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Fair Value

12 Months Ended

Dec. 31, 2019

See Note 15, 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 December 31, 2019 and 2018 was as follows (in thousands):



	Level 1		Level 2		Level 3		NAV Expedient⁽¹⁾		Other		Total
December 31, 2019:
Money markets	$	126,401	$	—	$	—	$	—	$	—	$	126,401
Securities segregated (U.S. Treasury Bills)	—		1,094,866		—		—		—		1,094,866
Derivatives	939		12,552		—		—		—		13,491
Investments
Equity securities	170,946		8,952		119		314		—		180,331
Long exchange-traded options	6,931		—		—		—		—		6,931
Limited partnership hedge funds⁽²⁾	—		—		—		—		47,361		47,361
Time deposits⁽³⁾	—		—		—		—		18,281		18,281
Other investments	5,883		—		—		—		8,007		13,890
Total investments	183,760		8,952		119		314		73,649		266,794
Total assets measured at fair value	$	311,100	$	1,116,370	$	119	$	314	$	73,649	$	1,501,552

Securities sold not yet purchased
Short equities – corporate	$	17,809	$	—	$	—	$	—	$	—	$	17,809
Short exchange-traded options	12,348		—		—		—		—		12,348
Derivatives	871		18,388		—		—		—		19,259
Contingent payment arrangements	—		—		22,911		—		—		22,911
Total liabilities measured at fair value	$	31,028	$	18,388	$	22,911	$	—	$	—	$	72,327



	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 software publishing company that does not have a readily available fair value ($1.0 million as of December 31, 2019), (ii) an investment in a start-up company that does not have a readily available fair value ($0.9 million as of both December 31, 2019 and 2018), (iii) an investment in an equity method investee that is not measured at fair value in accordance with GAAP ($2.9 million and $3.4 million as of December 31, 2019 and 2018, respectively), and (iv) broker dealer exchange memberships that are not measured at fair value in accordance with GAAP ($3.2 million and $3.1 million as of December 31, 2019 and 2018, respectively).

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 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 upon probability-weighted AUM and revenue projections, using unobservable market data inputs, which are included in Level 3 of the valuation hierarchy.

During the year ended December 31, 2019 we had transfers of $3.2 million from Level 2 to Level 1 securities. During the year ended December 31, 2018, we had no transfers from Level 2 to Level 1 securities. During the years ended December 31, 2019 and 2018, there were no transfers between Level 2 and Level 3 securities.

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



	December 31, 2019			December 31, 2018
	(in thousands)
Balance as of beginning of period	$	142		$	1,071
Purchases	—			—
Sales	—			—
Realized gains (losses), net	—			—
Unrealized (losses) gains, net	(23		)	(929		)
Balance as of end of period	$	119		$	142

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 consolidated statements of income.

As of January 1, 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 down 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 Autonomous Research LLP ("Autonomous") in 2019 and Ramius Alternative Solutions LLC in 2016, both 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:



	December 31, 2019			December 31, 2018
	(in thousands)
Balance as of beginning of period	$	7,336		$	10,855
Addition	17,384			—
Accretion	2,542			210
Changes in estimates	(3,051		)	(2,429		)
Payments	(1,300		)	(1,300		)
Balance as of end of period	$	22,911		$	7,336

During 2019, we recorded a $17.4 million contingent consideration payable for our 2019 acquisition based on projected fee revenues over a five-year measurement period. The liability was valued using expected revenue growth rates ranging from 0.7% to 2.5% and a discount rate of 10.4%, reflecting a 3.5% risk-free rate, based on our cost of debt, and a 6.9% market price of risk adjustment rate. Additionally, we recorded a $3.1 million change in estimate for the contingent consideration payable relating to

our 2016 acquisition. The liability relating to our 2016 acquisition was valued using a revised revenue growth rate of 50% over the remaining measurement periods and a 3.0% discount rate.

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 of $2.4 million related to the contingent consideration.

As of December 31, 2019 and 2018, acquisition-related contingent consideration liabilities were $22.9 million and $7.3 million, respectively.

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 years ended December 31, 2019 or 2018.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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