WHAT IS 'Managed Forex Accounts'

Managed forex accounts are a type of forex account in which a money manager trades the account on a client's behalf for a fee. Managed forex accounts are similar to hiring an investment advisor to manage a traditional investment account of equities and bonds. Returns and fees between managed accounts can vary greatly; therefore, it is important to research your options thoroughly before assigning your account to a professional manager.

BREAKING DOWN 'Managed Forex Accounts'

Managed forex accounts offer investors exposure to an asset class much different than stocks or bonds, because when an investor buys or sells a currency, he isn’t doing so with the expectation that the currency will earn a return in the form of interest payments or dividends. Rather, he is merely wagering that the value of a currency will rise or fall. Therefore, aside from those who invest in currencies as a means of hedging risk, foreign exchange traders are more accurately described as speculators than investors.

Pros and Cons of Managed Forex Accounts

Foreign exchange markets are commonly used by sophisticated investors, who take advantage of an ability to use large amounts of borrowed money to amplify their gains. Forex markets are more liquid than stock markets, and therefore transaction costs are lower, making it a popular forum for investors who enjoy the thrill of speculation.

At the same time, forex markets can be dangerous for inexperienced investors who might not have a sophisticated understanding of the effects of high leverage on their returns, and who don’t have a good understanding of how different news events, like economic releases or central bank policy decisions, affect currency prices.

Investors who are not expert in foreign currencies, but still want exposure to the market, may consider a managed forex account in order to 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 an investor’s earnings.

Choosing a Managed Forex Account

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 his investment fund to the max drawdown over the period, and is typically measured over a three-year period. The higher the Calmer Ratio, the better the manager’s risk-adjusted return; the lower the ratio, the worse his risk-adjusted return.

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