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, 2019 and December 31, 2018 was as follows (in thousands):



	Level 1		Level 2		Level 3		NAV Expedient⁽¹⁾		Other		Total
March 31, 2019:
Money markets	$	93,286	$	—	$	—	$	—	$	—	$	93,286
Securities segregated (U.S. Treasury Bills)	—		1,262,178		—		—		—		1,262,178
Derivatives	231		9,823		—		—		—		10,054
Investments
U.S. Treasury Bills	—		—		—		—		—		—
Equity securities	167,346		6,248		115		318		—		174,027
Long exchange-traded options	3,046		—		—		—		—		3,046
Limited partnership hedge funds⁽²⁾	—		—		—		—		77,303		77,303
Time deposits⁽³⁾	—		—		—		—		8,634		8,634
Other investments	5,028		—		—		—		7,155		12,183
Total investments	175,420		6,248		115		318		93,092		275,193
Total assets measured at fair value	$	268,937	$	1,278,249	$	115	$	318	$	93,092	$	1,640,711

Securities sold not yet purchased
Short equities – corporate	$	2,465	$	—	$	—	$	—	$	—	$	2,465
Short exchange-traded options	2,878		—		—		—		—		2,878
Derivatives	1,672		12,718		—		—		—		14,390
Contingent payment arrangements	—		—		7,390		—		—		7,390
Total liabilities measured at fair value	$	7,015	$	12,718	$	7,390	$	—	$	—	$	27,123



	Level 1		Level 2		Level 3		NAV Expedient⁽¹⁾		Other		Total
December 31, 2018:
Money markets	$	102,888	$	—	$	—	$	—	$	—	$	102,888
Securities segregated (U.S. Treasury Bills)	—		1,169,554		—		—		—		1,169,554
Derivatives	1,594		15,485		—		—		—		17,079
Investments
U.S. Treasury Bills	—		392,424		—		—		—		392,424
Equity securities	209,414		8,372		142		315		—		218,243
Long exchange-traded options	2,568		—		—		—		—		2,568
Limited partnership hedge funds⁽²⁾	—		—		—		—		80,699		80,699
Time deposits⁽³⁾	—		—		—		—		8,783		8,783
Other investments	4,269		—		—		—		7,358		11,627
Total investments	216,251		400,796		142		315		96,840		714,344
Total assets measured at fair value	$	320,733	$	1,585,835	$	142	$	315	$	96,840	$	2,003,865

Securities sold not yet purchased
Short equities – corporate	$	4,841	$	—	$	—	$	—	$	—	$	4,841
Short exchange-traded options	3,782		—		—		—		—		3,782
Derivatives	2,534		12,288		—		—		—		14,822
Contingent payment arrangements	—		—		7,336		—		—		7,336
Total liabilities measured at fair value	$	11,157	$	12,288	$	7,336	$	—	$	—	$	30,781

⁽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.

Other investments include (i) an investment in a start-up company that does not have a readily available fair value ($0.9 million as of March 31, 2019 and December 31, 2018), (ii) an investment in an equity method investee that is not measured at fair value in accordance with GAAP ($2.9 million as of March 31, 2019 and $3.4 million as of December 31, 2018), and (iii) broker dealer exchange memberships that are not measured at fair value in accordance with GAAP ($3.3 million as of March 31, 2019 and $3.1 million as of December 31, 2018).

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.


•	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, 2019, we had a transfer of $3.2 million from Level 2 to Level 1; there was no transfer between Level 2 and Level 3 securities.

The change in carrying value associated with Level 3 financial instruments carried at fair value, classified as private equity and equity securities, is as follows:



	Three Months Ended March 31,
	2019			2018
	(in thousands)
Balance as of beginning of period	$	142		$	1,071
Purchases	—			—
Sales	—			—
Realized gains (losses), net	—			—
Unrealized gains (losses), net	(27		)	—
Balance as of end of period	$	115		$	1,071

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, we had an investment in a private equity fund focused exclusively on the energy sector (fair value of $1.0 million) that was classified as Level 3 and written off during the second quarter of 2018.This investment's valuation was based on a market approach, considering recent transactions in the fund and the industry.

We acquired Ramius Alternative Solutions LLC in 2016, 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,
	2019		2018
	(in thousands)
Balance as of beginning of period	$	7,336	$	10,855
Accretion	54		53
Payments	—		—
Balance as of end of period	$	7,390	$	10,908

During 2018, we amended the contingent payment relating to our 2016 acquisition by modifying the earnout structure and extending it one year. As part of this amendment, we recorded a change in estimate and wrote off $2.4 million related to the contingent consideration in the fourth quarter. As of March 31, 2019 and December 31, 2018, the acquisition-related contingent liability with a fair value of $7.4 million and $7.3 million, respectively, remains relating to our 2016 acquisition, which was valued using a revenue growth rate of 18% and a discount rate ranging from 3.2% to 3.7%.

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, 2019 or during the year ended December 31, 2018.