HEDGES AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

HEDGES AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS

HEDGES AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS

The Company enters into derivative financial instruments as part of its overall risk management strategy or to facilitate its investment management activities. Risks associated with fluctuations in interest rates and foreign currency exchange rates in the normal course of business are addressed as part of the Company's overall risk management strategy that may include the use of derivative financial instruments to economically hedge or reduce these exposures. From time to time, the Company may enter into (a) foreign currency option and forward contracts to reduce earnings and cash flow volatility associated with changes in foreign currency exchange rates, or (b) interest-rate swaps to manage all or a portion of the interest-rate risk associated with its variable rate borrowings. As a result of the use of these or other derivative contracts, the Company is exposed to the risk that counterparties will fail to fulfill their contractual obligations. The Company attempts to mitigate this counterparty risk by entering into derivative contracts only with major financial institutions that have investment-grade ratings. Counterparty credit risk is evaluated in determining the fair value of derivative instruments.

In January 2013, the Company entered into an interest-rate swap with a notional value of $175.0 million, of which $168.8 million was designated to hedge a portion of the interest-rate risk associated with its variable-rate borrowings. In conjunction with the Company’s existing interest-rate swap, this swap effectively fixed the annual interest rate at a blended rate of 2.60% on the bulk of the first four years of the Company's term loan facility, based on the Company’s current credit ratings.

As of September 30, 2013, the Company had two interest-rate swaps designated as cash-flow hedges with a combined notional value of $386.3 million. These hedges continued to be effective as of September 30, 2013. As of December 31, 2012, the Company had one interest-rate swap designated as a cash-flow hedge with a notional value of $240.0 million.

In August 2013, to facilitate its investment management activities, the Company entered into a two-year total return swap (“TRS”) agreement with a financial institution to meet certain investment objectives for which the primary risk exposure is credit. Pursuant to the TRS agreement, as of September 30, 2013, the Company deposited $40 million in cash collateral with the counterparty and had the ability to access up to $200 million of U.S. dollar-denominated debt securities underlying the TRS. The Company will be entitled to receive or obligated to pay certain amounts based on the interest income or expense, as well as changes in the market values, of the TRS's underlying reference securities. The Company pays interest on the outstanding notional amount of the underlying reference securities at a spread to LIBOR. The TRS's fair value is based on changes in the fair value of the underlying reference securities, which are recorded as unrealized gains or losses until realized.

Freestanding derivatives are instruments that the Company enters into as part of its overall risk management strategy but does not designate as hedging instruments for accounting purposes. These instruments may include foreign exchange contracts, interest-rate swaps and other derivative contracts.

The fair value of forward currency sell contracts, which are recorded within the same caption as the underlying hedged items in the condensed consolidated statements of financial condition, consisted of the following:

As of September 30, 2013:	Contract  Amount in Local Currency	Contract  Amount in U.S. Dollars		Market  Value in U.S. Dollars		Net Unrealized Appreciation (Depreciation)
Euro, expiring 10/4/13-7/31/14	110,360	$	144,894	$	149,326	$	(4,432	)
USD (buy GBP), expiring 10/4/13-6/27/14	59,511	59,511		56,395		3,116
GBP, expiring 4/30/14	3,000	4,643		4,848		(205		)
Japanese Yen, expiring 11/27/13-1/30/15	5,468,700	55,955		55,835		120
Total		$	265,003	$	266,404	$	(1,401	)
As of December 31, 2012:
Euro, expiring 1/7/13-10/31/13	93,500	$	104,155	$	105,997	$	(1,842	)
Japanese Yen, expiring 2/28/13-5/31/13	1,330,000	16,418		15,379		1,039
Total		$	120,573	$	121,376	$	(803	)

The fair value of the TRS contract, which is included in other assets in the condensed consolidated statements of financial condition, consisted of the following:

As of September 30, 2013	Notional		Fair Value
Total-return swap	$	135,561	$	132

Realized and unrealized gains and losses arising from freestanding derivative instruments were recorded on the condensed consolidated statements of operations as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Foreign Currency Forward Contracts:	2013			2012			2013		2012
General and administrative expenses (1)	$	(3,531	)	$	(1,483	)	$	1,318	$	1,543
Total-return Swap:
Other income (expense), net	$	132		$	—		$	132	$	—

(1) To the extent that the Company's freestanding derivatives are utilized to hedge its exposure to investment income and management fees earned from consolidated funds, the related hedged items are eliminated in consolidation, with the derivative impact (a positive number reflects a reduction of expenses) reflected in consolidated general and administrative expenses.

As of both September 30, 2013 and December 31, 2012, the Company had not designated any derivatives as fair-value hedges or hedges of net investments in foreign operations.

Derivatives Held By Consolidated Funds

Certain consolidated funds utilize derivative instruments in ongoing investment operations. These derivatives primarily consist of foreign currency forward contracts utilized to manage currency risk, options and futures used to hedge exposure for specific securities, and total-return swaps and credit-default swaps utilized mainly to obtain exposure to leveraged loans or to participate in foreign markets not readily accessible. None of the derivative instruments is accounted for as a hedging instrument utilizing hedge accounting.

The impact of derivative instruments held by the consolidated funds on the condensed consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 was as follows:

	Three Months Ended September 30,
	2013						2012
	Net Realized Gain (Loss) on Investments			Net Change in Unrealized Appreciation (Depreciation) on Investments			Net Realized Gain (Loss) on Investments		Net Change in Unrealized Appreciation (Depreciation) on Investments
Total-return, credit-default and interest-rate swaps	$	(1,235	)	$	19,637		$	28,849	$	2,189
Foreign currency forward contracts	9,382			(222,589		)	40,148		(135,228		)
Options and futures	(2,871		)	(5,817		)	199		(6,380		)
Total	$	5,276		$	(208,769	)	$	69,196	$	(139,419	)

	Nine Months Ended September 30,
	2013						2012
	Net Realized Gain (Loss) on Investments			Net Change in Unrealized Appreciation (Depreciation) on Investments			Net Realized Gain (Loss) on Investments			Net Change in Unrealized Appreciation (Depreciation) on Investments
Total-return, credit-default and interest-rate swaps	$	2,648		$	44,396		$	59,313		$	38,311
Foreign currency forward contracts	28,934			(38,598		)	103,052			(137,422		)
Options and futures	(8,681		)	2,762			(12,318		)	(1,904		)
Total	$	22,901		$	8,560		$	150,047		$	(101,015	)

Although the Company generally presents derivative instruments on a gross basis in its condensed consolidated statements of financial condition, certain derivative instruments, primarily held by the consolidated funds, are subject to enforceable master netting arrangements with certain counterparties which allow for the derivative instruments to be offset. The table below sets forth the rights of setoff and related arrangements associated with the Company's derivative instruments:

	Gross Amounts of Assets (Liabilities)			Gross Amounts Offset in Assets (Liabilities)			Net Amounts of Assets (Liabilities) Presented			Gross Amounts Not Offset in Statements of Financial Condition					Net Amount
As of September 30, 2013										Derivative Assets (Liabilities)			Cash Collateral Received (Pledged)
Derivative Assets:
Foreign currency forward contracts	$	4,009		$	4,009		$	—		$	—		$	—	$	—
Total-return swaps	132			—			132			—			—		132
Subtotal	4,141			4,009			132			—			—		132
Derivative assets of consolidated funds:
Foreign currency forward contracts	16,989			52			16,937			13,388			—		3,549
Total-return, credit-default and interest-rate swaps	83,191			—			83,191			91			—		83,100
Options and futures	4,603			—			4,603			—			—		4,603
Swaptions	2,126			—			2,126			—			—		2,126
Subtotal	106,909			52			106,857			13,479			—		93,378
Total	$	111,050		$	4,061		$	106,989		$	13,479		$	—	$	93,510
Derivative Liabilities:
Foreign currency forward contracts	$	(5,410	)	$	(4,009	)	$	(1,401	)	$	(6	)	$	—	$	(1,395	)
Interest-rate swaps	(4,900		)	—			(4,900		)	6			—		(4,906		)
Subtotal	(10,310		)	(4,009		)	(6,301		)	—			—		(6,301		)
Derivative liabilities of consolidated funds:
Foreign currency forward contracts	(149,375		)	(52		)	(149,323		)	(13,388		)	—		(135,935		)
Total-return, credit-default and interest-rate swaps	(1,885		)	—			(1,885		)	(91		)	—		(1,794		)
Options and futures	(3,472		)	—			(3,472		)	—			—		(3,472		)
Subtotal	(154,732		)	(52		)	(154,680		)	(13,479		)	—		(141,201		)
Total	$	(165,042	)	$	(4,061	)	$	(160,981	)	$	(13,479	)	$	—	$	(147,502	)

	Gross Amounts of Assets (Liabilities)			Gross Amounts Offset in Assets (Liabilities)			Net Amounts of Assets (Liabilities) Presented			Gross Amounts Not Offset in Statements of Financial Condition						Net Amount
As of December 31, 2012										Derivative Assets (Liabilities)			Cash Collateral Received (Pledged)
Derivative Assets:
Foreign currency forward contracts	$	1,558		$	1,558		$	—		$	(549	)	$	—		$	549
Derivative assets of consolidated funds:
Foreign currency forward contracts	52,663			—			52,663			34,139			—			18,524
Total-return, credit-default and interest-rate swaps	48,727			—			48,727			312			340			48,075
Options and futures	6,170			—			6,170			—			—			6,170
Subtotal	107,560			—			107,560			34,451			340			72,769
Total	$	109,118		$	1,558		$	107,560		$	33,902		$	340		$	73,318
Derivative Liabilities:
Foreign currency forward contracts	$	(2,361	)	$	(1,558	)	$	(803	)	$	654		$	—		$	(1,457	)
Interest-rate swaps	(7,900		)	—			(7,900		)	(105		)	—			(7,795		)
Subtotal	(10,261		)	(1,558		)	(8,703		)	549			—			(9,252		)
Derivative liabilities of consolidated funds:
Foreign currency forward contracts	(146,526		)	—			(146,526		)	(34,139		)	(632		)	(111,755		)
Total-return, credit-default and interest-rate swaps	(9,561		)	—			(9,561		)	(312		)	(1,828		)	(7,421		)
Options and futures	(560		)	—			(560		)	—			(47		)	(513		)
Subtotal	(156,647		)	—			(156,647		)	(34,451		)	(2,507		)	(119,689		)
Total	$	(166,908	)	$	(1,558	)	$	(165,350	)	$	(33,902	)	$	(2,507	)	$	(128,941	)