Navigating Through the World of Managed Accounts

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The online trading industry has options for those interested in automated systems, or managed accounts to trade on their behalf under what is known as ‘Power of Attorney’.

The concept of delegating trading activity to a third party is not new, but the FX trading arena has developed a specific range of automated/managed accounts, with specific terminology that FX traders have typically used, and continue to use today.

Other financial asset classes such as stocks, bonds, commodities, futures or options — will rarely be traded within PAMM, LAMM or MAM accounts, although there are always exceptions. Technically, you are able to use any financial instrument in whichever configuration you please — as long as its economically viable of course.

Let’s go through each one to see which one could be right for you.

 

Profit Allocation Money Management (PAMM)

PAMM is a method of conducting managed account services on behalf of investors (clients) by investment managers (account managers). This process is usually facilitated by an intermediary (broker) which takes funds from the investor and enables account managers to conduct discretionary trading services either via manual trading or automated trading via EA’s (expert advisors).

Good examples of companies offering such services include eToro and XM.com among the better offerings. Other algorithmic-focused services which may suit clients is ZuluTrade as a one-stop shop for hundreds of different trading strategies trading on clients’ behalf.

Combing through the various offers being made is a key requirement, and checking past history of results is critical.

Why Managed accounts?

PAMM accounts allow investors to invest into trading strategies/systems even if they lack a high amount of capital. For account managers, PAMM accounts provide an ability to solicit and engage multiple clients in manageable pools. Clients are compensated proportionately depending on the size of the capital deposit (investment) made. The higher the deposit, the higher the ratio of the overall profit generated.

The account manager’s trading activity including all profits and losses are allocated between managed accounts according to the same ratio.

Currency trading strategies tend to achieve profitability within very narrow margins amidst often volatile market conditions which makes PAMM systems a great tool for distributing risk among a larger group of investors and enabling a greater tolerance for short-term volatility. PAMM investors will not have itemised trades visible on their accounts, but each time their account manager (or money manager) closes a trade, a corresponding profit or loss is automatically attributed to his/her account.

Supposing our PAMM manager had five clients.

  • Client 1: Accounts for 5% of total equity.
  • Client 2: Accounts for 30% of total equity.
  • Client 3: Accounts for 30% of total equity
  • Client 4: Accounts for 15% of total equity.
  • Client 5: Accounts for 20% of total equity.

The 100 lot long EUR/USD trade would be broken as follows:

  • Client 1: Long 5 Lots of the EUR/USD.
  • Client 2: Long 30 Lots of the EUR/USD.
  • Client 3: Long 30 Lots of the EUR/USD.
  • Client 4: Long 15 Lots of the EUR/USD.
  • Client 5: Long 20 Lots of the EUR/USD.

 

LAMM (Lot Allocation Money Management)

LAMM works in slightly different way – each time an account manager opens a position, the same position is opened in each account allocated to that strategy. LAMM is a less sophisticated version of PAMM or MAM by crudely replicating trading positions without considering underlying account size.

LAMM strategies are now virtually extinct because of the back and middle-office strains it places on brokers, liquidity providers and MetaTrader server space.

MAM (Multi-Account Manager)

MAM accounts are designed for account managers and allow them to raise the level of complexity/sophistication and potential returns — by allowing them to assign a higher leverage to specific subaccounts.

Regulating leverage and other risk-management features across sub-accounts provides more flexibility and choice within speculative markets — this is a double-edged sword and can be as destructive as it can be profit generative.

MAM accounts are particularly suitable for investors with a high-risk tolerance and a high level of market understanding.

 

LAMM, PAMM and MAM accounts differ in how they actually function, but all essentially allow for someone to manage multiple accounts from one master account.

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Things to note

Alongside the rapid growth of FX trading services and brokers over the past 10 years, there has also existed a similarly growing dark side of the FX industry: rogue money managers.

Since 2012, the NFA in the US, the FCA in the UK (formerly FSA), ASIC in Australia and various other financial regulators — have all taken synchronised steps to curb the practise of dishonest sales practises and unlicensed advisory services to the general public. Example of ‘creative’ managed account advertisement from a broker:

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The regulators have identified that unlicensed individuals are promising incredibly high rates of return to novice investors and using incredibly pushy sales tactics. As a result, regulators in the US, UK, Australia and Europe have placed severe restrictions on the use of PAMM accounts by money managers, the amount of leverage able to be used and the level of financial market knowledge clients/account managers must have before being allowed to open managed accounts.

A host of measures have made it more difficult for rogue account managers to operate, although this side of the FX industry continue to flourish as Fintech innovations are often used by nefarious individuals to conduct duplicitous deeds rather than provide robust trading services.

Most FX traders turn to the possibility of investing in a managed account after failing at trading themselves. Having seen the stellar returns promised by a glitzy online ad, the perception of managed accounts is often perpetual .  Perpetual profits providing a perpetual income in perpetuity.  In reality, managed accounts are accumulating slowly and surely.

All potential managed account investors should proceed with extreme caution and are advised to conduct extensive due diligence on all counterparties that will be handing their capital.

 

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