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:



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

	VIEs		VOEs		Total		VIEs		VOEs		Total
Cash and cash equivalents	$	445,176	$	74	$	445,250	$	337,525	$	—	$	337,525
Investments	770,953		28,982		799,935		550,850		23,226		574,076
Other assets	5,850		605		6,455		44,570		—		44,570
Total assets	$	1,221,979	$	29,661	$	1,251,640	$	932,945	$	23,226	$	956,171

Liabilities	$	591,231	$	2,569	$	593,800	$	292,800	$	—	$	292,800
Redeemable non-controlling interest	415,761		493		416,254		384,294		—		384,294
Partners' capital attributable to AB Unitholders	214,146		26,599		240,745		221,229		23,226		244,455
Non-redeemable non-controlling interests in consolidated entities	841		—		841		34,622		—		34,622
Total liabilities, redeemable non-controlling interest and partners' capital	$	1,221,979	$	29,661	$	1,251,640	$	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 September 30, 2017 and December 31, 2016 was as follows (in thousands):



	Level 1		Level 2		Level 3		NAV Expedient		Total
September 30, 2017:
Investments - VIEs	$	663,348	$	105,627	$	1,897	$	81	$	770,953
Investments - VOEs	6,830		22,031		121		—		28,982
Derivatives - VIEs	68		1,668		—		—		1,736
Derivatives - VOEs	17		63		—		—		80
Total assets measured at fair value	$	670,263	$	129,389	$	2,018	$	81	$	801,751

Short equities - VIEs	$	583,491	$	—	$	—	$	—	$	583,491
Derivatives - VIEs	104		2,564		—		—		2,668
Derivatives - VOEs	7		128		—		—		135
Total liabilities measured at fair value	$	583,602	$	2,692	$	—	$	—	$	586,294

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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(in thousands)

Balance as of beginning of period	$	2,797		$	13,108		$	5,741		$	—
Impact of adoption of ASU 2015-02	—			—			—			14,740
Deconsolidated funds	—			(1,403		)	(6,697		)	(1,403		)
Transfers (out) in	(35		)	(23,566		)	378			(24,881		)
Purchases	346			640			5,358			996
Sales	(1,148		)	(278		)	(3,045		)	(786		)
Realized gains (losses), net	5			15			1			(24		)
Unrealized gains (losses), net	52			14,243			269			14,120
Accrued discounts	1			—			13			(3		)
Balance as of end of period	$	2,018		$	2,759		$	2,018		$	2,759

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 September 30, 2017 and December 31, 2016, the VIEs held $14.1 million and $2.9 million (net), respectively, of futures, forwards and swaps within their portfolios (including $15.0 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 nine months ended September 30, 2017, we recognized $3.8 million and $18.8 million, respectively, of gains on these derivative positions. For the three and nine months ended September 30, 2016, we recognized $2.0 million of losses and $0.7 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 September 30, 2017 and December 31, 2016, the VIEs held $0.2 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 September 30, 2017 and December 31, 2016, the VIEs delivered $4.6 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 September 30, 2017, the VOEs collateral and investment gains (losses) are not considered material and, accordingly, no further discloses are necessary.

Offsetting Assets and Liabilities

Offsetting of derivative assets of consolidated company-sponsored investment funds as of September 30, 2017 and December 31, 2016 was as follows:



	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received			Net Amount
	(in thousands)
September 30, 2017:
Derivatives - VIEs	$	16,767	$	—	$	16,767	$	—	$	(186	)	$	16,581
Derivatives - VOEs	$	80	$	—	$	80	$	—	$	(12	)	$	68
December 31, 2016:
Derivatives - VIEs	$	4,997	$	—	$	4,997	$	—	$	(461	)	$	4,536

Offsetting of derivative liabilities of consolidated company-sponsored investment funds as of September 30, 2017 and December 31, 2016 was as follows:



	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged			Net Amount
	(in thousands)
September 30, 2017:
Derivatives - VIEs	$	2,668	$	—	$	2,668	$	—	$	(2,668	)	$	—
Derivatives - VOEs	$	135	$	—	$	135	$	—	$	(34	)	$	101
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 September 30, 2017, the net assets of company-sponsored investment products that are non-consolidated VIEs are approximately $52.1 billion, and our maximum risk of loss is our investment of $7.4 million in these VIEs and advisory fee receivables from these VIEs, which are not material.