Opening a trading account within a PAMM is a wise choice for Investors who want to profit from trading the Forex markets but don’t have the time and/or expertise to go it alone. PAMM is short for Percentage Allocation Management Module and is a technical solution provided by Forex brokers that allows clients to have their own secured accounts managed by a professional trader on the basis of a limited power of attorney permitting the manager to trade only. Essentially, a PAMM acts like pooled money for Forex trading, however, it allows for total segregation between accounts which is how multiple investors can simultaneously participate in the benefit of a seasoned trade manager without having to pool their funds in a Hedge Fund or Commodity Pool.
A few things to understand before you open an account that employs a PAMM are:
For investors contributing to a PAMM utilizing manager, there are multiple advantages. Firstly, they benefit from the trading expertise of successful managers who can be spread across numerous qualified investors. Secondly, they can typically withdraw from their accounts at any time if they are unsatisfied with how the account manager is performing or simply wish to take some profits off the table. Finally, they are in many ways also protected from fraud because of the automatic funds distribution mechanism and having daily visibility into their accounts with statements that are often by license required to be generated and issued by third party software providers. Overall, the goal is to generate maximum profit, optimal transparency and desirable liquidity.
Limited Power of Attorney
The basis of the PAMM is that investors are providing the Forex manger (or other type of managed account provider) with a Limited Power of Attorney (LPOA) to manage their money in his or her own unique trading style, with full disclosure that the manager may simultaneously be trading for a hundred other people. No single party is given preferential treatment rather their pro rata share of both profits and losses is based on their account size measured against the total AUM in the PAMM. By signing the LPOA, the investors agree to accept the risk of the manager’s trades, as should be stipulated in the investor agreements and proper risk disclosure documentation. While the manager trades the account, the funds are handled directly by a prime brokerage firm who clears all of the transactions and handles directed transfers, deposits, and withdrawals.
Know Your Trade Ratio
When you open a managed account, it will have its own trade allocation ratio depending on the size of deposit compared against the gross deposits of all investors. The trader’s performance results (trades, profit and loss) are allocated between managed accounts according to this percent allocation ratio without the co-mingling of funds. Depending on each unique client’s account balance, different ratios are applied automatically and systematically to each account based on the same formula of an account size divided by the total AUM. That percentage tabulation is the percentage of what is distributed “pro rata” for both profits and losses to each account.
Access to Funds
It is essential to know who can access your funds. At Mediatrix Capital, for example, we apply trades to clients’ accounts on their behalf but we never have direct access to client funds residing within the managed account as the custodian is the Prime Broker, and not the trader. Additionally, client funds are held in segregated accounts, and all deposits, transfers, and withdrawals are handled directly by the regulated brokerage firm we trade through. You should insist on complete access to your account either through an online brokerage portal and/or daily activity statements whereby you are able to check your balances and activities.
Lock-Ups and Withdrawals
Most Forex managers have an initial lock-up period for new accounts. Mediatrix Capital’s lock-up is only 120 days, after which all managed account holders are free to make withdrawals with a 30-day prior notice. This notification period enables the manager to close any open positions that would be affected by the withdrawal. If you expect to make monthly withdrawals for cash flow purposes, it is important to advise the manager so that proper margin and trade placement is set proportionately to accommodate a regularly scheduled anticipated withdrawal without potentially increasing risk to your account.
Understand the Fees
Manager fees should be clearly stated in the agreement. Ideally, the only fees paid would be the agreed upon performance fees earned on the account balance that is over and above the initial account deposit and/or subsequent deposits. Additionally, Performance Fees should only be based on the account’s increase from new monthly profits (high watermark) and be deducted from the account monthly, by the prime broker, with your approval. This ensures that the fees are only deducted from new net gains, rather than fees being earned during the loss recovery from lower performance. In other words, if an account ever experiences a negative position below the high watermark, the account must first recover any previous losses on the prior balance, and only then, with equity gained above the high watermark, would a performance fee be earned in the future.
When selecting a manager with which to open an account, you need to do proper due diligence and be 100% comfortable with the traders’ platform. Ask the questions needed to ascertain whether it is secure, reliable, tested and compliant with any relevant governmental regulations.
The manager you select should be open with respect to your daily accounting, deposits/withdrawals and ongoing trading activities. At Mediatrix Capital, clients are able to see each and every closed trade when they view their account statements or go to their broker portal.
In order to make an informed Forex manager choice, check the team’s resumes and qualifications, track record of past performances in terms of returns, amount of money managed, numbers of investors and length of time working together. Mediatrix began systematic/algorithmic development for trading the Forex Spot Market utilizing in 2007 and by mid-2013, went live trading client funds.