Hedges and Other Derivative Financial Instruments

6 Months Ended

Jun. 30, 2012

Hedges and Other Derivative Financial Instruments [Abstract]

HEDGES AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS

5. HEDGES AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates in the normal course of business. The Company addresses these risks as part of its 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) currency option and forward contracts to reduce earnings and cash flow volatility associated with changes in foreign 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 derivative contracts, the Company is exposed to the risk that counterparties will fail to fulfill their contractual obligations. To mitigate such counterparty risk, the Company enters into contracts with certain major financial institutions that have investment grade ratings. Counterparty credit risk is evaluated in determining the fair value of derivative instruments.

Cash flow hedges

The Company uses interest rate swaps to hedge all or a portion of the interest rate risk associated with its variable rate borrowings. The Company has designated these financial instruments as cash flow hedges. Changes in the fair value of a highly effective derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income until earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness is recorded in current-period earnings. Amounts reclassified from other comprehensive income to earnings are recorded within interest expense in the condensed consolidated statements of operations. In the condensed consolidated statements of financial condition, the fair value of the derivative instrument is reflected within other assets when it represents an asset and within other liabilities when it represents a liability.

The Company had one derivative designated as a cash flow hedge at June 30, 2012 and December 31, 2011. This interest rate swap had a notional value of $255.0 million and $270.0 million as of June 30, 2012 and December 31, 2011, respectively. The hedge continued to be effective as of June 30, 2012.

Freestanding derivatives

Freestanding derivatives are instruments that the Company enters into as part of its overall risk management strategy. These derivative contracts are not designated as hedging instruments for accounting purposes and may include foreign exchange contracts, interest rate swaps and other derivative contracts. The fair value of freestanding derivative assets and liabilities are recorded within the same caption as the underlying hedged items in the condensed consolidated statements of financial condition.

The Company’s freestanding derivatives consisted of the following net forward currency sell contracts at June 30, 2012 and December 31, 2011:

June 30, 2012:	Contract amount in local currency		Contract amount in U.S. dollars		Market value in    U.S. dollars		Net unrealized appreciation (depreciation)
Pound Sterling, expiring 7/6/12-4/5/13		18,765	$	29,474	$	28,569	$	905
Euro, expiring 7/31/12-4/30/13		49,000		64,999		62,032		2,967
Japanese Yen, expiring 8/23/12-11/21/12		1,430,000		18,059		17,936		123
Total			$	112,532	$	108,537	$	3,995
December 31, 2011:
Euro, expiring 1/31/12		16,000	$	22,720	$	20,733	$	1,987
Japanese Yen, expiring 2/29/12		1,250,000		16,073		16,241		(168	)
Total			$	38,793	$	36,974	$	1,819

The impact of freestanding derivative instruments (including both realized and unrealized gains and losses) on the condensed consolidated statement of operations for the three and six months ended June 30, 2012 and 2011 was as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
Foreign currency forward contracts:	2012		2011			2012		2011
General, administrative and other expense (1)	$	2,260	$	(1,300	)	$	3,024	$	(3,344	)

(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, administrative and other expenses.

As of June 30, 2012 and December 31, 2011, 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 risks, options 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 to the consolidated funds. 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 six months ended June 30, 2012 and 2011 was as follows:

	Three Months Ended June 30,
	2012					2011
	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 and credit default swaps	$	19,538		$	18,938	$	7,382		$	(4,710	)
Foreign currency forward contracts		(1,913	)		98,624		72,764			(122,643	)
Options and futures		(10,254	)		4,740		(2,322	)		(9,594	)
Total	$	7,371		$	122,302	$	77,824		$	(136,947	)

	Six Months Ended June 30,
	2012						2011
	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 and credit default swaps	$	30,464		$	36,122		$	12,727		$	20,953
Foreign currency forward contracts		62,904			(2,194	)		(338,613	)		10,442
Options and futures		(12,517	)		4,476			(4,087	)		(36,927	)
Total	$	80,851		$	38,404		$	(329,973	)	$	(5,532	)