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May 02, 2006 at 08:00 PM
NEW YORK (HedgeWorld.com)–A retirement system decides to fire a manager and invest with someone else. Or it is putting more money into alternative investments. Or it needs to liquidate assets to pay benefits.
Making such moves may not sound difficult, but as portfolios grow more complex it has become a challenge to implement decisions without incurring high costs and losing returns.
A growing number of banks and brokerages, including Goldman Sachs, are offering transition management services to plan sponsors. But the expansion in these services comes with conflict of interest concerns.
Managing transitions now requires portfolio skills as well as trading capabilities, said Nick Bonn, executive vice president at State Street Global Markets, part of the institutional asset management company.
He and State Street entered this niche early, starting in 1992. “The business has got quite a bit more sophisticated, especially in the last five years,” he said, talking at a briefing.
Assets need to be liquidated and reinvested in ways that minimize expenses and shield performance during the transition. For instance, a pension may make a large commitment to a private equity fund that requires infusions of capital over time in unpredictable amounts. The money has to be readily available, but keeping it in cash brings a meager return.
Instead, a derivative may be used to gain exposure to a market where returns look promising. The transition manager sets up the derivative and unwinds it as the private equity fund calls for capital.
The State Street group’s mandates for transitions in bond portfolios have been doubling annually in the past several years. Pensions see more need to get assistance as these portfolios become more complex. Mortgage-backed assets, junk paper, distressed debt–with illiquid securities, a specialized trading desk that knows where to find buyers and sellers can get better terms.
