Transition Management

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Transition management is a systematic, controlled process that utilizes all available sources of liquidity to simultaneously minimize the total cost while managing the overall risk of the transition.^[1]

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 spreads, 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. ^[2]

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.^[3]. Additionally, they may have specialist traders who handle illiquid securities.

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