Fair Value

See Note 14, 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, 2018 and December 31, 2017 was as follows (in thousands):



	Level 1		Level 2		Level 3		NAV Expedient⁽¹⁾		Other		Total
March 31, 2018:
Money markets	$	48,942	$	—	$	—	$	—	$	—	$	48,942
Securities segregated (U.S. Treasury Bills)	—		1,024,529		—		—		—		1,024,529
Derivatives	1,517		12,048		—		—		—		13,565
Investments
U.S. Treasury Bills	—		52,685		—		—		—		52,685
Equity securities	237,169		15,533		117		413		—		253,232
Long exchange-traded options	5,395		—		—		—		—		5,395
Limited partnership hedge funds⁽²⁾	—		—		—		—		39,112		39,112
Private equity	—		—		954		37,057		—		38,011
Time deposits⁽³⁾	—		—		—		—		5,160		5,160
Other investments	—		—		—		—		11,786		11,786
Total investments	242,564		68,218		1,071		37,470		56,058		405,381
Total assets measured at fair value	$	293,023	$	1,104,795	$	1,071	$	37,470	$	56,058	$	1,492,417

Securities sold not yet purchased
Short equities – corporate	$	13,567	$	—	$	—	$	—	$	—	$	13,567
Short exchange-traded options	13,966		—		—		—		—		13,966
Derivatives	1,240		11,866		—		—		—		13,106
Contingent payment arrangements	—		—		10,908		—		—		10,908
Total liabilities measured at fair value	$	28,773	$	11,866	$	10,908	$	—	$	—	$	51,547

December 31, 2017:
Money markets	$	62,071	$	—	$	—	$	—	$	—	$	62,071
Securities segregated (U.S. Treasury Bills)	—		816,350		—		—		—		816,350
Derivatives	948		10,671		—		—		—		11,619
Investments
U.S. Treasury Bills	—		52,609		—		—		—		52,609
Equity securities	276,755		16,618		117		94		—		293,584
Long exchange-traded options	4,981		—		—		—		—		4,981
Limited partnership hedge funds⁽²⁾	—		—		—		—		37,199		37,199
Private equity	—		—		954		37,232		—		38,186
Time deposits⁽³⁾	—		—		—		—		5,138		5,138
Other investments	—		—		—		—		11,892		11,892
Total investments	281,736		69,227		1,071		37,326		54,229		443,589
Total assets measured at fair value	$	344,755	$	896,248	$	1,071	$	37,326	$	54,229	$	1,333,629

Securities sold not yet purchased
Short equities – corporate	$	16,376	$	—	$	—	$	—	$	—	$	16,376



Short exchange-traded options	13,585		—		—		—		—		13,585
Derivatives	2,540		11,783		—		—		—		14,323
Contingent payment arrangements	—		—		10,855		—		—		10,855
Total liabilities measured at fair value	$	32,501	$	11,783	$	10,855	$	—	$	—	$	55,139

⁽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.

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 $37.1 million and no unfunded commitment as of March 31, 2018. This partnership 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 without specific approval by the general partner.

Other investments include (i) an investment in a start-up company that does not have a readily available fair value ($4.6 million as March 31, 2018 and December 31, 2017), (ii) an investment in an equity method investee that is not measured at fair value in accordance with GAAP ($4.0 million as March 31, 2018 and $4.1 million as of December 31, 2017), and (iii) broker dealer exchange memberships ($3.2 million as March 31, 2018 and December 31, 2017).

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 securities: Our equity securities consist principally of company-sponsored mutual funds with NAVs and various separately-managed portfolios consisting primarily of equity and fixed income mutual funds 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 three months ended March 31, 2018, 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 March 31,
	2018		2017
	(in thousands)
Balance as of beginning of period	$	1,071	$	5,023
Purchases	—		—
Sales	—		—
Realized gains (losses), net	—		—
Unrealized gains (losses), net	—		3
Balance as of end of period	$	1,071	$	5,026

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.

As of March 31, 2018 and December 31, 2017, we have an investment in a private equity fund focused exclusively on the energy sector (fair value of $1.0 million as of 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.

We acquired Ramius Alternative Solutions LLC in 2016, CPH Capital Fondsmaeglerselskab A/S in 2014 and SunAmerica's alternative investment group in 2010, all of which included contingent consideration arrangements as part of the purchase price. 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,
	2018		2017
	(in thousands)
Balance as of beginning of period	$	10,855	$	17,589
Accretion	53		178
Payments	—		(590		)
Balance as of end of period	$	10,908	$	17,177

During the third quarter of 2017, we made the final contingent consideration payment relating to our 2014 acquisition and recorded a change in estimate and wrote off the remaining contingent consideration payable relating to our 2010 acquisition. As of March 31, 2018 and December 31, 2017, one acquisition-related contingent liability of $10.9 million for both periods remains relating to our 2016 acquisition, which was valued using a revenue growth rate of 31% and a discount rate ranging from 1.4% to 2.3%.

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, 2018 or during the year ended December 31, 2017.