Forex Managed Accounts

A Closer Look At Forex Managed Accounts

Below we will take a closer look at a Forex managed account program, as described on the ForexFunds.com website, unlike a Forex hedge fund, a managed account is fully disclosed with the funds remaining under the name of the investor and held by a preferably regulated brokerage, and control is given to the manager based on a limited power of attorney which only provides authorization for trading (not for withdrawing/depositing or transferring funds).The importance of conducting through due diligence cannot be understated, as there are numerous funds and managed account programs competing to attract investor capital. However, funds vary along with the strategies and managers that aim to execute them.Moreover, as an example, with the advent of social media trading platforms, and social copy trading technologies, many traders want to be managers or tout their performance to the masses, however such cherry picked performances from newbie or even experienced traders can be riddled with other reporting biases.

Investigating Which Managed Account To Choose?

Investors should always expect that a professional managed account program should include a detailed disclosure document or fund prospectus accompanying any serious program.

Whereas performance only records, or track records of hypothetical results should not be heavily relied upon.Therefore, once due diligence is conducted and a decision reached, the investment into a fund can be made with realistic expectations and an understanding of the material risks involved both quantitatively and from a qualitative perspective.

Looking closer at the types of Forex managed accounts and how such authorization is provided by investors to managers, we can see that through the LPOA or Limited Power of Attorney, the investor authorizes the professional FX trader to trade the funds in the FX market, once the invested funds are placed in the “master block”.

LPOA provides The Green Light to Start

The purpose of the LPOA is authorize the manager to managed the Investors account, and typically includes a fee schedule or commission rate that is agreed upon, which may include one or more of the following:

1] Management Fee: This is charged monthly, and calculated yearly based on a percentage of assets under management paid as a management fee by the investor to the manager.

2] Performance Fee: This is charged monthly, and calculated only on any net-new profits that have caused the investors equity to reach a new high water-mark over previous level (i.e. only on new profits that cause an increase, and not just a recovery over prior losses).

3] Commission Fee: This is charged either in real-time per trade, or applied to all trades at the end of the month, for the prior month, and typically is a fixed $ amount tied to either trade volume or per order (i.e. $100 per $1,000,000 worth of securities traded, or $20 per 100,000 units of currency traded,etc..).

Fees are Agreed Before Investing

Once fee’s have been agreed upon and the LPOA fully executed by all parties involved, a copy is provided to the brokerage which enables the authorization to be applied giving the manager access to trade the account and manage it, alongside other investors, if any, in the program.

As described on ForexFunds.com, unlike Forex Hedge Funds, which may also have certain advantages, a Forex managed account gives investors more transparency, full safety and total control.

At all times, the investor can inspect their daily trading activities and check their fund balances, as well as make cash deposits and withdrawals. They are not tied to a permanent binding agreement with the trader, and can revoke the LPOA at any time.  Hence, they can back out anytime they wish to, in any case that they are not satisfied with their trader.

Reporting is Transparent, and Allocations Will Depend on Systems Used

Forex managed accounts are structure in several ways for managers to be able to trade on behalf of all investors by focusing on one master account, that instantly allocates the master trade to all participants, in a manner proportional to their respective holdings. This can be done via a percentage allocation, an allocation of trade size, or the ability for the manage to trade the accounts directly in parallel without the need for allocations, under some limitations, such as in the following examples:

1. PAMM (Percent Allocation Management Module) – This software helps the trader to distribute the gains, losses and fees to be spread out on an even percentage. The purpose of spreading out is to create a more even return for the FX investments.

2. LAMM (Lot Allocation Management Module) – This program aids the trader in allocating trade lots for each investor account. It is more advantageous in utilizing various leverages for investors with varying investment styles.

3. MAM (Multi Account Manager) – This combines the capabilities of PAMM and LAMM. However, investor participation in managing his trading account is lesser, given that its automated features allows greater flexibility for the trader to manage investor accounts.

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