Forex managed accounts offers ‘investors‘ a means to trade the currency markets online without having to actually trade themselves. If you notice, we use the term ‘investor‘ as opposed to a ‘trader‘. The reason is because in a forex managed account, although you are required to create a trading account, your primary role is that of an investor.
In that, you are not involved in trading but are rather confined to the role of an investor.
To learn more about forex managed accounts and how to go about creating one, continue reading this article.
What is a Forex Managed Account?
A forex managed account is a feature that is available to investors who want to trade the forex markets without actually trading themselves. When using a forex managed account, you are ‘legally’ giving the authority to a fund manager or a money manager to trade with your funds. The term ‘Limited Power of Attorney’ is almost synonymous with a managed forex account for this reason.
Forex managed accounts offers investors an option to participate from the currency markets without having to trade them directly by themselves. Instead, by making use of the Limited Power of Attorney, investors legally authorize a fund manager to trade on their behalf.
Who is a Forex Fund Manager or a Money Manager
A forex fund manager is basically the trader or a company that employs the traders to trade on your behalf. In most instances, investors who use a forex managed account usually delegate their account either to an individual trader or to a professionally managed forex managed accounts company.
Forex Fund Manager – Individual V.s Company
The choice of what kind of a forex fund manager you want to make use of is usually one of a personal choice. In most cases, if an investor opts for an individual forex money manager it could be that the investor has noticed the returns offered by that particular trader.
However, in some rare cases, trusting your funds with an individual forex money manager can have some risks. Due to the fact that your funds are managed only by an individual they are susceptible to various factors such as emotions or sentiment.
However, most individual forex fund managers are well experienced and come with considerable past traders that have been generating profits for their previous investors. On the same note, the advantage of using an individual forex fund manager is that the costs are low.
Of course, there are some costs involved when using a forex managed account as we cover this in the following sections of the article.
Using a professional forex managed accounts company brings with it a higher level of management. Because your funds are no longer in the hands of just one trader but rather a couple of traders who obviously have a trade supervisor, your funds are better managed. The only downside with using a forex managed accounts company is that the costs may be slightly higher.
So if you are confused about choosing an individual or a company to managed your forex account weigh the pros and cons. Usually it boils down to risk/safety of funds and transparency. If you are investing large amounts, then opting for a forex managed accounts company is your best option.
The reason is because you can request audits of your trades and also be sure that your funds are in good hands. But this however comes at a premium.
Costs involved in a forex managed account
Because you are allowing a professional trader(s) to trade forex on your behalf, there are certain costs involved. Most forex managed accounts, be it an individual or a company usually charge a management fee and a performance fee.
The performance fee is also referred to as a High-Watermark fee.
What is High Watermark?
To ensure that the forex fund manager does not get paid for poor performance, most forex fund managers set up a minimum watermark level. This infers that if your managed forex fund reaches for example $10,000 during the first month, then the forex fund manager charges you a 20% performance fee.
During the second month, if the fund makes only $5000, then there is no performance fee charged. And during the third month your fund peaks $15000, then you are charged a performance fee of $10,000 as this is the watermark.
How to open a forex managed account?
The first step to open a forex managed account is to scout for a good forex managed accounts company or an individual. When prospecting for a forex managed accounts company, here are some key points to bear in mind:
Do some background research into the forex managed accounts company. Check if the forex managed account company is indeed registered and operating as a business
Some of the background checks can include calling up the company directly and also checking on their management and following up on the individuals on professional networking sites such as LinkedIn.
Look at past historical data to gain an idea on how the company has been managing their client’s funds. Historical data should be used to only gauge the past performance of the company and must not be used as a deciding factor if you choose to open a managed forex account.
Check what leverage the forex managed company uses and ask on details such as their risk management strategies. It is also good practice to seek what kind of instruments and markets are traded by the forex managed accounts company. And don’t forget to ask why!
Check how the managed account is opened. Ideally it should be through a Limited Power of Attorney and one where you have the control over your funds. You should also keep track of the performance fee that is charged by the managed accounts company so you know upfront the commissions you have to pay.
Ask for audits if possible and preferably from a third party auditing service. To open a forex managed account, you would be directed to open a trading account with the forex broker that your forex fund manager trades with.
Opening an account is straight forward and once all your documents are verified, you will then need to sign a limited power of attorney where you identify the fund manager whom you want to manage your funds.
To conclude, a forex managed account is often a simpler way out for investors who either do not have the time or the knowledge to trade the financial markets.
Further more, if you are an active investor in other instruments such as mutual funds, stocks etc, investing in a forex managed accounts can be a great way to diversify your investment portfolio. Forex managed accounts come at a premium with average investments ranging from $5000 and above.
For first timers who are uncomfortable with investing larger sums initially can always opt to invest the bare minimum and monitor their accounts. If the returns prove to be profitable for you, you could always increase your investments.