What is a Managed Forex Accounts
Managed forex accounts are a type of foreign exchange (FX) account in which a money manager trades on a client's behalf for a fee. Managed forex accounts are similar to hiring an investment advisor to maintain a traditional investment account of equities and bonds. Returns and fees between managed accounts can vary greatly. It is essential to research your options thoroughly before assigning your account to a professional manager.
BREAKING DOWN Managed Forex Accounts
Managed forex accounts offer exposure to an asset class much different than stocks or bonds. Unlike these equities, currencies do not deliver returns in the form of interest payments or dividends. Rather, these trades are merely wagering that the value of one currency will rise or fall in relation to another. So, aside from those who invest in currencies as a means of hedging risk, foreign exchange traders are more accurately described as speculators than investors.
Those who delve into buying and selling on the FX market are known as traders. This term is in contrast to investors. The main difference between a trader and an investor is the duration for which the person holds the asset. Investors tend to have a longer-term time horizon, while traders tend to keep assets for shorter periods of time to capitalize on short-term trends.
Safety and Costs of a 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 a faster paced trading action than the stock market offers. 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 expert 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, however, 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 Calmer Ratio, which compares the average annual compound rate of return of their trading fund to the max drawdown risk over the period. Measurement of this ratio is typically over a three-year period. The higher, the Calmer Ratio, the better the manager’s risk-adjusted return will be. Conversely, the lower the ratio, the worse their risk-adjusted return results are.