Managed Forex Accounts
If you want to enjoy all the benefit of trading forex, but you’re not ready to take on the responsibility of live trading, a managed forex account is for you.
Managed forex accounts mean that a manager will handle trading for you. A manager is like an investment advisor, except that in forex, the manager will simply make trades without discussing them with you – there’s no time in the forex market for the kind of discussion that goes on between an investment advisor and a client about a potential stock market investment.
There is a great deal of variety of terms in managed forex accounts, and you should look carefully at any contract that is proposed by a broker or other professional. If your manager is located where you live, he/she must be licensed – never work with a local manager who is not! But, if your manager is in London, and you’re in Poughkeepsie, that manager is not legally required to have a license.
But, unless you have total confidence in any manager, wherever they may be, make sure he/she is licensed by the local financial authorities. It’s a just a way of making sure you and your money are not easily parted.
You should understand that the manager will not just trade your account by itself. The manager will integrate it into a fund which will allow maximizing trading value. You can, however, choose the level of risk you wish to accept, and the manager will take a percentage of your earnings based, in part, on that risk level.
You should understand that managers take significant percentages as fees, with the best managers charging fees of between 20 percent to 30 percent of profit. These managers promise, thanks to their past record, to justify earning such large percentage with high levels of performance.
Your broker will often help you to choose a manager, working with you to pick the one closest to your needs and most appropriate for your available funds.
Choosing an Account Manager
When choosing a manager for your forex account, you should first ask the manager to explain his/her strategy and to show evidence of repeated success in trading.
Then you can check an objective benchmark for the manager, called the Calmar Ratio, (California Managed Accounts Reports). It shows the extent to which a fund's portfolio has gained or lost value, as expressed as a percentage. It's calculated by taking a hedge fund's average annual rate of return, typically over a three year period, and dividing it by the fund's maximum drawdown — this is a measure of the fund's maximum loss from its peak value. It is calculated by subtracting the fund's lowest value from its peak value and then dividing that figure by the peak value.
The Calmar will show with a high degree of accuracy just how well that manager’s fund is doing. Although it was invented for judging hedge fund performance, it applies with great precision to forex funds as well.
Types of Managed Forex Accounts
There are three basic types of managed forex accounts, apart from the most basic one in which funds are simply made available to the manager:
· The Multi-Account Manager (MAM) Account enables the manager to run multiple trading accounts using a single terminal. With MAM accounts, individual accounts are combined into a fund. The investor decides how his/her specific account is integrated into that fund, and that determines the investments made. Individual trading accounts are free to modify MAM trades according to their preferences. The performance fee is paid to the master trader according to his performance and as a percentage of the returns. MAM account is an advanced type of managed account that offers excellent control for an investor, although the risk level is higher and that means you’ll need confidence in your trading abilities.
· Percentage Allocation Management Module (PAMM) Accounts offer greater investor involvement in trading with the advantages of management. With PAMM accounts, investors copy trades from a master account, then execute them themselves. PAMM accounts allow investors to choose from different manager styles and strategies. This means they can diversify their trading without tying themselves down to a single strategy. PAMM account trading means that one strategy can even be used to hedge against another.
· Lot Allocation Management Module (LAMM) Accounts allow the investor to select the number of lots being traded by the manager, and the percentage of profit or loss depends on that amount. The idea is to reduce trading risks and to maintain liquidity. The manager doesn't have to worry about the number of investors connected to the account as he/she only trades using his own funds. Investors can choose the amount of funds per trade and monitor every trade being copied. And the investor can work with as many managers as he/she wishes, to benefit from diversification and to sample different strategies.