HEDGES AND OTHER DERIVATIVE INSTRUMENTS

The Company enters into derivative 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 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, and (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 credit 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%, based on the Company's current credit ratings, on the bulk of the first four years of the Company's term loan.

As of December 31, 2013, the Company had two interest-rate swaps designated as cash-flow hedges with a combined notional value of $378.8 million. These hedges continued to be effective as of December 31, 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 December 31, 2013, the Company had deposited $50 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 currency exchange contracts, interest-rate swaps and other derivative contracts.

The fair value of forward currency sell contracts consisted of the following:



As of December 31, 2013:	Contract Amount in Local Currency	Contract Amount in U.S. Dollars		Market Value in U.S. Dollars		Net Unrealized Appreciation (Depreciation)
Euro, expiring 1/8/14-10/31/14	115,685	$	153,959	$	159,485	$	(5,526	)
USD (buy GBP), expiring 1/8/14-9/30/14	54,361	54,361		50,286		4,075
GBP, expiring 4/30/14	3,000	4,643		4,966		(323		)
Japanese Yen, expiring 1/31/14-1/30/15	6,261,700	63,107		59,581		3,526
Total		$	276,070	$	274,318	$	1,752
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 consolidated statements of financial condition, consisted of the following:



As of December 31, 2013	Notional		Fair Value
Total-return swap	$	189,089	$	4,515

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



	For the Year Ended December 31,
Foreign Currency Forward Contracts:	2013		2012		2011
General and administrative expenses ⁽¹⁾	$	3,763	$	1,545	$	(1,688	)

Total-return Swap:
Investment income	$	4,515	$	—	$	—


(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 December 31, 2013 and 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, interest-rate swaps to hedge interest-rate risk, options and futures used to hedge exposure for specific securities, and total-return and credit-default swaps utilized mainly to obtain exposure to leveraged loans or to participate in foreign markets not readily accessible. The primary risk exposure for options and futures is price, while the primary risk exposure for total-return and credit-default swaps is credit. 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 consolidated statements of operations was as follows:



	Year Ended December 31,
	2013						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			Net Realized Gain (Loss) on Investments			Net Change in Unrealized Appreciation (Depreciation) on Investments
Total-return, credit-default and interest-rate swaps	$	89,333		$	(22,619	)	$	66,992		$	33,445		$	80,398		$	(60,023	)
Foreign currency forward contracts	(217,234		)	(286,336		)	85,773			(148,791		)	(307,681		)	233,816
Options and futures	(17,922		)	(238		)	(13,202		)	(1,972		)	(36,693		)	(5,367		)
Total	$	(145,823	)	$	(309,193	)	$	139,563		$	(117,318	)	$	(263,976	)	$	168,426

Foreign Currency Contracts

Certain consolidated funds enter into foreign currency contracts to hedge foreign currencies utilized in certain current investments or future purchase commitments. All commitments are valued using the applicable foreign currency exchange rate, with the resulting unrealized gain or loss included in income. Gains or losses are realized at the time forward contracts are either extinguished or closed if entering into an offsetting contract.

The average notional amounts of foreign currency contracts outstanding during 2013 were $4.5 billion long and $243.6 million short, and during 2012 were $3.8 billion long and $205.2 million short. Outstanding foreign currency contracts as of December 31, 2013 and 2012, which included $51.8 million and $53.3 million of gross unrealized appreciation, and $135.2 million and $147.2 million of gross unrealized depreciation, respectively, were as follows.



As of December 31, 2013:	Contract Amount in Local Currency		Contract Amount in U.S. Dollars			Market Value in U.S. Dollars			Net Unrealized Appreciation (Depreciation)
Euro, expiring 1/6/14-3/4/15	(1,324,989	)	$	1,832,932		$	1,878,449		$	(45,517	)
Pound Sterling, expiring 1/6/14-12/12/14	(905,090	)	1,437,028			1,510,779			(73,751		)
Canadian Dollar, expiring 1/16/14-2/13/14	(8,289	)	7,864			7,706			158
Australian Dollar, expiring 1/16/14-6/12/14	(404,642	)	376,193			361,010			15,183
Hong Kong Dollar, expiring 1/23/14	(37,208	)	4,800			4,799			1
Japanese Yen, expiring 1/10/14-11/28/14	(37,773,587	)	383,383			359,072			24,311
Swiss Franc, expiring 1/23/14	(2,355	)	2,635			2,648			(13		)
Singapore Dollar, expiring 1/23/14	(5,741	)	2,717			2,633			84
South Korean Won, expiring 1/23/14	(1,236,110	)	1,161			1,177			(16		)
New Zealand Dollar, expiring 2/13/14-6/12/14	(114,303	)	94,065			92,984			1,081
Danish Krone, expiring 11/4/14	(314,524	)	57,007			58,047			(1,040		)
Indian Rupee, expiring 1/2/14-12/1/15	424,331		(6,106		)	(6,502		)	396
Korean Won, expiring 2/4/14-7/23/14	(104,273,576	)	93,775			98,133			(4,358		)
Total			$	4,287,454		$	4,370,935		$	(83,481	)



As of December 31, 2012:	Contract Amount in Local Currency		Contract Amount in U.S. Dollars		Market Value in U.S. Dollars			Net Unrealized Appreciation (Depreciation)
Euro, expiring 1/7/13-6/27/14	(1,612,565	)	$	2,030,641	$	2,126,806		$	(96,165	)
Pound Sterling, expiring 1/7/13-8/3/15	(419,386	)	666,362		680,600			(14,238		)
Canadian Dollar, expiring 1/10/13-3/14/13	(14,743	)	15,056		14,789			267
Australian Dollar, expiring 1/10/13-3/14/13	(643,136	)	654,139		665,263			(11,124		)
Hong Kong Dollar, expiring 1/17/13	(31,301	)	4,038		4,038			—
Japanese Yen, expiring 1/10/13-11/29/13	(32,661,235	)	413,138		377,884			35,254
Swiss Franc, expiring 1/7/13-1/17/13	(10,041	)	10,803		10,971			(168		)
Singapore Dollar, expiring 1/17/13	(1,858	)	1,520		1,521			(1		)
Chinese Yuan, expiring 3/7/13	—		—		(55		)	(632		)
New Zealand Dollar, expiring 1/10/13	(68,079	)	54,573		56,133			(1,560		)
Korean Won, expiring 2/4/13-6/19/14	(85,515,234	)	74,002		79,498			(5,496		)
Total			$	3,924,272	$	4,017,448		$	(93,863	)

Credit Default Swaps

Changes in the value of a CDS are recorded as unrealized appreciation or depreciation. Upfront payments received or paid by the consolidated funds are reflected as an asset or liability in the consolidated statements of financial condition.

As of December 31, 2013

As of December 31, 2013, payments in the amount of $3,506 had been received as upfront payments. Periodic premiums received or payments made by the consolidated funds are recorded as realized gains or losses on consolidated funds' investments, respectively, in the consolidated statements of operations. Gains or losses are realized upon early termination of the swap agreement. Collateral, in the form of cash or securities, may be required to be held in segregated accounts with a custodian in compliance with a CDS contract.

As of December 31, 2013, the consolidated funds have bought protection on various index swaps. The maximum receipts on these buy protection contracts were approximately $50,000, with terms up to five years. The net unrealized depreciation on these contracts was $4,335 as of December 31, 2013.

As of December 31, 2012

As of December 31, 2012, payments in the amount of $4,350 had been received or paid as upfront payments. Periodic premiums received or payments made by the consolidated funds are recorded as realized gains or losses on consolidated funds' investments, respectively, in the consolidated statements of operations. Gains or losses are realized upon early termination of the swap agreement. Collateral, in the form of cash or securities, may be required to be held in segregated accounts with a custodian in compliance with a CDS contract.

As of December 31, 2012, the consolidated funds have sold protection and bought protection on various single-name swaps and index swaps. There was a maximum payout of approximately $269,800 on sell protection contracts and maximum receipt of approximately $10,000 on buy protection contracts, with terms up to five years. The maximum payout amount could be offset by the subsequent sale, if any, of assets obtained via the execution of a payout event. The net unrealized appreciation on these contracts was $7,692 as of December 31, 2012. The table below summarizes the CDSs for which the consolidated funds were protection sellers as of December 31, 2012:



	Single-name CDS						Bank Loan Swap Index
Reference Asset Type	Bank Loan			Corporate Bond			Bank Loan Swap Index
Fair value of sell protection	$	3,115		$	164		$	92
Maximum potential future payments	221,700			5,600			42,500
Collateral held at third party	(20,503		)	(196		)	(3,040		)

The credit spread on the underlying asset is generally indicative of the current status of the underlying risk of the CDS. Higher credit spreads with a shorter contract term could be indicative of a higher likelihood for the protection seller to perform. The current credit spreads for each contract term period where the consolidated funds were protection sellers is summarized below:



	Maximum Payout Amounts By Contract Term
Current Credit Spread (in Basis Points)	0-1 Year		1-3 Years
0-1,000	$	269,800	$	—

Balance Sheet Offsetting

The Company recognizes all derivatives as assets or liabilities at fair value in its consolidated statements of financial condition. In connection with its derivative activities, the Company generally enters into agreements subject to enforceable master netting arrangements that allow the Company to offset derivative assets and liabilities in the same currency by specific derivative type or, in the event of default by the counterparty, to offset derivative assets and liabilities with the same counterparty. The table below sets forth the rights of setoff and related arrangements associated with derivative instruments held by the Company. The “gross amounts not offset in statements of financial condition” column in the table below relates to derivative instruments that are eligible to be offset in accordance with applicable accounting guidance, but for which management has elected not to offset in the consolidated statements of financial condition.



	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, 2013	Gross Amounts of Assets (Liabilities)			Gross Amounts Offset in Assets (Liabilities)		Net Amounts of Assets (Liabilities) Presented			Derivative Assets (Liabilities)			Cash Collateral Received (Pledged)			Net Amount
Derivative Assets:
Foreign currency forward contracts	$	7,893		$	—	$	7,893		$	5,951		$	—		$	1,942
Total-return swaps	4,515			—		4,515			—			—			4,515
Subtotal	12,408			—		12,408			5,951			—			6,457
Derivative assets of consolidated funds:
Foreign currency forward contracts	51,765			—		51,765			31,223			—			20,542
Total-return, credit-default and interest-rate swaps	18,318			—		18,318			483			—			17,835
Options and futures	18,138			—		18,138			—			—			18,138
Swaptions	6,716			—		6,716			1,324			—			5,392
Subtotal	94,937			—		94,937			33,030			—			61,907
Total	$	107,345		$	—	$	107,345		$	38,981		$	—		$	68,364

Derivative Liabilities:
Foreign currency forward contracts	$	(6,141	)	$	—	$	(6,141	)	$	(4,466	)	$	—		$	(1,675	)
Interest-rate swaps	(4,171		)	—		(4,171		)	(1,485		)	—			(2,686		)
Subtotal	(10,312		)	—		(10,312		)	(5,951		)	—			(4,361		)
Derivative liabilities of consolidated funds:
Foreign currency forward contracts	(135,246		)	—		(135,246		)	(31,223		)	(11,583		)	(92,440		)
Total-return, credit-default and interest-rate swaps	(7,096		)	—		(7,096		)	(483		)	(4,358		)	(2,255		)
Options and futures	(6,214		)	—		(6,214		)	—			(3,067		)	(3,147		)
Swaptions	(1,324		)	—		(1,324		)	(1,324		)	—			—
Subtotal	(149,880		)	—		(149,880		)	(33,030		)	(19,008		)	(97,842		)
Total	$	(160,192	)	$	—	$	(160,192	)	$	(38,981	)	$	(19,008	)	$	(102,203	)



	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	Gross Amounts of Assets (Liabilities)			Gross Amounts Offset in Assets (Liabilities)			Net Amounts of Assets (Liabilities) Presented			Derivative Assets (Liabilities)			Cash Collateral Received (Pledged)			Net Amount
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	)