What are managed forex accounts?
A managed forex account is a type of currency trading account in which a professional money manager trades and transacts on behalf of a client for a fee.
Individual investors who are not currency experts but want exposure to this asset class should consider a managed forex account. Managed forex accounts are also frequently used as sub-advised funds by money managers who want to include a currency component in their portfolio but do not specialize in foreign exchange (FX) trading.
Understanding Managed Forex Accounts
Managed forex accounts are an investment opportunity for those seeking the potential returns of leveraged forex trading, are willing to take significant risks, and prefer to delegate selection and trading to professionals. It entails depositing funds into a forex account and having a professional trade those funds in highly leveraged foreign exchange markets. Investors who choose this type of account do so with the expectation and hope of making unusually large gains, but with the understanding that they may also suffer severe losses.
Managed forex accounts provide exposure to an asset class that is very different from stocks or bonds. Forex trades gain value as the value of one currency rises or falls in relation to another, unlike more traditional securities, which provide returns in the form of share growth, interest payments, or dividends. Those who invest in currencies do so either to hedge risk in international markets or as speculators who recognize the potential for large shifts in pricing and values between international markets.
Individual investors and speculators typically open forex accounts and trade using their own knowledge. Many amateurs find this notoriously difficult, but the few who succeed can earn extremely high returns—sometimes even higher than the return on equities. Using the services of a professional manager is a good way to avoid the extra time, effort, and loss that inexperienced traders in this market face. It is hoped that a more experienced professional can be relied on to deliver profitable results.
Costs and Safety of Managed Forex Accounts
Foreign exchange markets are frequently used by sophisticated traders who use their ability to handle large amounts of borrowed money to increase their profits. They have more liquidity and trade at a much faster rate than stock and bond markets; in fact, forex is the world’s most active market. Furthermore, the lower transaction costs make it a popular forum for those who enjoy the thrill of speculation.
At the same time, forex markets can be dangerous for inexperienced traders who do not have a sophisticated understanding of the effects of high leverage on their returns or a good perception of how different news events such as economic releases or central bank monetary policy decisions affect currency prices.
Ordinary investors can benefit from the expertise of an experienced and proven forex trader by using a managed account. The disadvantage of this strategy is that the best managers typically charge high-performance fees ranging from 20% to 30% of a trade’s earnings, or account profits.
Particular Considerations
An investor should consider a prospective account manager’s historical risk and reward profile when deciding to open a managed forex account. Consider their Calmar Ratio, a performance metric that compares their trading fund’s average annual compound rate of return to the maximum drawdown (the portfolio’s greatest movement from a high point to a low point) over the period. This ratio is typically measured over a three-year period. The greater the Calmar Ratio, the higher the manager’s risk-adjusted return. In contrast, the lower the ratio, the lower the risk-adjusted return results.
What Is the Process of Forex Account Management?
When you open a managed forex trading account, an account manager (or a team of traders) will buy and sell currencies on your behalf alongside the capital of other investors. They have discretionary power over the funds, which means they make the decisions without consulting you first. They usually charge a performance fee, which means they only get paid when you make money.
How to Deposit Money Into a Forex Account?
Simply log in to their respective forex accounts, enter their credit card information, and the funds will be posted within one business day. Investors can also transfer funds from an existing bank account into their trading accounts, or send funds via wire transfer or online check. Clients can also write a personal check or a bank check directly to their forex brokers, though this takes longer.
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