| Fair Value Measurements for Operating Entities and Consolidated Funds |
Fair Value Measurements for Operating Entities and Consolidated Funds The following table presents the assets and liabilities that are measured at fair value on a recurring basis on the condensed consolidated statements of financial condition by caption and by level within the valuation hierarchy as of September 30, 2012 and December 31, 2011: Operating Entities | | | | | | | | | | | | | | | | | | Assets at Fair Value as of September 30, 2012 | | Level 1 | | Level 2 | | Level 3 | | Total | | | | (dollars in thousands) | | | Securities owned and derivatives | | | | | | | | US Government securities | $ | 95,038 |
| | $ | — |
| | $ | — |
| | $ | 95,038 |
| Common stocks | 297,987 |
| | 43 |
| | 2,960 |
| | 300,990 |
| Convertible bonds | — |
| | 50,854 |
| | — |
| | 50,854 |
| Corporate bonds | — |
| | 168,021 |
| | — |
| | 168,021 |
| Futures | 653 |
| | — |
| | — |
| | 653 |
| Currency forwards | — |
| | 418 |
| | — |
| | 418 |
| Options | 23,298 |
| | 3,245 |
| | — |
| | 26,543 |
| Warrants and rights | 374 |
| | — |
| | 4,062 |
| | 4,436 |
| Mutual funds | 2,890 |
| | — |
| | — |
| | 2,890 |
| Other investments |
|
| |
|
| |
|
| | | Portfolio Funds | — |
| | 26,794 |
| | 20,493 |
| | 47,287 |
| Real estate investments | — |
| | — |
| | 2,102 |
| | 2,102 |
| Lehman claim | — |
| | — |
| | 761 |
| | 761 |
| | $ | 420,240 |
| | $ | 249,375 |
| | $ | 30,378 |
| | $ | 699,993 |
|
| | | | | | | | | | | | | | | | | | Liabilities at Fair Value as of September 30, 2012 | | Level 1 | | Level 2 | | Level 3 | | Total | | (dollars in thousands) | Securities sold, not yet purchased and derivatives | | | | | | | | US Government securities | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 8 |
| Common stocks | 195,911 |
| | — |
| | — |
| | 195,911 |
| Corporate bonds | — |
| | 61 |
| | — |
| | 61 |
| Futures | 101 |
| | — |
| | — |
| | 101 |
| Currency forwards | — |
| | 21 |
| | — |
| | 21 |
| Options | 14,725 |
| | — |
| | — |
| | 14,725 |
| | $ | 210,745 |
| | $ | 82 |
| | $ | — |
| | $ | 210,827 |
|
| | | | | | | | | | | | | | | | | | Assets at Fair Value as of December 31, 2011 | | Level 1 | | Level 2 | | Level 3 | | Total | | | | (dollars in thousands) | | | Securities owned and derivatives | | | | | | | | US Government securities | $ | 182,868 |
| | $ | — |
| | $ | — |
| | $ | 182,868 |
| Common stocks | 248,598 |
| | 713 |
| | 1,069 |
| | 250,380 |
| Convertible bonds | — |
| | 18,130 |
| | — |
| | 18,130 |
| Corporate bonds | — |
| | 231,864 |
| | — |
| | 231,864 |
| Futures | 172 |
| | — |
| | — |
| | 172 |
| Equity swaps | — |
| | 635 |
| | — |
| | 635 |
| Options | 55,530 |
| | 169 |
| | — |
| | 55,699 |
| Warrants and rights | 1,225 |
| | — |
| | 1,534 |
| | 2,759 |
| Mutual funds | 3,214 |
| | — |
| | — |
| | 3,214 |
| Other investments | | | | | | |
| Portfolio Funds | — |
| | 23,431 |
| | 16,919 |
| | 40,350 |
| Real estate investments | — |
| | — |
| | 2,353 |
| | 2,353 |
| Lehman claim | — |
| | — |
| | 553 |
| | 553 |
| | $ | 491,607 |
| | $ | 274,942 |
| | $ | 22,428 |
| | $ | 788,977 |
|
| | | | | | | | | | | | | | | | | | Liabilities at Fair Value as of December 31, 2011 | | Level 1 | | Level 2 | | Level 3 | | Total | | (dollars in thousands) | Securities sold, not yet purchased and derivatives | | | | | | | | US Government securities | $ | 165,197 |
| | $ | — |
| | $ | — |
| | $ | 165,197 |
| Common stocks | 123,875 |
| | 2 |
| | — |
| | 123,877 |
| Corporate bonds | — |
| | 1,529 |
| | — |
| | 1,529 |
| Futures | 617 |
| | — |
| | — |
| | 617 |
| Equity swaps—short exposure | — |
| | 140 |
| | — |
| | 140 |
| Options | 43,648 |
| | — |
| | — |
| | 43,648 |
| | $ | 333,337 |
| | $ | 1,671 |
| | $ | — |
| | $ | 335,008 |
|
Consolidated Funds' investments | | | | | | | | | | | | | | | | | | Assets at Fair Value as of September 30, 2012 | | Level 1 | | Level 2 | | Level 3 | | Total | | | | (dollars in thousands) | | | Securities owned | | | | | | | | US Government securities | $ | 1,501 |
| | $ | — |
| | $ | — |
| | $ | 1,501 |
| Commercial paper | — |
| | 1,594 |
| | — |
| | 1,594 |
| Other investments | | | | | | | | Portfolio Funds | — |
| | 10,438 |
| | 187,797 |
| | 198,235 |
| Lehman claims | — |
| | — |
| | 6,860 |
| | 6,860 |
| | $ | 1,501 |
| | $ | 12,032 |
| | $ | 194,657 |
| | $ | 208,190 |
|
| | | | | | | | | | | | | | | | | | Assets at Fair Value as of December 31, 2011 | | Level 1 | | Level 2 | | Level 3 | | Total | | | | (dollars in thousands) | | | Securities owned | | | | | | | | US Government securities | $ | 2,006 |
| | $ | — |
| | $ | — |
| | $ | 2,006 |
| Commercial paper | — |
| | 3,927 |
| | — |
| | 3,927 |
| Corporate bonds | — |
| | 401 |
| | — |
| | 401 |
| Other investments | | | | | | | | Portfolio Funds | — |
| | 8,078 |
| | 213,402 |
| | 221,480 |
| Lehman claims | — |
| | — |
| | 7,340 |
| | 7,340 |
| | $ | 2,006 |
| | $ | 12,406 |
| | $ | 220,742 |
| | $ | 235,154 |
|
The following table includes a rollforward of the amounts for the three and nine months ended September 30, 2012 and 2011 for financial instruments classified within level 3. The classification of a financial instrument within level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended September 30, 2012 and 2011 | | Operating Entities | | Consolidated Funds | | Common stocks | | Common stocks, sold not yet purchased | | Restricted Common Stock | | Warrants and Rights | | Warrants and Rights, sold not yet purchased | | Portfolio Funds | | Real estate | | Lehman claim | | Portfolio Funds | | Lehman claim | | (dollars in thousands) | Balance at June 30, 2012 | $ | 959 |
| | $ | — |
| | $ | — |
| | $ | 2,844 |
| | $ | 3 |
| | $ | 19,876 |
| | $ | 2,079 |
| | $ | 731 |
| | $ | 209,507 |
| | $ | 6,538 |
| Transfers in | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Transfers out | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Purchases/(covers) | 2,000 |
| | — |
| | — |
| | 341 |
| | — |
| | 320 |
| | — |
| | — |
| | — |
| | — |
| (Sales)/short buys | — |
| | — |
| | — |
| | — |
| | — |
| | (361 | ) | | — |
| | — |
| | (19,233 | ) | | — |
| Realized gains (losses) | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (48 | ) | | — |
| | — |
| | 182 |
| | — |
| Unrealized gains (losses) | 1 |
| | — |
| | — |
| | 877 |
| | — |
| | 706 |
| | 23 |
| | 30 |
| | (2,659 | ) | | 322 |
| Balance at September 30, 2012 | $ | 2,960 |
| | $ | — |
| | $ | — |
| | $ | 4,062 |
| | $ | — |
| | $ | 20,493 |
| | $ | 2,102 |
| | $ | 761 |
| | $ | 187,797 |
| | $ | 6,860 |
| | | | | | | | | | | | | | | | | | | | | Balance at June 30, 2011 | $ | 953 |
| | $ | — |
| | $ | 5,000 |
| | $ | 3,534 |
| | $ | — |
| | $ | 17,744 |
| | $ | 2,289 |
| | $ | 501 |
| | $ | 239,588 |
| | $ | 7,320 |
| Transfers in | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Transfers out | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Purchases/(covers) | 19 |
| | — |
| | — |
| | 40 |
| | — |
| | 7,356 |
| | 17 |
| | — |
| | 1 |
| | — |
| (Sales)/short buys | (135 | ) | | — |
| | (4,857 | ) | | (36 | ) | | — |
| | (11,648 | ) | | (1 | ) | | — |
| | (16,320 | ) | | — |
| Realized gains (losses) | 135 |
| | — |
| | (143 | ) | | — |
| | — |
| | 1 |
| | — |
| | — |
| | 68 |
| | — |
| Unrealized gains (losses) | (160 | ) | | — |
| | — |
| | (2,184 | ) | | — |
| | 456 |
| | 2 |
| | — |
| | (4,181 | ) | | (125 | ) | Balance at September 30, 2011 | $ | 812 |
| | $ | — |
| | $ | — |
| | $ | 1,354 |
| | $ | — |
| | $ | 13,909 |
| | $ | 2,307 |
| | $ | 501 |
| | $ | 219,156 |
| | $ | 7,195 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended September 30, 2012 and 2011 | | Operating Entities | | Consolidated Funds | | Common
stocks | | Common stocks, sold not yet purchased | | Restricted
Common
Stock | | Warrants
and
Rights | | Warrants and Rights, sold not yet purchased | | Portfolio
Funds | | Real
estate | | Lehman
claim | | Portfolio
Funds | | | Lehman
claim | | (dollars in thousands) | Balance at December 31, 2011 | $ | 1,069 |
| | $ | — |
| | $ | — |
| | $ | 1,534 |
| | $ | — |
| | $ | 16,919 |
| | $ | 2,353 |
| | $ | 553 |
| | $ | 213,402 |
| | | $ | 7,340 |
| Transfers in | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 16,227 |
| (a) | | — |
| Transfers out | — |
| | — |
| | — |
| | (88 | ) | (b) | (1,004 | ) | (c) | — |
| | — |
| | — |
| | (17,151 | ) | (a) | | — |
| Purchases/(covers) | 2,000 |
| | — |
| | — |
| | 623 |
| | (306 | ) | | 3,171 |
| | 152 |
| | — |
| | 434 |
| | | — |
| (Sales)/short buys | (6 | ) | | — |
| | — |
| | (65 | ) | | 982 |
| | (1,175 | ) | | (501 | ) | | — |
| | (24,259 | ) | | | (2,291 | ) | Realized gains (losses) | 6 |
| | — |
| | — |
| | 56 |
| | (38 | ) | | (41 | ) | | — |
| | — |
| | (1,510 | ) | | | 1,914 |
| Unrealized gains (losses) | (109 | ) | | — |
| | — |
| | 2,002 |
| | 366 |
| | 1,619 |
| | 98 |
| | 208 |
| | 654 |
| | | (103 | ) | Balance at September 30, 2012 | $ | 2,960 |
| | $ | — |
| | $ | — |
| | $ | 4,062 |
| | $ | — |
| | $ | 20,493 |
| | $ | 2,102 |
| | $ | 761 |
| | $ | 187,797 |
| | | $ | 6,860 |
| | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2010 | $ | 334 |
| | $ | — |
| | $ | 5,000 |
| | $ | 1,977 |
| | $ | — |
| | $ | 17,081 |
| | $ | 1,882 |
| | $ | 313 |
| | $ | 311,242 |
| | | $ | 6,243 |
| Transfers in | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | — |
| Transfers out | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | — |
| Purchases/(covers) | 678 |
| | (978 | ) | | — |
| | 105 |
| | — |
| | 43,929 |
| | 254 |
| | — |
| | 2 |
| | | — |
| (Sales)/short buys | (544 | ) | | 833 |
| | (4,857 | ) | | (84 | ) | | — |
| | (48,377 | ) | | (6 | ) | | — |
| | (97,244 | ) | | | — |
| Realized gains (losses) | 135 |
| | 145 |
| | (143 | ) | | 48 |
| | — |
| | 108 |
| | — |
| | — |
| | 2,444 |
| | | — |
| Unrealized gains (losses) | 209 |
| | — |
| | — |
| | (692 | ) | | — |
| | 1,168 |
| | 177 |
| | 188 |
| | 2,712 |
| | | 952 |
| Balance at September 30, 2011 | $ | 812 |
| | $ | — |
| | $ | — |
| | $ | 1,354 |
| | $ | — |
| | $ | 13,909 |
| | $ | 2,307 |
| | $ | 501 |
| | $ | 219,156 |
| | | $ | 7,195 |
|
(a) Change in consolidated funds (see Note 3b). (b) The security was listed on an exchange subsequent to a private funding. (c) The security began trading on an exchange due to a business combination. All realized and unrealized gains (losses) in the table above are reflected in other income (loss) in the accompanying condensed consolidated statements of operations. Certain assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables above. These include assets such as goodwill and intangibles. The Company recognizes all transfers at the beginning of the reporting period and related unrealized gain (loss) is also transferred at the beginning of the reporting period. Transfers between level 1 and 2 generally relate to whether the principal market for the security becomes active or inactive. Transfers between level 2 and 3 generally relate to whether significant relevant observable inputs are available for the fair value measurements or due to change in liquidity restrictions for the investments. During the three and nine months ended September 30, 2012 and 2011, there were no transfers between level 1 and level 2 assets and liabilities. The following table includes quantitative information as of September 30, 2012 for financial instruments classified within level 3. The table below quantifies information about the significant unobservable inputs used in the fair value measurement of the Company's level 3 financial instruments. | | | | | | | | | | | | Quantitative Information about Level 3 Fair Value Measurements | | Fair Value at September 30, 2012 | | Valuation techniques | | Unobservable Inputs | | Range (weighted average) | | | | | | | | | Common stocks | $ | 2,960 |
| | Discounted cash flows, market multiples, recent transactions, bid levels, and comparable transactions. | | Market multiples, valuation metric weights, and DCF discount rate. | | Valuation metric: 25%-100%. DCF discount rates: 15%-25%, Market multiples: 9x-10x | Warrants and rights | 4,062 |
| | Model based | | Volatility | | Volatility: 20% to 40% | Real estate | 275 |
| | Market approach, income approach, and replacement cost. | | Capital rate, DCF discount rate, net operating income, and replacement cost assumptions. | | Capital rate: 4.99% to 8.75% | Lehman claim | 761 |
| | Discounted cash flows and market quotes. | | Projected cash flows and DCF discount rate. | | Timing of projected cash flow: 9 months. DCF discount rate: 15% | | $ | 8,058 |
| | | | | | | Other level 3 assets and liabilities (a) | 216,977 |
| | | | | | | Total level 3 assets and liabilities | $ | 225,035 |
| | | | | | |
| | (a) | Quantitative disclosures of unobservable inputs and assumptions are not required for investments for which NAV per share is used as a practical expedient to determine fair value, as their redemption features rather than observability of inputs cause them to be classified as a level 3 type asset within the fair value hierarchy. In addition, the fair value of the Consolidated Funds' investments are determined based on net asset value and therefore quantitative disclosures are not included in the table above. |
The Company has established valuation policies and procedures and an internal control infrastructure over its fair value measurement of financial instruments which includes ongoing oversight by the valuation committee as well as periodic audits performed by the Company's internal audit group. The valuation committee is comprised of senior management, including non-investment professionals, who are responsible for overseeing and monitoring the pricing of the Company's investments, including the review of the results of the independent price verification process, approval of new trading asset classes and use of applicable pricing models and approaches. The US GAAP fair value leveling hierarchy is designated and monitored on an ongoing basis. In determining the designation, the Company takes into consideration a number of factors including the observability of inputs, liquidity of the investment and the significance of a particular input to the fair value measurement. Designations, models, pricing vendors, third party valuation providers and inputs used to derive fair market value are subject to review by the valuation committee and the internal audit group. The Company reviews its valuation policy guidelines on an ongoing basis and may adjust them in light of, improved valuation metrics and models, the availability of reliable inputs and information, and prevailing market conditions. The Company reviews a daily profit and loss report, as well as other periodic reports, and analyzes material changes from period-to-period in the valuation of its investments as part of its control procedures. The Company also performs back testing on a regular basis by comparing prices observed in executed transactions to previous valuations. The fair market value for level 3 securities may be highly sensitive to the use of industry standard models, unobservable inputs and subjective assumptions. The degree of fair market value sensitivity is also contingent upon the subjective weight given to specific inputs and valuation metrics. The Company holds various equity and debt instruments where different weight may be applied to industry standard models representing standard valuation metrics such as: discounted cash flows, market multiples, comparative transactions, capital rates, recovery rates and timing, and bid levels. Generally, changes in the weights ascribed to the various valuation metrics and the significant unobservable inputs in isolation may result in significantly lower or higher fair value measurements. Volatility levels for warrants and options are not readily observable and subject to interpretation. Changes in capital rates, discount rates and replacement costs could significantly increase or decrease the valuation of the real estate investments. The interrelationship between unobservable inputs may vary significantly amongst level 3 securities as they are generally highly idiosyncratic. Significant increases (decreases) in any of those inputs in isolation can result in a significantly lower (higher) fair value measurement. |