Before investing in a managed account or establishing yourself as a money manager, understanding how the foreign exchange market (Forex market) operates and the process a managed account follows is encouraged.
A Multi Account Manager, or ‘MAM’, as its name implies, is an individual trader who executes trades on behalf of clients (investors). Think of a MAM as a ‘fund manager’, a professional that specialises in trading financial instruments, such as Forex and CFDs.
A MAM account, or sometimes referred to as a ‘lead account’, provides the money manager a platform to control more than one account at the same time.
How a Managed Forex Account Operates
Once a MAM account is active, and has connected sub-accounts (these are investor accounts or client accounts), the money manager can begin executing trades in real-time in the master trading account.
The master account is traded only by the money manager; these trades will reflect in the sub-accounts.
Investors (sub-accounts) can deposit and withdraw funds when required – the money manager does not (cannot) request deposits or withdrawals on behalf of the client.
The minimum investment with FP Markets is $10,000 from all sub-accounts.
For money managers, two allocation methods (allocation money management) are available with FP Markets: proportional by equity or lot allocation.
Proportional by equity:
Equity of sub-account / Total equity of active accounts * lot size = number of lots
By way of an example, imagine a multi-account manager has five investors with equity totalling $50,000.
The MAM executes a 10-lot position on EUR/USD in the master account.
Investor 1: $12,000/$50,000 * 10 = 2.4 lots
Investor 2: $15,000/$50,000 * 10 = 3 lots
Investor 3: $5,000/$50,000 * 10 = 1 lots
Investor 4: $10,000/$50,000 * 10 = 2 lots
Investor 4: $8,000/$50,000 * 10 = 1.6 lots
Total number of lots: 10
Lot Allocation Method:
Volume of sub-account = (lot parameter of sub-account / lot parameter of all active subs) * Volume of the master trade
As an example, consider two active sub-accounts with the lot parameter set as 2 and 3 lots, respectively.
If the master account executes a position totaling 10 lots, the trading volume can be calculated as follows:
Trading volume of the first sub-account: 2/5 * 10 = 4 lots
Trading volume of the second sub-account: 3/5 * 10 = 6 lots
How Does the Money Manager Profit?
The money manager is not an employee or representative of the Forex broker.
The Forex brokerage firm provides the multi-account manager with MAM software to execute trades on behalf of introduced clients. This software makes it possible for the money manager to allocate trades placed on accounts in the MetaTrader 4 (MT4) trading platform.
There are three primary ways a money manager profits from his/her trading activity:
The performance fee is a monthly fee requested by the money manager.
The fee is based on the High watermark (HWM) principle.
The performance fee is agreed before creating the MAM account – clients agree to this by means of a signed LPOA (Limited Power of Attorney). A LPOA permits a money manager to perform specific functions on behalf of investors.
Once the month ends, profits are calculated.
Imagine the money manager returned 10% on the month. Clients who invested $10,000 earn $700 and the money manager, assuming a 30% performance fee, receives $300. However, an investor with only $1,000 invested earns $70 and the money manager $30, again assuming a 30% performance fee.
Do note, however, the performance fee is debited from the client’s sub-account, as requested by the money manager.
This is essentially an ongoing fixed percentage fee for managing client funds, though not something requested very often.
The management fee is paid regardless of performance, a condition investors have to agree to in a signed LPOA.
Money managers can choose to mark-up spreads and commissions in certain circumstances; however, sub-account clients will need to agree to this via a signed LPOA.
For example, the money manager could earn an additional $2 per lot on the sub-account trading volume.
Professional money managers should have a minimum investment of $10,000 of initial funds from introduced clients.
In addition, the money manager should be able to provide a strong trading history.