FINANCIAL INSTRUMENTS

In the normal course of its business, the Company purchases and sells various financial instruments, which include listed and unlisted equities, corporate and sovereign debt, commodities, futures, put and call options, currency forwards, other derivatives and similar instruments sold, not yet purchased.

Fair Value Hierarchy

The Company’s financial instruments are carried at fair value, and the net unrealized gains or losses are included in net investment income (loss) in the condensed consolidated statements of income.

The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of September 30, 2017:



	Fair value measurements as of September 30, 2017
Description	Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)		Total
	($ in thousands)
Assets:
Debt instruments	$	—		$	903		$	834	$	1,737
Listed equity securities	1,178,079			17,785			—		1,195,864
Commodities	119,349			—			—		119,349
Private and unlisted equity securities	—			—			6,127		6,127
	$	1,297,428		$	18,688		$	6,961	$	1,323,077
Private equity funds measured at net asset value⁽¹⁾									13,689
Total investments									$	1,336,766
Financial contracts receivable	$	16		$	20,628		$	—	$	20,644
Liabilities:
Listed equity securities, sold not yet purchased	$	(792,632	)	$	—		$	—	$	(792,632	)
Debt instruments, sold not yet purchased	—			(97,369		)	—		(97,369		)
Total securities sold, not yet purchased	$	(792,632	)	$	(97,369	)	$	—	$	(890,001	)
Financial contracts payable	$	(34	)	$	(10,375	)	$	—	$	(10,409	)

⁽¹⁾ Investments measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The fair value amounts are presented in the above table to facilitate reconciliation to the condensed consolidated balance sheets.

The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of December 31, 2016:



	Fair value measurements as of December 31, 2016
Description	Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)		Total
	($ in thousands)
Assets:
Debt instruments	$	—		$	21,819		$	654	$	22,473
Listed equity securities	823,421			20,580			—		844,001
Commodities	137,296			—			—		137,296
Private and unlisted equity securities	—			—			6,109		6,109
	$	960,717		$	42,399		$	6,763	$	1,009,879
Private equity funds measured at net asset value ⁽¹⁾									12,658
Total investments									$	1,022,537
Financial contracts receivable	$	20		$	76,361		$	—	$	76,381
Liabilities:
Listed equity securities, sold not yet purchased	$	(770,267	)	$	—		$	—	$	(770,267	)
Debt instruments, sold not yet purchased	—			(89,635		)	—		(89,635		)
Total securities sold, not yet purchased	$	(770,267	)	$	(89,635	)	$	—	$	(859,902	)
Financial contracts payable	$	—		$	(2,237	)	$	—	$	(2,237	)

The following table presents the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017:



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three months ended September 30, 2017
	Debt instruments		Private and unlisted equity securities		Total
	($ in thousands)
Beginning balance	$	776	$	6,085	$	6,861
Total realized and unrealized gains (losses) and amortization included in earnings, net	58		42		100
Ending balance	$	834	$	6,127	$	6,961



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Nine months ended September 30, 2017
	Debt instruments		Private and unlisted equity securities			Total
	($ in thousands)
Beginning balance	$	654	$	6,109		$	6,763
Purchases	—		1,750			1,750
Total realized and unrealized gains (losses) and amortization included in earnings, net	180		36			216
Transfers out of Level 3	—		(1,768		)	(1,768		)
Ending balance	$	834	$	6,127		$	6,961

During the nine months ended September 30, 2017, $1.8 million of the private equity securities were transferred from Level 3 as these securities commenced trading on a listed exchange. However, due to lock-up period restrictions on those securities, they were classified as Level 2. During the three months ended September 30, 2017, the lock-up period expired and these securities were transfered from Level 2 to Level 1 with the fair value based on the last traded price on an active market.

There were no other transfers between Level 1, Level 2 or Level 3 during the three and nine months ended September 30, 2017.



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three months ended September 30, 2016
	Debt instruments		Private and unlisted equity securities		Total
	($ in thousands)
Beginning balance	$	586	$	5,987	$	6,573
Total realized and unrealized gains (losses) and amortization included in earnings, net	56		124		180
Ending balance	$	642	$	6,111	$	6,753



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Nine months ended September 30, 2016
	Debt instruments		Private and unlisted equity securities			Total
	($ in thousands)
Beginning balance	$	505	$	8,452		$	8,957
Sales	—		(2,539		)	(2,539		)
Total realized and unrealized gains (losses) and amortization included in earnings, net	137		198			335
Ending balance	$	642	$	6,111		$	6,753

There were no transfers between Level 1, Level 2 or Level 3 during the three and nine months ended September 30, 2016.

As of September 30, 2017, the Company held investments in private equity funds of $13.7 million (December 31, 2016: $12.7 million) with fair values measured using the unadjusted net asset values as reported by the managers of these funds as a practical expedient. Some of these net asset values were reported from periods prior to September 30, 2017. The private equity funds have varying lock-up periods and, as of September 30, 2017, all of the funds had redemption restrictions. The redemption restrictions have been in place since inception of the investments and are not expected to lapse in the near future. As of September 30, 2017, the Company had $7.2 million (December 31, 2016: $9.2 million) of unfunded commitments relating to private equity funds whose fair values are determined based on unadjusted net asset values reported by the managers of these funds. These commitments are included in the amounts presented in the schedule of commitments and contingencies in Note 9 of these condensed consolidated financial statements.

For the three and nine months ended September 30, 2017, included in net investment income in the condensed consolidated statements of income were no net realized losses relating to Level 3 securities (2016: nil and $1.4 million, respectively).

For Level 3 securities still held as of the reporting date, the change in net unrealized gain for the three and nine months ended September 30, 2017 of $0.1 million and $0.2 million, respectively (three and nine months ended September 30, 2016: net unrealized losses of $0.2 million and $1.7 million), were included in net investment income (loss) in the condensed consolidated statements of income.

Investments

Debt instruments, trading

At September 30, 2017, the following investments were included in debt instruments:



	Cost/amortized cost		Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Corporate debt – U.S.	$	8,508	$	—	$	(6,874	)	$	1,634
Corporate debt – Non U.S.	2,109		—		(2,006		)	103
Total debt instruments	$	10,617	$	—	$	(8,880	)	$	1,737

At December 31, 2016, the following investments were included in debt instruments:



	Cost/amortized cost		Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Corporate debt – U.S.	$	21,294	$	6,509	$	(5,331	)	$	22,472
Corporate debt – Non U.S.	2,109		—		(2,108		)	1
Total debt instruments	$	23,403	$	6,509	$	(7,439	)	$	22,473

The maturity distribution for debt instruments held at September 30, 2017 and December 31, 2016 was as follows:



	September 30, 2017				December 31, 2016
	Cost/ amortized cost		Fair value		Cost/ amortized cost		Fair value
	($ in thousands)
Within one year	$	6,106	$	741	$	—	$	—
From one to five years	1,451		59		17,803		19,492
From five to ten years	2,109		103		4,649		2,327
More than ten years	951		834		951		654
	$	10,617	$	1,737	$	23,403	$	22,473

Equity securities, trading

At September 30, 2017, the following long positions were included in equity securities, trading:



	Cost		Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Equities – listed	$	1,013,956	$	214,617	$	(49,737	)	$	1,178,836
Exchange traded funds	15,056		1,972		—			17,028
Total equity securities	$	1,029,012	$	216,589	$	(49,737	)	$	1,195,864

At December 31, 2016, the following long positions were included in equity securities, trading:



	Cost		Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Equities – listed	$	753,813	$	115,379	$	(40,706	)	$	828,486
Exchange traded funds	15,056		459		—			15,515
Total equity securities	$	768,869	$	115,838	$	(40,706	)	$	844,001

Other Investments

“Other investments” include commodities and private and unlisted equity securities. As of September 30, 2017 and December 31, 2016, all commodities were comprised of gold bullion.

At September 30, 2017, the following securities were included in other investments:



	Cost		Unrealized gains		Unrealized losses		Fair value
	($ in thousands)
Commodities	$	101,184	$	18,165	$	—	$	119,349
Private and unlisted equity securities	14,801		5,015		—		19,816
	$	115,985	$	23,180	$	—	$	139,165

At December 31, 2016, the following securities were included in other investments:



	Cost		Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Commodities	$	130,671	$	6,625	$	—		$	137,296
Private and unlisted equity securities	14,418		4,375		(26		)	18,767
	$	145,089	$	11,000	$	(26	)	$	156,063

Investments in Securities Sold, Not Yet Purchased

Securities sold, not yet purchased, are securities that the Company has sold, but does not own, in anticipation of a decline in the market value of the security. The Company’s risk is that the value of the security will increase rather than decline. Consequently, the settlement amount of the liability for securities sold, not yet purchased, may exceed the amount recorded in the condensed consolidated balance sheet as the Company is obligated to purchase the securities sold, not yet purchased, in the market at prevailing prices to settle its obligations. To establish a position in a security sold, not yet purchased, the Company needs to borrow the security for delivery to the buyer. On each day the transaction is open, the liability for the obligation to replace the borrowed security is marked-to-market and an unrealized gain or loss is recorded. At the time the transaction is closed, the Company realizes a gain or loss equal to the difference between the price at which the security was sold and the cost of replacing the borrowed security. While the transaction is open, the Company will also incur an expense for any dividends or interest which will be paid to the lender of the securities.

At September 30, 2017, the following securities were included in investments in securities sold, not yet purchased:



	Proceeds			Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Equities – listed	$	(646,419	)	$	27,120	$	(173,333	)	$	(792,632	)
Sovereign debt – Non U.S.	(96,230		)	—		(1,139		)	(97,369		)
	$	(742,649	)	$	27,120	$	(174,472	)	$	(890,001	)

At December 31, 2016, the following securities were included in investments in securities sold, not yet purchased:



	Proceeds			Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Equities – listed	$	(690,270	)	$	30,768	$	(110,765	)	$	(770,267	)
Sovereign debt – Non U.S.	(96,230		)	6,595		—			(89,635		)
	$	(786,500	)	$	37,363	$	(110,765	)	$	(859,902	)

Financial Contracts

As of September 30, 2017 and December 31, 2016, the Company had entered into total return equity swaps, interest rate swaps, commodity swaps, options, warrants, rights, futures and forward contracts with various financial institutions to meet certain investment objectives. Under the terms of each of these financial contracts, the Company is either entitled to receive or is obligated to make payments, which are based on the product of a formula contained within each contract that includes the change in the fair value of the underlying or reference security.

At September 30, 2017, the fair values of financial contracts outstanding were as follows:



Financial Contracts	Listing currency⁽¹⁾	Notional amount of underlying instruments	Fair value of net assets (obligations) on financial contracts
		($ in thousands)
Financial contracts receivable
Call options	USD	14,008	$	887
Commodity Swaps	USD	34,190	2,392
Interest rate swaps	JPY	21,286	302
Put options ⁽²⁾	USD	1,363	8
Total return swaps – equities	EUR/RON/USD	46,686	17,037
Warrants and rights on listed equities	EUR/USD	52	18
Total financial contracts receivable, at fair value			$	20,644
Financial contracts payable
Commodity Swaps	USD	17,833	$	(104	)
Forwards	KRW	12,611	(124		)
Futures	USD	5,773	(34		)
Put options	USD	253	(42		)
Total return swaps – equities	BRL/EUR/GBP/KRW/USD	57,616	(10,105		)
Total financial contracts payable, at fair value			$	(10,409	)

⁽¹⁾USD = US Dollar; BRL = Brazilian Real; EUR = Euro; GBP = British Pound; JPY = Japanese Yen; KRW = Korean Won; RON = Romanian New Leu.

⁽²⁾ Includes options on the Chinese Yuan, denominated in U.S. dollars.

At December 31, 2016, the fair values of financial contracts outstanding were as follows:



Financial Contracts	Listing currency ⁽¹⁾	Notional amount of underlying instruments	Fair value of net assets (obligations) on financial contracts
		($ in thousands)
Financial contracts receivable
Call options	USD	134,495	$	26,508
Commodity Swaps	USD	82,009	13,506
Interest rate swaps	JPY	20,490	218
Put options ⁽²⁾	USD	115,481	6,703
Total return swaps – equities	EUR/GBP/USD	100,199	29,413
Warrants and rights on listed equities	EUR/USD	67	33
Total financial contracts receivable, at fair value			$	76,381
Financial contracts payable
Forwards	KRW	6,880	$	(118	)
Put options	USD	815	(172		)
Total return swaps – equities	EUR/GBP/KRW/RON/USD	31,257	(1,947		)
Total financial contracts payable, at fair value			$	(2,237	)

⁽¹⁾USD = US Dollar; EUR = Euro; GBP = British Pound; JPY = Japanese Yen; KRW = Korean Won; RON = Romanian New Leu.

⁽²⁾ Includes options on the Japanese Yen and the Chinese Yuan, denominated in U.S. dollars.

Options are derivative financial instruments that give the buyer, in exchange for a premium payment, the right, but not the obligation, to either purchase from (call option) or sell to (put option) the writer, a specified underlying security at a specified price on or before a specified date. The Company enters into option contracts to meet certain investment objectives. For exchange traded option contracts, the exchange acts as the counterparty to specific transactions and therefore bears the risk of delivery to and from counterparties of specific positions.

As of September 30, 2017, the Company held $0.0 million OTC put options (long) (December 31, 2016: $6.7 million), $0.3 million OTC call options (long) (December 31, 2016: $22.4 million), and $0.0 million OTC put options (short) (December 31, 2016: $0.2 million).

During the three and nine months ended September 30, 2017 and 2016, the Company reported gains and losses on derivatives as follows:



Derivatives not designated as hedging instruments	Location of gains and losses on derivatives recognized in income	Gain (loss) on derivatives recognized in income
		Three months ended September 30						Nine months ended September 30
		2017			2016			2017			2016
		($ in thousands)
Forwards	Net investment income (loss)	$	(28	)	$	(116	)	$	306		$	(184	)
Futures	Net investment income (loss)	(77		)	793			(480		)	2,086
Interest rate swaps	Net investment income (loss)	113			—			20			—
Options, warrants, and rights	Net investment income (loss)	(6,467		)	(2,834		)	(18,579		)	(5,082		)
Commodity swaps	Net investment income (loss)	1,794			(1,476		)	(8,911		)	(1,195		)
Total return swaps – equities	Net investment income (loss)	12,635			7,769			12,353			21,573
Total		$	7,970		$	4,136		$	(15,291	)	$	17,198

The Company generally does not enter into derivatives for risk management or hedging purposes. The volume of derivative activities varies from period to period depending on potential investment opportunities.

For the three and nine months ended September 30, 2017, the Company’s volume of derivative activities (based on notional amounts) was as follows:



2017	Three months ended September 30				Nine months ended September 30
Derivatives not designated as hedging instruments (notional amounts)	Entered		Exited		Entered		Exited
	($ in thousands)
Forwards	$	1,781	$	—	$	5,421	$	—
Futures	5,807		2,650		38,207		32,537
Options, warrants and rights ⁽¹⁾	372,894		15,840		950,811		125,942
Commodity swaps	—		17,729		2,025		34,317
Total return swaps	—		20,147		243,495		316,560
Total	$	380,482	$	56,366	$	1,239,959	$	509,356

⁽¹⁾ Exited amount excludes derivatives that expired or were exercised during the period.

For the three and nine months ended September 30, 2016, the Company’s volume of derivative activities (based on notional amounts) was as follows:



2016	Three months ended September 30				Nine months ended September 30
Derivatives not designated as hedging instruments (notional amounts)	Entered		Exited		Entered		Exited
	($ in thousands)
Forwards	$	—	$	2,950	$	—	$	3,128
Futures	1,603,250		1,578,692		1,777,971		1,773,858
Options, warrants and rights⁽¹⁾	215,008		65,625		368,547		324,327
Commodity swaps	—		6,257		75,566		70,282
Total return swaps	33,479		10,501		35,529		59,766
Total	$	1,851,737	$	1,664,025	$	2,257,613	$	2,231,361

⁽¹⁾ Exited amount excludes derivatives that expired or were exercised during the period.

The Company does not offset its derivative instruments and presents all amounts in the condensed consolidated balance sheets on a gross basis. The Company has pledged cash collateral to derivative counterparties to support the current value of amounts due to the counterparties on its derivative instruments.

As of September 30, 2017, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:



September 30, 2017	(i)			(ii)		(iii) = (i) - (ii)			(iv) Gross amounts not offset in the balance sheet						(v) = (iii) + (iv)
Description	Gross amounts of recognized assets (liabilities)			Gross amounts offset in the balance sheet		Net amounts of assets (liabilities) presented in the balance sheet			Financial instruments available for offset			Cash collateral (received) pledged			Net amount of asset (liability)
	($ in thousands)
Financial contracts receivable	$	20,644		$	—	$	20,644		$	(5,509	)	$	(10,695	)	$	4,440
Financial contracts payable	(10,409		)	—		(10,409		)	5,509			4,900			—

As of December 31, 2016, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:



December 31, 2016	(i)			(ii)		(iii) = (i) - (ii)			(iv) Gross amounts not offset in the balance sheet						(v) = (iii) + (iv)
Description	Gross amounts of recognized assets (liabilities)			Gross amounts offset in the balance sheet		Net amounts of assets (liabilities) presented in the balance sheet			Financial instruments available for offset			Cash collateral (received) pledged			Net amount of asset (liability)
	($ in thousands)
Financial contracts receivable	$	76,381		$	—	$	76,381		$	(938	)	$	(44,572	)	$	30,871
Financial contracts payable	(2,237		)	—		(2,237		)	938			1,299			—