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 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 each fund's 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:



	June 30, 2017						December 31, 2016
	(in thousands)

	VIEs		VOEs		Total		VIEs		VOEs		Total
Cash and cash equivalents	$	364,738	$	39	$	364,777	$	337,525	$	—	$	337,525
Investments	629,680		29,656		659,336		550,850		23,226		574,076
Other assets	6,044		913		6,957		44,570		—		44,570
Total assets	$	1,000,462	$	30,608	$	1,031,070	$	932,945	$	23,226	$	956,171

Liabilities	$	416,194	$	9,853	$	426,047	$	292,800	$	—	$	292,800
Redeemable non-controlling interest	335,440		—		335,440		384,294		—		384,294
Partners' capital attributable to AB Unitholders	212,660		20,755		233,415		221,229		23,226		244,455
Non-redeemable non-controlling interests in consolidated entities	36,168		—		36,168		34,622		—		34,622
Total liabilities, redeemable non-controlling interest and partners' capital	$	1,000,462	$	30,608	$	1,031,070	$	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 June 30, 2017 and December 31, 2016 was as follows (in thousands):



	Level 1		Level 2		Level 3		NAV Expedient		Total
June 30, 2017:
Investments - VIEs	$	526,097	$	100,725	$	2,777	$	81	$	629,680
Investments - VOEs	12,757		16,879		20		—		29,656
Derivatives - VIEs	70		1,487		—		—		1,557
Derivatives - VOEs	1		9		—		—		10
Total assets measured at fair value	$	538,925	$	119,100	$	2,797	$	81	$	660,903

Short equities - VIEs	$	406,811	$	—	$	—	$	—	$	406,811
Derivatives - VIEs	30		2,823		—		—		2,853
Derivatives - VOEs	—		9		—		—		9
Total liabilities measured at fair value	$	406,841	$	2,832	$	—	$	—	$	409,673

December 31, 2016:
Investments - VIEs	$	341,830	$	203,197	$	5,741	$	82	$	550,850
Investments - VOEs	10,188		12,061		—		977		23,226
Derivatives - VIEs	58		1,739		—		—		1,797
Total assets measured at fair value	$	352,076	$	216,997	$	5,741	$	1,059	$	575,873

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

Balance as of beginning of period	$	10,273		$	15,426		$	5,741		$	—
Impact of adoption of ASU 2015-02	—			—			—			14,740
Deconsolidated funds	(6,697		)	—			(6,697		)	—
Transfers in (out)	(336		)	(1,315		)	413			(1,315		)
Purchases	435			350			5,012			356
Sales	(824		)	(455		)	(1,897		)	(508		)
Realized (losses), net	8			(39		)	(4		)	(39		)
Unrealized gains (losses), net	(54		)	(838		)	217			(123		)
Accrued discounts	(8		)	(21		)	12			(3		)
Balance as of end of period	$	2,797		$	13,108		$	2,797		$	13,108

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 June 30, 2017 and December 31, 2016, the VIEs held $11.6 million and $2.9 million (net), respectively, of futures, forwards and swaps within their portfolios (including $12.9 million and $3.2 million, respectively, of derivatives included in their investments balance on the condensed consolidated statements of financial condition). For the three and six months ended June 30, 2017, we recognized $7.8 million and $15.0 million, respectively, of gains on these derivative positions. For the three and six months ended June 30, 2016, we recognized $0.3 million of losses and $2.7 million of gains, respectively, on these derivative positions. These gains and losses are recognized in investment gains (losses) in the condensed consolidated statements of income. As of June 30, 2017 and December 31, 2016, the VIEs held $0.1 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 June 30, 2017 and December 31, 2016, the VIEs delivered $3.8 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.

Offsetting Assets and Liabilities

Offsetting of derivative assets of consolidated company-sponsored investment funds as of June 30, 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)
June 30, 2017:
Derivatives - VIEs	$	14,422	$	—	$	14,422	$	—	$	(88	)	$	14,334
Derivatives - VOEs	$	10	$	—	$	10	$	—	$	—		$	10
December 31, 2016:
Derivatives - VIEs	$	4,997	$	—	$	4,997	$	—	$	(461	)	$	4,536

Offsetting of derivative liabilities of consolidated company-sponsored investment funds as of June 30, 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)
June 30, 2017:
Derivatives - VIEs	$	2,853	$	—	$	2,853	$	—	$	(2,853	)	$	—
Derivatives - VOEs	$	9	$	—	$	9	$	—	$	(1	)	$	8
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 June 30, 2017, the net assets of company-sponsored investment products that are non-consolidated VIEs are approximately $49.4 billion, and our maximum risk of loss is our investment of $19.5 million in these VIEs and advisory fee receivables from these VIEs, which are not material.