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 condensed consolidated statements of financial condition by caption and by level within the valuation hierarchy as of March 31, 2018 and December 31, 2017:



	Assets at Fair Value as of March 31, 2018
	Level 1			Level 2			Level 3			Total
				(dollars in thousands)
Operating Entities
Securities owned
US Government securities	$	1,791		$	—		$	—		$	1,791
Preferred stock	1,547			2,033			8,817			12,397
Common stocks	489,041			3,716			7,400			500,157
Convertible bonds	—			—			—			—
Corporate bonds	—			11,659			—			11,659
Trade claims	—			—			5,955			5,955
Warrants and rights	10,079			—			1,702			11,781
Receivable on derivative contracts, at fair value
Futures	748			—			—			748
Currency forwards	—			520			—			520
Swaps	—			1,631			—			1,631
Options	31,216			798			—			32,014
Other investments
Lehman claim	—			—			312			312
Consolidated Funds
Securities owned
US Government securities	5,567			3,259			—			8,826
Preferred stock	—			—			11,893			11,893
Common stocks	75,001			6,458			50			81,509
Warrants and rights	—			—			5,254			5,254
Receivable on derivative contracts, at fair value
Currency forwards	—			4			—			4
Equity swaps	—			1,407			—			1,407
Options	455			—			—			455
	$	615,445		$	31,485		$	41,383		$	688,313
Percentage of total assets measured at fair value on a recurring basis	89.4		%	4.6		%	6.0		%
Portfolio funds measured at net asset value (a)										111,810
Consolidated funds' portfolio funds measured at net asset value (a)										376,886
Equity method investments										45,171
Total investments										$	1,222,180



	Liabilities at Fair Value as of March 31, 2018
	Level 1			Level 2			Level 3			Total
	(dollars in thousands)
Operating Entities
Securities sold, not yet purchased
Common stocks	$	252,585		$	—		$	—		$	252,585
Corporate bonds	—			1,287			—			1,287
Preferred stock	450			—			—			450
Warrants and rights	7,264			—			—			7,264
Payable for derivative contracts, at fair value
Futures	209			—			—			209
Currency forwards	—			620			—			620
Swaps	—			623			—			623
Options	26,028			—			21,395			47,423
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	—			166			—			166
Options	154			—			—			154
Equity swaps	—			1,660			—			1,660
	$	286,690		$	4,356		$	24,835		$	315,881
Percentage of total liabilities measured at fair value	90.8		%	1.4		%	7.9		%

(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 condensed 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 March 31, 2018 can range from $0.1 million to $15.0 million.



	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
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		%

(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.

The following table includes a roll forward of the amounts for the three months ended March 31, 2018 and 2017 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 March 31, 2018
	Balance at December 31, 2017		Transfers in		Transfers out				Purchases/(covers)		(Sales)/shorts			Realized and Unrealized gains/losses			Balance at March 31, 2018		Change in unrealized gains/losses relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	8,115	$	—	$	—			$	1,415	$	(478	)	$	(235	)	$	8,817	$	486
Common stocks	7,570		—		—				310		(133		)	(347		)	7,400		412
Convertible bonds	282		—		—				—		(307		)	25			—		—
Options, asset	1,455		—		—				—		(1,455		)	—			—		—
Options, liability	22,401		—		—				—		—			(1,006		)	21,395		1,006
Warrants and rights	2,517		—		—				—		—			(815		)	1,702		510
Trade claims	5,950		—		—				—		—			5			5,955		5
Lehman claim	301		—		—				—		—			11			312		12
Contingent consideration liability	3,440		—		—				—		—			—			3,440		—
Consolidated Funds
Preferred stock	50,445		—		(38,552		)	(a)	—		—			—			11,893		—
Common stocks	50		—		—				—		—			—			50		—
Warrants and rights	3,568		—		(20		)	(a)	—		—			1,706			5,254		1,706



	Three Months Ended March 31, 2017
	Balance at December 31, 2016		Transfers in			Transfers out		Purchases/(covers)		(Sales)/shorts			Realized and Unrealized gains/losses			Balance at March 31, 2017		Change in unrealized gains/losses relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	15,811	$	—		$	—	$	1,732	$	(31	)	$	(996	)	$	16,516	$	(996	)
Common stocks	10,121		—			—		31		(52		)	404			10,504		404
Convertible bonds	250		—			—		—		—			—			250		—
Options, asset	14,753		—			—		—		—			(7,782		)	6,971		(7,782		)
Options, liability	14,753		—			—		—		—			(7,782		)	6,971		(7,782		)
Warrants and rights	3,719		451		(b)	—		—		—			(31		)	4,139		(31		)
Trade Claims	562		—			—		—		(70		)	211			703		190
Lehman claim	265		—			—		—		—			32			297		32
Contingent consideration liability	5,997		—			—		—		(167		)	(556		)	5,274		(556		)
Consolidated Funds
Preferred stock	36,928		—			—		—		—			3,387			40,315		3,887
Common stock	295		—			—		—		—			1			296		1
Warrants and rights	3		—			—		—		—			(1		)	2		(1		)
Term Loan	657		—			—		—		—			54			711		54

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

(a) The Company deconsolidated a fund (See note 3)

(b) The Company received warrants as consideration as part of an investment banking transaction.

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.

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 three months ended March 31, 2018 and 2017, there were no transfers between level 1 and level 2 assets and liabilities.

The following table includes quantitative information as of March 31, 2018 and December 31, 2017 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 March 31, 2018		Valuation techniques	Unobservable Inputs	Range
Level 3 Assets	(dollars in thousands)
Common and preferred stocks	$	3,411	Guideline companies/Discounted cash flows	Discount rate Market multiples	50% 4.5x to 8.5x
Trade claims	72		Discounted cash flows	Discount rate	20%
Warrants and rights	1,702		Model based Discounted cash flows	Discount rate	8%-9%
Other level 3 assets (a)	36,198
Total level 3 assets	41,383
Level 3 Liabilities
Options	21,395		Option pricing models	Volatility	30%-37%
Contingent consideration liability	3,440		Discounted cash flows	Projected cash flow and discount rate	8% - 23% (weighted average 22%)
Total level 3 liabilities	$	24,835



	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


(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 March 31, 2018 and December 31, 2017, 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.



	March 31, 2018						December 31, 2017						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	$	117,680		$	117,680		$	130,052		$	130,052		Level 1
Cash collateral pledged	14,786			14,786			17,888			17,888			Level 2
Segregated cash	131,444			131,444			116,268			116,268			Level 1
Securities borrowed	598,090			577,017			443,148			414,763			Level 2
Loans receivable	36,186			36,186		(d)	37,993			37,993		(d)	Level 3
Consolidated funds
Cash and cash equivalents	3,666			3,666			21,988			21,988			Level 1
Financial Liabilities
Securities loaned	462,854			445,271			456,831			440,162			Level 2
Convertible debt	142,962		(a)	171,720		(b)	141,502		(a)	172,709		(b)	Level 2
Notes payable and other debt	260,244			180,489		(c)	173,458			182,352		(c)	Level 2


(a)	The carrying amount of the convertible debt includes an unamortized discount of $25.8 million and $25.6 million as of March 31, 2018 and December 31, 2017, 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.