What Are Managed Forex Accounts?
A managed forex account is a type of currency trading account in which a professional money manager trades the account on a client's behalf for a fee.
Managed forex accounts are often chosen as sub-advised funds for money managers who want a currencies component to their portfolio but who do not specialize in FX trading.
- Managed forex account consists of putting money in a forex account and having a professional trade those funds in the highly leveraged foreign exchange markets.
- Managed forex accounts offer exposure to an asset class much different than stocks or bonds.
- Managed forex accounts are high-risk, high-reward investments.
Understanding Managed Forex Accounts
Managed Forex accounts are an investment opportunity for those who want the potential of returns from leveraged forex trading, are willing to take serious risks, and want to have professionals do the work of trading and selection. It consists of putting money in a forex account and having a professional trade those funds in the highly leveraged foreign exchange markets. Investors who choose this have the hope and expectations of unusually large gains with the understanding that they could experience severe losses.
Managed forex accounts offer exposure to an asset class much different than stocks or bonds. Unlike these equities which deliver returns in the form of share growth, interest payments, or dividends, forex trades gain in value as the value of one currency will rise or fall in relation to another. Those who invest in currencies as an asset class will either do so as a means of hedging risk in international markets, or as speculators who recognize the opportunity for large shifts in pricing and values between international markets.
Individual speculators typically open forex accounts and attempt to trade based on their own information and speculation. Many find this to be notoriously difficult, though the few that succeed at it are able to make extreme returns that are multiples of typical equities markets. Using the services of a professional manager is a way to attempt skipping the extra time and eventual loss that comes to inexperienced traders in this market, and hoping that a more seasoned professional can be trusted to deliver the hoped-for returns.
Safety and Costs of Managed Forex Accounts
Foreign exchange markets are commonly used by sophisticated traders, who take advantage of an ability to handle large amounts of borrowed money to amplify their gains. Forex markets have more liquidity and trade at a much faster pace than do stock and bond markets. Because it is the most active market in the world, transaction costs are lower, making it a popular forum for those who enjoy the thrill of speculation.
At the same time, forex markets can be dangerous for the inexperienced trader who may not have a sophisticated understanding of the effects of high leverage on their returns, and who do not have a good perception of how different news events like economic releases or central bank monetary policy decisions affect currency prices.
Those who are not experts in foreign currencies but still want exposure to the market and another asset class, may consider a managed forex account. Using a managed account, they can take advantage of the expertise of an experienced and proven forex trader. The downside to this approach is that the best managers typically charge high-performance fees of between 20% and 30% of a trade's earnings.
When deciding on a managed forex account, it is wise to consult your prospective account manager's historical risk/reward profile. An example would be looking at their Calmar Ratio, which compares the average annual compound rate of return of their trading fund to the maximum drawdown over the period. Measurement of this ratio is typically over a three-year period. The higher the Calmar Ratio, the better the manager’s risk-adjusted return will be. Conversely, the lower the ratio, the worse their risk-adjusted return results are.
Managed forex accounts are similar in purpose to managed futures accounts. The difference is that the managed futures industry is more regulated. The managed futures industry is so reliant on licensed commodities trading advisors (CTA) that it is sometimes also referred to as the CTA industry. CTAs are individuals or organizations that manage assets and provide advice for trading in derivatives. This term is also sometimes used to describe advisors to hedge funds, mutual funds, and other similar investment instruments.