Transition Management
Encyclopedia
Transition management is a service usually offered by sell side
institutions to help buy side
firms transition a portfolio of securities
. Various events including acquisitions
and management changes can cause the need for a portfolio to be transitioned. A typical example would be a mutual fund has decided to merge two funds into one larger fund. In doing this, large quantities of securities will need to be bought and sold. Another frequent occurrence is a firm wanting to liquidate a large portfolio. The process of doing this can be very expensive. The costs include commissions, market impact
, bid-offer spread
s, and opportunity costs.
A firm seeking to transition a portfolio will often look for an outside firm to perform the transition. Transition managers are generally able to transition the portfolio at a lower cost than what a firm could do internally. Companies offering transition management can also add value by helping plan the transition, managing risk during the transition, and generating reports after the transition. Such companies are often referred to as Transition companies
.
Transition managers have a number of methods to help transition a portfolio. Usually they are directly connected to multiple markets or liquidity centers. They can execute orders using algorithmic trading
, and thereby minimize market impact. Since they may be transitioning several different portfolios they can cross orders, reducing commission and exchange fees. Additionally, they may have specialist traders who handle illiquid securities.
A fiduciary-friendly recent trend has been to remove all conflicts of interest associated with transition management by "unbundling" advice from execution through the use of a transition or brokerage consultant. In this way, the adviser's sole possible interest is improving performance and lowering execution costs, rather than having a trader and adviser under the same roof.
Sell side
Sell side is a term used in the financial services industry. It is a general term that indicates a firm that sells investment services to asset management firms, typically referred to as the buy side, or corporate entities...
institutions to help buy side
Buy side
Buy-side is a term used in investment banking to refer to advising institutions concerned with buying, rather than selling, assets or securities...
firms transition a portfolio of securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
. Various events including acquisitions
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
and management changes can cause the need for a portfolio to be transitioned. A typical example would be a mutual fund has decided to merge two funds into one larger fund. In doing this, large quantities of securities will need to be bought and sold. Another frequent occurrence is a firm wanting to liquidate a large portfolio. The process of doing this can be very expensive. The costs include commissions, market impact
Market impact
In financial markets, market impact is the effect that a market participant has when it buys or sells an asset. It is the extent to which the buying or selling moves the price against the buyer or seller, i.e. upward when buying and downward when selling...
, bid-offer spread
Bid-offer spread
The bid–offer spread for securities is the difference between the prices quoted for an immediate sale and an immediate purchase...
s, and opportunity costs.
A firm seeking to transition a portfolio will often look for an outside firm to perform the transition. Transition managers are generally able to transition the portfolio at a lower cost than what a firm could do internally. Companies offering transition management can also add value by helping plan the transition, managing risk during the transition, and generating reports after the transition. Such companies are often referred to as Transition companies
Transition companies
Transition companies are professional mergers and acquisitions companies that assist middle market business owners in the transition from one person’s ownership to another...
.
Transition managers have a number of methods to help transition a portfolio. Usually they are directly connected to multiple markets or liquidity centers. They can execute orders using algorithmic trading
Algorithmic trading
In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the...
, and thereby minimize market impact. Since they may be transitioning several different portfolios they can cross orders, reducing commission and exchange fees. Additionally, they may have specialist traders who handle illiquid securities.
A fiduciary-friendly recent trend has been to remove all conflicts of interest associated with transition management by "unbundling" advice from execution through the use of a transition or brokerage consultant. In this way, the adviser's sole possible interest is improving performance and lowering execution costs, rather than having a trader and adviser under the same roof.