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 June 30, 2017 and December 31, 2016 was as follows (in thousands):



	Level 1		Level 2		Level 3		NAV Expedient⁽¹⁾		Other		Total
June 30, 2017:
Money markets	$	173,176	$	—	$	—	$	—	$	—	$	173,176
Securities segregated (U.S. Treasury Bills)	—		1,007,079		—		—		—		1,007,079
Derivatives	813		7,063		—		—		—		7,876
Investments
Trading
U.S. Treasury Bills	—		27,764		—		—		—		27,764
Equity securities	204,418		4,006		114		65		—		208,603
Fixed income securities	78,328		11,365		—		13		—		89,706
Long exchange-traded options	8,348		—		—		—		—		8,348
Limited partnership hedge funds⁽²⁾	—		—		—		—		38,679		38,679
Private equity	—		—		4,914		39,938		—		44,852
Time deposits⁽³⁾	—		—		—		—		50,429		50,429
Other
Available-for-sale	102		—		—		—		—		102
Other investments⁽²⁾⁽⁴⁾	—		—		—		—		11,498		11,498
Total investments	291,196		43,135		5,028		40,016		100,606		479,981
Total assets measured at fair value	$	465,185	$	1,057,277	$	5,028	$	40,016	$	100,606	$	1,668,112

Securities sold not yet purchased
Short equities – corporate	$	15,042	$	—	$	—	$	—	$	—	$	15,042
Short exchange-traded options	7,510		—		—		—		—		7,510
Derivatives	916		7,260		—		—		—		8,176
Contingent payment arrangements	—		—		16,777		—		—		16,777
Total liabilities measured at fair value	$	23,468	$	7,260	$	16,777	$	—	$	—	$	47,505

December 31, 2016:
Money markets	$	107,250	$	—	$	—	$	—	$	—	$	107,250
Securities segregated (U.S. Treasury Bills)	—		893,189		—		—		—		893,189
Derivatives	1,224		7,189		—		—		—		8,413
Investments
Trading
U.S. Treasury Bills	—		28,937		—		—		—		28,937
Equity securities	148,128		5,724		110		36		—		153,998
Fixed income securities	80,473		11,107		—		12		—		91,592
Long exchange-traded options	3,106		—		—		—		—		3,106
Limited partnership hedge funds⁽²⁾	—		—		—		—		40,530		40,530
Private equity	—		—		4,913		40,365		—		45,278
Time deposits⁽³⁾	—		—		—		—		70,097		70,097



Other
Available-for-sale	45		—		—		—		—		45
Other investments⁽²⁾⁽⁴⁾	—		—		—		—		7,522		7,522
Total investments	231,752		45,768		5,023		40,413		118,149		441,105
Total assets measured at fair value	$	340,226	$	946,146	$	5,023	$	40,413	$	118,149	$	1,449,957

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

⁽¹⁾Investments measured at fair value using NAV (or its equivalent) as a practical expedient.

⁽²⁾ Investments in equity method investees that are not measured at fair value in accordance with GAAP.

⁽³⁾ Investments carried at amortized cost that are not measured at fair value in accordance with GAAP.

⁽⁴⁾ Investments carried at cost that are not measured at fair value in accordance with GAAP.

One of our private equity investments (measured at fair value using NAV as a practical expedient) is a venture capital fund with a fair value of $39.9 million and unfunded commitment of $0.8 million as of June 30, 2017, invests in communications, consumer, digital media, healthcare and information technology markets. The fair value of this investment has been estimated using the capital account balances provided by the partnership. The interest in this partnership cannot be redeemed.

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.

During the six months ended June 30, 2017, there were no transfers between Level 1 and Level 2 securities.

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 June 30,					Six Months Ended June 30,
	2017		2016			2017		2016
	(in thousands)

Balance as of beginning of period	$	5,026	$	6,605		$	5,023	$	16,148
Reclassification (see below)	—		—			—		(9,532		)
Purchases	—		—			—		—
Sales	—		—			—		—
Realized gains (losses), net	—		—			—		—
Unrealized gains (losses), net	2		(1,667		)	5		(1,678		)
Balance as of end of period	$	5,028	$	4,938		$	5,028	$	4,938

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 June 30, 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 June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands)

Balance as of beginning of period	$	17,177		$	31,119		$	17,589		$	31,399
Accretion	177			353			355			706
Payments	(577		)	(611		)	(1,167		)	(1,244		)
Balance as of end of period	$	16,777		$	30,861		$	16,777		$	30,861

As of June 30, 2017 and December 31, 2016, the three acquisition-related contingent consideration liabilities recorded have a combined fair value of $16.8 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 six months ended June 30, 2017 or during the year ended December 31, 2016.