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 accompanying consolidated statements of financial condition by caption and by level within the valuation hierarchy as of December 31, 2017 and 2016:



	Assets at Fair Value as of December 31, 2017
	Level 1			Level 2			Level 3			Total
				(dollars in thousands)
Operating Entities
Securities owned
US Government securities	$	2,807		$	—		$	—		$	2,807
Preferred stock	571			918			8,115			9,604
Common stocks	627,011			5,484			7,570			640,065
Convertible bonds	—			—			282			282
Corporate bonds	—			4,909			—			4,909
Trade claims	—			—			5,950			5,950
Warrants and rights	7,087			—			2,517			9,604
Receivable on derivative contracts, at fair value
Futures	58			—			—			58
Currency forwards	—			5			—			5
Swaps	—			10,942			—			10,942
Options	56,717			—			1,455			58,172
Other investments
Lehman claim	—			—			301			301
Consolidated Funds
Securities owned
US Government securities	30,552			3,649			—			34,201
Preferred stock	—			—			50,445			50,445
Common stocks	77,652			—			50			77,702
Warrants and rights	—			—			3,568			3,568
Receivable on derivative contracts, at fair value
Currency forwards	—			524			—			524
Equity swaps	—			1,754			—			1,754
Options	242			—			—			242
	$	802,697		$	28,185		$	80,253		$	911,135
Percentage of total assets measured at fair value on a recurring basis	88.1		%	3.1		%	8.8		%
Portfolio funds measured at net asset value (a)										100,148
Consolidated funds' portfolio funds measured at net asset value (a)										374,111
Equity method investments										41,099
Total investments										$	1,426,493



	Liabilities at Fair Value as of December 31, 2017
	Level 1			Level 2			Level 3			Total
	(dollars in thousands)
Operating Entities
Securities sold, not yet purchased
Common stocks	$	342,328		$	—		$	—		$	342,328
Corporate bonds	—			122			—			122
Preferred stock	77			—			—			77
Warrants and rights	—			—			—			—
Payable for derivative contracts, at fair value
Futures	242			—			—			242
Currency forwards	—			874			—			874
Swaps	—			71			—			71
Options	19,162			—			22,401			41,563
Accounts payable, accrued expenses and other liabilities
Contingent consideration liability (b)	—			—			3,440			3,440
Consolidated Funds
Payable for derivative contracts, at fair value
Currency forwards	—			11			—			11
Options	77			—			—			77
Equity swaps	—			7,042			—			7,042
	$	361,886		$	8,120		$	25,841		$	395,847
Percentage of total liabilities measured at fair value	91.4		%	2.1		%	6.5		%

(a) In accordance with US GAAP, certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated statement of financial condition.

(b) In accordance with the terms of the purchase agreements for acquisitions that closed during the third and fourth quarter of 2015 and the second quarter of 2016, the Company is required to pay to the sellers a portion of future net income and/or revenues of the acquired businesses, if certain targets are achieved through the periods ended December 2018, December 2020, and June 2018, respectively. The Company estimated the contingent consideration liability using the income approach (discounted cash flow method) which requires the Company to make estimates and assumptions regarding the future cash flows and profits. Changes in these estimates and assumptions could have a significant impact on the amounts recognized. The undiscounted amounts as of December 31, 2017 can range from $0.1 million to $15.0 million.



	Assets at Fair Value as of December 31, 2016
	Level 1			Level 2			Level 3			Total
				(dollars in thousands)
Operating Entities
Securities owned
US Government securities	$	3,780		$	—		$	—		$	3,780
Preferred stock	—			—			15,811			15,811
Common stocks	658,179			1,355			10,121			669,655
Convertible bonds	—			—			250			250
Corporate bonds	—			2,477			—			2,477
Trade claims	—			—			562			562
Warrants and rights	4,616			—			3,719			8,335
Mutual funds	6			—			—			6
Receivable on derivative contracts, at fair value
Futures	104			—			—			104
Currency forwards	—			592			—			592
Swaps	—			468			—			468
Options	6,662			322			14,753			21,737
Other investments
Lehman claim	—			—			265			265
Consolidated Funds
Securities owned
US Government securities	6,994			—			—			6,994
Preferred stock	—			415			36,928			37,343
Common stocks	19,467			8,712			295			28,474
Corporate bonds	—			4,214			—			4,214
Warrants and rights	—			—			3			3
Term loan	—			1,552			657			2,209
Receivable on derivative contracts, at fair value
Currency forwards	—			18			—			18
Equity swaps	—			731			—			731
Options	132			12			—			144
	$	699,940		$	20,868		$	83,364		$	804,172
Percentage of total assets measured at fair value on a recurring basis	87.0		%	2.6		%	10.4		%
Portfolio funds measured at net asset value (a)										120,023
Consolidated funds' portfolio funds measured at net asset value (a)										401,465
Equity method investments										36,991
Total investments										$	1,362,651



	Liabilities at Fair Value as of December 31, 2016
	Level 1			Level 2			Level 3			Total
	(dollars in thousands)
Operating Entities
Securities sold, not yet purchased
Common stocks	$	263,460		$	—		$	—		$	263,460
Corporate bonds	—			2,591			—			2,591
Warrants and rights	39			—			—			39
Payable for derivative contracts, at fair value
Futures	642			—			—			642
Swaps	—			181			—			181
Options	5,186			—			14,753			19,939
Accounts payable, accrued expenses and other liabilities
Contingent consideration liability (b)	—			—			5,997			5,997
Consolidated Funds
Securities sold, not yet purchased
Common stocks	211			—			—			211
Corporate bonds	—			672			—			672
Payable for derivative contracts, at fair value
Currency forwards	—			10			—			10
Options	67			—			—			67
Equity swaps	—			495			—			495
	$	269,605		$	3,949		$	20,750		$	294,304
Percentage of total liabilities measured at fair value	91.6		%	1.3		%	7.1		%

(b) In accordance with the terms of the purchase agreements for acquisitions that closed during 2012 and the third and fourth quarter of 2015, the Company is required to pay to the sellers a portion of future net income and/or revenues of the acquired businesses, if certain targets are achieved through the periods ended December 2018, and December 2020, respectively. The Company estimated the contingent consideration liability using the income approach (discounted cash flow method) which requires the Company to make estimates and assumptions regarding the future cash flows and profits. Changes in these estimates and assumptions could have a significant impact on the amounts recognized. The undiscounted amounts as of December 31, 2016 can range from $0.1 million to $15.1 million.

The following table includes a roll forward of the amounts for the year ended December 31, 2017 and 2016 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.



	Year Ended December 31, 2017
	Balance at December 31, 2016		Transfers in			Transfers out				Purchases/(covers)		(Sales)/shorts			Realized and Unrealized gains/losses			Balance at December 31, 2017		Change in unrealized gains/losses relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	15,811	$	—		$	(25,098	)	(a) (f)	$	25,785	$	(2,956	)	$	(5,427	)	$	8,115	$	486
Common stocks	10,121		—			—				2,670		(2,688		)	(2,533		)	7,570		(412		)
Convertible bonds	250		—			—				282		—			(250		)	282		—
Options, asset	14,753		—			—				—		—			(13,298		)	1,455		(13,298		)
Options, liability	14,753		—			—				—		—			7,648			22,401		7,648
Warrants and rights	3,719		2,173		(b) (d)	—				—		(4,118		)	743			2,517		510
Trade claims	562		—			—				5,865		(611		)	134			5,950		202
Lehman claim	265		—			—				—		—			36			301		36
Contingent consideration liability	5,997		—			—				—		(392		)	(2,165		)	3,440		(2,165		)
Consolidated Funds
Preferred stock	36,928		22,644		(f)	(13,668		)	(a)	8,437		(11,903		)	8,007			50,445		3,896
Common stocks	295		—			—				526		(848		)	77			50		—
Warrants and rights	3		—			—				—		—			3,565			3,568		3,565
Term Loan	657		—			—				202		(1,021		)	162			—		—



	Year Ended December 31, 2016
	Balance at December 31, 2015		Transfers in			Transfers out				Purchases/(covers)		(Sales)/shorts			Realized and Unrealized gains/losses			Balance at December 31, 2016		Change in unrealized gains/losses relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	12,872	$	—		$	(1,000	)	(a)	$	3,717	$	(218	)	$	440		$	15,811	$	34
Common stocks	2,278		—			—				7,099		(3,222		)	3,966			10,121		3,972
Convertible bonds	819		—			—				—		(569		)	—			250		—
Options, asset	18,194		—			—				—		—			(3,441		)	14,753		(3,441		)
Options, liability	18,194		—			—				—		—			(3,441		)	14,753		(3,441		)
Warrants and rights	2,572		—			—				1,914		(817		)	50			3,719		79
Trade Claims	—		675		(e)	—				289		(325		)	(77		)	562		(111		)
Lehman claim	299		—			—				—		—			(34		)	265		(35		)
Contingent consideration liability	6,158		—			—				2,397		(4,697		)	2,139			5,997		—
Consolidated Funds
Preferred stock	32,000		—			(11,000		)	(a)	13,483		—			2,445			36,928		2,445
Common Stock	—		—			—				314		—			(19		)	295		(19		)
Warrants and rights	—		—			—				—		—			3			3		3
Term Loan	—		—			—				590		—			67			657		67

(1) Unrealized gains/losses are reported in other income (loss) in the accompanying consolidated statements of operations.

(a) The investments were converted to common stock.

(b) The Company received warrants as part of a transaction.

(d) As part of the preferred stock sale, the sellers received contingent value rights to be paid in the event certain

milestones are reached.

(e) The investment undertook a reorganization and subsequently is not traded in an active market.

(f) The Company transferred investments to a consolidated fund.

All realized and unrealized gains (losses) in the table above are reflected in other income (loss) in the accompanying 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.

The Company recognizes all transfers and the related unrealized gain (loss) 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 years ended December 31, 2017 and 2016, there were no transfers between level 1 and level 2 assets and liabilities.

The following table includes quantitative information as of December 31, 2017 and 2016 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 December 31, 2017		Valuation techniques	Unobservable Inputs	Range
Level 3 Assets	(dollars in thousands)
Common and preferred stocks	$	5,642	Guideline companies/transaction price	Market multiples	4.8x to 8.5x
Trade claims	70		Discounted cash flows	Discount rate	20%
Warrants and rights	2,516		Model based Discounted cash flows	Volatility Discount rate	61% 22%
Options	1,455		Option pricing models	Volatility	28%
Other level 3 assets (a)	70,570
Total level 3 assets	80,253
Level 3 Liabilities
Options	22,401		Option pricing models	Volatility	28%
Contingent consideration liability	3,440		Discounted cash flows	Projected cash flow and discount rate	8% - 23% (weighted average 22%)
Total level 3 liabilities	$	25,841



	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at December 31, 2016		Valuation techniques	Unobservable Inputs	Range
Level 3 Assets	(dollars in thousands)
Common and preferred stocks	$	10,917	Guideline companies/transaction price Option pricing method, discounted cash flow	Volatility Market multiples Discount rate	37% 0.8x to 9.3x 9.5% to 10%
Trade claims	520		Discounted cash flows	Market multiples Discount rate	6x 20%
Warrants and rights	3,719		Model based	Volatility	30% to 85% (weighted average 73%)
Options	14,753		Option pricing models	Volatility	40%
Other level 3 assets (a)	53,455
Total level 3 assets	83,364
Level 3 Liabilities
Options	14,753		Option pricing models	Volatility	40%
Contingent consideration liability	5,997		Discounted cash flows	Projected cash flow and discount rate	8% - 25% (weighted average 23%)
Total level 3 liabilities	$	20,750


(a)	The quantitative disclosures exclude financial instruments for which the determination of fair value is based on prices from recent transactions.

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.

Other financial assets and liabilities

The following table presents the carrying values and fair values, at December 31, 2017 and 2016, of financial assets and liabilities and information on their classification within the fair value hierarchy which are not measured at fair value on a recurring basis. For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value see Note 3.



	December 31, 2017						December 31, 2016						Fair Value Hierarchy
	Carrying Amount			Fair Value			Carrying Amount			Fair Value			Fair Value Hierarchy
				(dollars in thousands)
Financial Assets
Operating companies
Cash and cash equivalents	$	130,052		$	130,052		$	110,990		$	110,990		Level 1
Cash collateral pledged	17,888			17,888			13,342			13,342			Level 2
Segregated cash	116,268			116,268			1,024			1,024			Level 1
Securities borrowed	443,148			414,763			—			—			Level 2
Loans receivable	37,993			37,993		(d)	31,088			31,088		(d)	Level 3
Consolidated funds
Cash and cash equivalents	21,988			21,988			17,761			17,761			Level 1
Financial Liabilities
Securities loaned	456,831			440,162			—			—			Level 2
Convertible debt	141,502		(a)	172,709		(b)	130,029		(a)	149,545		(b)	Level 2
Notes payable and other debt	173,458			182,352		(c)	77,030			80,817		(c)	Level 2


(a)	The carrying amount of the convertible debt includes an unamortized discount of $25.6 million and $17.8 million as of December 31, 2017 and 2016, respectively.


(b)	The convertible debt includes the conversion option and is based on the last broker quote available.


(c)	Notes payable and other debt are based on the last broker quote available.


(d)	The fair market value of level 3 loans is calculated using discounted cash flows.