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, 2018						December 31, 2017
	(in thousands)
	VIEs		VOEs		Total		VIEs		VOEs			Total
Cash and cash equivalents	$	22,881	$	812	$	23,693	$	326,158	$	360		$	326,518
Investments	196,391		105,234		301,625		1,189,835		56,448			1,246,283
Other assets	6,109		2,069		8,178		33,931		1,466			35,397
Total assets	$	225,381	$	108,115	$	333,496	$	1,549,924	$	58,274		$	1,608,198

Liabilities	$	5,141	$	1,831	$	6,972	$	695,997	$	2,104		$	698,101
Redeemable non-controlling interest	92,730		10,430		103,160		596,241		(18		)	596,223
Partners' capital attributable to AB Unitholders	126,806		95,854		222,660		256,929		56,188			313,117
Non-redeemable non-controlling interests in consolidated entities	704		—		704		757		—			757
Total liabilities, redeemable non-controlling interest and partners' capital	$	225,381	$	108,115	$	333,496	$	1,549,924	$	58,274		$	1,608,198

During the second quarter of 2018, we deconsolidated a fund in which we have a seed investment of approximately $100 million due to no longer having a controlling financial interest. This VIE had significant consolidated assets and liabilities as of December 31, 2017.

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



	Level 1		Level 2		Level 3		NAV Expedient		Total
June 30, 2018:
Investments - VIEs	$	19,044	$	171,609	$	5,738	$	—	$	196,391
Investments - VOEs	53,721		51,380		133		—		105,234
Derivatives - VIEs	289		2,339		—		—		2,628
Derivatives - VOEs	60		796		—		—		856
Total assets measured at fair value	$	73,114	$	226,124	$	5,871	$	—	$	305,109

Derivatives - VIEs	111		2,875		—		—		2,986
Derivatives - VOEs	94		437		—		—		531
Total liabilities measured at fair value	$	205	$	3,312	$	—	$	—	$	3,517

December 31, 2017:
Investments - VIEs	$	1,053,824	$	133,796	$	2,205	$	10	$	1,189,835
Investments - VOEs	5,491		50,898		59		—		56,448
Derivatives - VIEs	252		30,384		—		—		30,636
Derivatives - VOEs	49		251		—		—		300
Total assets measured at fair value	$	1,059,616	$	215,329	$	2,264	$	10	$	1,277,219

Short equities - VIEs	$	669,258	$	—	$	—	$	—	$	669,258
Derivatives - VIEs	421		21,820		—		—		22,241
Derivatives - VOEs	12		619		—		—		631
Total liabilities measured at fair value	$	669,691	$	22,439	$	—	$	—	$	692,130

See Note 12 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,
	2018			2017			2018			2017
	(in thousands)

Balance as of beginning of period	$	5,901		$	10,273		$	2,264		$	5,741
Deconsolidated funds	—			(6,697		)	—			(6,697		)
Transfers in (out)	337			(336		)	324			413
Purchases	2,100			435			6,134			5,012
Sales	(2,290		)	(824		)	(2,623		)	(1,897		)
Realized (losses) gains, net	(104		)	8			(99		)	(4		)
Unrealized (losses) gains, net	(75		)	(54		)	(133		)	217
Accrued discounts	2			(8		)	4			12
Balance as of end of period	$	5,871		$	2,797		$	5,871		$	2,797

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, 2018 and December 31, 2017, the VIEs held $0.4 million and $8.4 million (net), respectively, of futures, forwards and swaps within their portfolios. For the three and six months ended June 30, 2018, we recognized $15.8 million and $0.9 million of gains, respectively, on these derivatives. 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. These gains and losses are recognized in investment gains (losses) in the condensed consolidated statements of income. As of both June 30, 2018 and December 31, 2017, the VIEs held $0.2 million 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, 2018 and December 31, 2017, the VIEs delivered $1.1 million and $2.9 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 both June 30, 2018 and December 31, 2017, the VOE held $0.3 million (net) of futures, forwards, options and swaps within their portfolios. For the three and six months ended June 30, 2018, we recognized $1.8 million and $1.3 million of gains, respectively, on these derivatives. These gains and losses are recognized in investment gains (losses) in the condensed consolidated statements of income. As of June 30, 2018, the VOEs held $0.1 million 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, 2018 and December 31, 2017, the VOEs held $0.6 million and $0.2 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 June 30, 2018 and December 31, 2017 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)
June 30, 2018:
Derivatives - VIEs	$	2,628	$	—	$	2,628	$	—	$	(240	)	$	2,388
Derivatives - VOEs	$	856	$	—	$	856	$	—	$	(136	)	$	720
December 31, 2017:
Derivatives - VIEs	$	30,636	$	—	$	30,636	$	—	$	(194	)	$	30,442
Derivatives - VOEs	$	300	$	—	$	300	$	—	$	(37	)	$	263

Offsetting of derivative liabilities of consolidated company-sponsored investment funds as of June 30, 2018 and December 31, 2017 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)
June 30, 2018:
Derivatives - VIEs	$	2,986	$	—	$	2,986	$	—	$	(1,089	)	$	1,897
Derivatives - VOEs	$	531	$	—	$	531	$	—	$	(531	)	$	—
December 31, 2017:
Derivatives - VIEs	$	22,241	$	—	$	22,241	$	—	$	(2,884	)	$	19,357
Derivatives - VOEs	$	631	$	—	$	631	$	—	$	(228	)	$	403

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, 2018, the net assets of company-sponsored investment products that are non-consolidated VIEs are approximately $47.6 billion, and our maximum risk of loss is our investment of $6.2 million in these VIEs and our advisory fee receivables from these VIEs, which are not material.