ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking Statements
Throughout this quarterly report on Form 10-Q, the Company may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to, among other things, such matters as anticipated operating results, prospects for achieving the critical threshold of assets under management, technological developments, economic trends (including interest rates and market volatility), expected transactions and acquisitions and similar matters. The words "expect", "estimate", "may", "intend", and similar expressions identify forward-looking statements that speak only as of the date thereof. While the Company believes that the assumptions underlying its forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and accordingly, the actual results and experiences of the Company could differ materially from the anticipated results or other expectations expressed by the Company in its forward-looking statements. Factors that could cause such actual results or experiences to differ from results discussed in the forward-looking statements include, but are not limited to: the adverse effect from a decline in the securities markets; a decline in the performance of the Company's products; changes in interest rates; a general downturn in the economy; changes in government policy and regulation, including monetary policy; changes in the Company's ability to attract or retain key employees; unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations; and other risks identified from time-to-time in the Company's other public documents on file with the SEC. General
Diamond Hill Investment Group, Inc. (the "Company"), an Ohio corporation organized in 1990, derives its consolidated revenue and net income from investment advisory services provided by its subsidiary Diamond Hill Capital Management, Inc. ("DHCM"). DHCM is a registered investment adviser under the Investment Advisers Act of 1940 providing investment advisory services to individuals and institutional investors through the Diamond Hill sponsored mutual funds, separate accounts, and private investment funds (generally known as "hedge funds"). The Company was first incorporated in April 1990. During the first quarter of 2008, the Company incorporated two new subsidiaries, Beacon Hill Fund Services, Inc. ("BHFS") and BHIL Distributors, Inc. ("BHIL") to collectively operate as Beacon Hill. Beacon Hill will provide certain fund administration services and distribution services to small to mid size mutual funds, including Diamond Hill Funds.
In this section, the company discusses and analyzes the consolidated results of operations for the three and nine month periods ending September 30, 2008 and 2007 and other factors that may affect future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to the Consolidated Financial Statements, and Selected Financial Data.
The Company's revenue is derived primarily from investment advisory and administration fees received from Diamond Hill Funds and investment advisory and performance incentive fees received from separate accounts and private investment funds. Investment advisory and administration fees paid to the Company are based primarily on the value of the investment portfolios managed by the Company and fluctuate with changes in the total value of the assets under management. Such fees are recognized in the period that the Company manages these assets. Performance incentive fees are generally 20% annually on the amount of client investment performance in excess of a 5% annual return hurdle. Because performance incentive fees are based primarily on the performance of client accounts, they will be volatile from period to period. The Company's major expense is employee compensation and benefits.

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Assets Under Management As of September 30, 2008, assets under management ("AUM") totaled $5.5 billion, a 27% increase in comparison to September 30, 2007. Revenues are highly dependant on both the value and composition of AUM. The following is a summary of the firm's AUM by product and objective as of September 30, 2008 and 2007 and a roll-forward of AUM growth for the nine months ended September 30, 2008 and 2007: Assets Under Management by Product As of September 30, (in millions) 2008 2007 % Change Mutual funds $ 3,864 $ 2,889 34 % Separate accounts 1,315 1,000 32 % Private investment funds 369 491 -25 % Total $ 5,548 $ 4,380 27 % Assets Under Management by Objective As of September 30, (in millions) 2008 2007 % Change Small and Small-Mid Cap $ 582 $ 660 -12 % Large Cap and Select 1,422 1,028 38 % Long-Short 3,363 2,394 40 % Strategic and fixed income 181 298 -39 % Total $ 5,548 $ 4,380 27 % Change in Assets Under Management For the Nine Months Ended September 30, (in millions) 2008 2007 AUM at beginning of the period $ 4,403 $ 3,708 Net cash inflows (outflows) mutual funds 1,482 347 separate accounts 545 51 private investment funds (73 ) 174 1,954 572 Net market appreciation (depreciation) and income (809 ) 100 Increase during the period 1,145 672 AUM at end of the period $ 5,548 $ 4,380