Transition Overlay

Parametric’s Transition Overlay solutions allow investors to maintain market exposure seamlessly throughout transition events to reduce policy risk and increase expected return.

Institutional investors have periodic transition events that produce a gap in their portfolio exposures. These may result from manager terminations, large contributions, or asset-allocation changes. Transition Overlay seeks to help institutions maintain market exposure, lower performance risk, and increase expected returns during transition events.

Investing in an overlay program involves risk. All investments are subject to loss. Learn more.

Derivatives such as futures, swaps, and other investment strategies have certain disadvantages and risks. Futures require the posting of initial and variation margin; therefore, a portion of risk capital must be preserved for this purpose rather than being allocated to a manager. Liquid futures may not exist for published benchmarks, which may result in tracking error. Also, some intraperiod mispricing may occur. Swaps require periodic payments, may be less liquid than futures, and may have counterparty or credit risk. Some investment strategies require a cash investment equal to the desired amount of exposure.

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How it works

Before implementing a Transition Overlay, we collaborate with our client to create a transition plan for manager changes, asset-allocation adjustments, exposure changes, and updated portfolio targets. We create a transition plan through a three-step process:

number 1

Plan

We work with the investor to determine which asset class exposures will be affected, select the most appropriate investment instruments, and discuss trade timing.

number 2

Add transition overlay

We coordinate with other asset managers to align the timing of their physical position sales with Transition Overlay position purchases.

number 3

Remove transition overlay

The transition ends when the new fund manager is funded. Parametric then sells the Transition Overlay position in tandem and completely removes the market exposure.

Intended benefits of Transition Overlay