Everything You Need to Know About Managed Forex Accounts

Everything You Need to Know About Managed Forex Accounts

Becoming a successful trader is no easy task. In fact, 80% of all day traders quit within the first two years because they lack the qualities and know-how needed to make a profit consistently.

But, what if there was another way that enabled you to generate profits by leveraging other traders’ expertise? Well, thanks to brokerages now providing managed forex accounts, investors can now take advantage of skilled money managers to trade on their behalf for a small fee.

Curious? Well, carry on reading, and we’ll dive into exactly how managed forex accounts work and how you can use them to your advantage.

What is a managed forex account?

A managed forex account enables a professional money manager to trade on behalf of the client for a fee. This type of account means the client doesn’t have to make their own trading decisions, which can be particularly beneficial if they don’t have much trading knowledge or expertise.

Trading takes a significant amount of time investment and a high-level understanding of financial markets, so using a money manager can be a great way to passively grow your money over the long run and save you unnecessary stress.

However, it’s highly important that those wishing to utilise a money manager choose one who has proven experience and verifiable results. Managed forex accounts can be susceptible to scams, and it’s critical you do your due diligence before you hand over any money.

Characteristics of a managed forex account

There are some key characteristics to a managed forex account that all investors should be aware of. These include:

  • All managed accounts are designed to relieve the client from making any trading-related decisions.
  • At most brokerage companies, client funds will be pooled together to enable the money manager to trade from a master account. This is done to enable the manager to trade with a larger volume and generate maximum trading value.
  • Each clients account is segregated and there is no relationship between the money managers account and the clients’ account.
  • When a client decides to engage in a managed forex account, they must sign a Limited Power of Attorney Agreement (LPOA) between themselves and the money manager. The LPOA will be provided by the broker.
  • Although money managers make the trading decisions, clients can disclose the level of risk they wish their money manager to take.
  • All clients have full control over their funds*. They can deposit or withdraw whenever they wish, without intervention from the money manager (note that some brokers require for all positions to be closed before processing a withdrawal or even ending an LPOA).
  • A money manager does not have to discuss with the client the trades they are executing.
  • All managed forex accounts will incur a fee. It varies from broker to broker, but you can expect to pay between 20 to 30 per cent on the profit you receive (it will obviously depend on the manager that you choose).

*Some brokers do not instantly remove funds when a withdrawal request is made and some AMs will place pending orders.  This means there will not always be a way to prevent an issue, other than telling the AM about the planned withdrawal in advance.

Different Types of managed forex accounts

There are four different types of managed forex accounts that investors can take advantage of. These include:

  • Percentage Allocation Management Module (PAMM) Accounts

PAMM accounts are the most popular form of managed forex accounts among investors. PAMM providers allow managers to set up a trading strategy that investors can choose to follow and invest in.

Investors can choose from a range of different styles and strategies. They also don’t have to settle on one strategy, rather they can take advantage of multiple strategies if they wish to diversify their portfolio.

Once an investor has found a strategy that they want to follow, they simply copy the trades from a master account and execute the positions themselves. Over time, as the manager’s trades produce profits, the investors can also share in those profits.

Overall, PAMM accounts are a great tool as they enable investors to understand and monitor all the trading activities the manager is undertaking in real-time. Investors also retain complete control over when they enter/exit a strategy, making them a flexible and convenient choice.

 

  • Trading directly in Client’s Trading account via LPOA

This method of investment is basically a written understanding and agreement with both the Broker and the Money Manager via LPOA (Limited Power of Attorney), where the manager will trade directly in your trading account. This can be an easier solution for the investor as funds are managed independently (and password can be changed at any time), but it can be extremely difficult to handle by the manager, especially if they have multiple accounts to trade individually.

 

  • Multi-Account Manager (MAM) Accounts

A MAM account enables a money manager to pool together individual investors money into a fund. This money manager will then use the collected funds to execute trades from the master account to all of the sub-accounts. Despite the fact that the trades are executed from the masters’ account, the sub-account investors still have control over their risk and trade allocation, and are able to revoke their LPOA (Limited Power of Attorney) directly with their Broker.

If the master trader can generate returns for its investors, then the sub-account investors will pay a performance fee of generally between 20-30% to the master trader.

MAM accounts are a good option for investors seeking transparency on what trades are being executed, as most MAM accounts will normally display a complete transaction history and provide detailed statistics. Most accounts will usually allow investors to track their performance and the fees incurred.

Although a MAM account can be a great option, investors should be aware that a MAM account is best suited for individuals with a high-risk tolerance and a strong understanding of the markets.

 

  • Lot Allocation Management Module (LAMM) Accounts

LAMM accounts work like a copy-trading system. When a manager opens up a position, the investor will replicate that position. Each investor and manager will use their own funds, and fees will only be payable when managers generate a profit for investors.

A LAMM account shares many similarities with a PAMM account, most notably the fact that both types of accounts can still function irrespective of the size of the investors account. However, the most notable difference between the two is that a LAMM account allows the investor to determine the number of lots they want the money manager to trade.

LAMM accounts are a good option for investors who want to be in full control of the amount of money they trade. Another big plus of LAMM accounts is that investors can monitor each and every trade.

Are investors funds secure in managed forex accounts?

Managed forex accounts are secure, if you choose the right broker and money manager. To select the right broker and manager, you have to do your research before blindly handing over money. You’ll find many examples of people on the internet who have failed to do proper due diligence and research, and unfortunately, have become victims of scams.

To protect yourself against becoming a victim of fraud, you have to make sure you consider the following:

  • The broker you’re considering is fully regulated.
  • Avoid brokers that advertise unrealistic returns.
  • Ensure that the broker holds your funds in segregated accounts.
  • Look at the broker’s reviews to find out if other traders have had a positive or negative experience with them.
  • Always carefully assess each money manager and only select the ones you trust.

Most brokers and money managers are legitimate and operate in the best interests of their clients. Unfortunately, however, there are some people out there who will try and take advantage of you to make a quick buck. As long as you choose a recognised broker and money manager with a solid reputation, you’ll be fine.

Pros and cons of managed forex accounts

Managed forex accounts are not suitable for everyone. Therefore, it’s important to consider the pros and cons connected with them before you consider selecting one. To help you gain a more thorough understanding, let’s take a quick look at some of the advantages and disadvantages:

Pros

  • Since you’re not trading the markets yourself, there’s no time investment on your part.
  • You don’t necessarily have to have any knowledge or experience in trading the markets.
  • You’ll avoid making any emotionally charged decisions that many traders fall foul of.
  • A money manager is committed to getting results for their clients.

Cons

  • You have to pay a fee to the money manager, usually between 20-30%.
  • Some brokers charge a minimum deposit fee to use a managed forex account.
  • You don’t have control over what is being traded.
  • You’re missing out on the opportunity to learn how to trade the markets by yourself.

An example of a managed forex account

So now, let’s go ahead and look at some examples. We’ll focus on an account that has made a profit and one that has generated a loss.

Example 1:

  1. An investor deposits $5,000 into their brokerage account.
  2. After the deposit, the investor finds a suitable money manager with a sound trading strategy he’d like to copy.
  3. The investor and money manager enter into an LPOA agreement. If the money manager generates a profit for the investor, the manager will take a 20% fee (a good one will earn only under a High water mark principle, which means that if one month the performance is negative, the next month he will have to recover the previous loss to be entitled with any performance fee).
  4. After the first month, the money manager generates a return of 15% for the investor.
  5. The investors initial $5,000 deposit has now grown to $5,750.
  6. From the $750 profit generated, the money manager charges their 20% fee. This leaves the investor with a total profit of $600.
  7. The investor ends the first month with a total portfolio value of $5,600.

Example 2:

  1. An investor deposits $2,000 into a managed forex account.
  2. The investor selects a money manager they’d like to use.
  3. They both enter into an LPOA agreement. Any profits will be subject to a 20% fee.
  4. After the first month, the money manager records a 10% loss for the investor.
  5. The loss means that the investor’s portfolio is now sitting at $1.800.
  6. As the investor didn’t make a profit, they do not need to pay a fee to the money manager (and not until he recovers the 10% loss).

Although most skilled money managers should consistently be able to provide you with a healthy return, inevitably, there may be some months where you may record a loss. However, investors can take comfort that if they do lose money in a given month, there will be no fee to pay to the manager.

Managed Forex Account FAQ

Now that we’ve gone into detail on managed forex accounts, let’s answer some of the questions which you may have on your mind.

Why are managed forex accounts useful?

Managed forex accounts are useful because they allow inexperienced and less knowledgeable investors to still participate in the market. Investing shouldn’t just be for the super knowledgable or wealthy elite, which is why a managed forex account represents a great solution, as they allow everyday people to generate a steady and passive return on their capital.

Who can use a managed forex account?

Anyone can use a managed forex account, as long as they meet the account opening requirements of the broker. This typically means:

  1. You have to be 18+ years of age
  2. Be able to provide a Social Security Number or Tax ID
  3. Provide a copy of your passport or national identity card
  4. You cannot be resident in a country that has a ban on CFD trading

Does a money manager have access to your funds?

This is a question that gets asked a lot. However, the short answer is no. With every managed forex account, you have complete control over your funds. The money manager cannot have access to any of your deposits or withdrawals from your account. The only control they do have is over what they trade for you on your behalf (which you agree to when you sign the LPOA agreement).

Interested in opening a managed forex account?

If you’re interested in opening a managed forex account, make sure you choose a reputable and regulated broker. The last thing you want to do is lose your hard-earned money to scrupulous brokers and money managers.

An example of a broker who offers PAMM accounts to their clients is 4XC. They’re an excellent solution for investors looking to build a social trading network to connect with money managers and investors.

If you would like to learn more about their PAMM tool, click here.

 

 

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James Lordes

James Lordes

James is a staff writer at 4XC with a deep knowledge about all things from finance to regulation.

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