Consolidated VIEs

As of March 31, 2017, the net assets of company-sponsored investment products that are non-consolidated VIEs are approximately $49.3 billion, and our maximum risk of loss is our investment of $23.6 million in these VIEs and advisory fee receivables from these VIEs, which are not material.