How to invest in Forex managed accounts

Ever wanted to put your capital into a Forex managed account?
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Ever wanted to put your capital into a Forex managed account? If you’re new to managed accounts, the process can seem complex. In this article, I’ll attempt to simplify the steps and explain how to invest into Forex managed accounts.

Managed account or fund?

First, let’s clarify the difference between a managed account programme and a ‘fund’. Unfortunately, most people mistake them for being one and the same.

A lot of retail investors lose money by investing into funds that are illegal schemes. You can protect yourself by reading this post. Be sure to follow these guidelines when finding a managed account programme (or fund) to invest in.

What is a fund?

A fund is an independent structure – much like a limited company. Investors stand on one side and buy shares in the fund.

Each share has a value. This value changes as the fund uses capital to make investments. The fund also employs an investment manager to oversee capital allocation. Keep in mind that the shareholders have no say in running the fund. They can simply put money in or take money out according to the terms of the fund. It’s the investment manager’s responsibility to run the fund and allocate its money. Typically, this results in either a profit or a loss for the fund.

The key point to take away is that a fund has its own structure. This means that all the money sits in the fund’s bank account – and trades are placed via the fund’s own trading account. As such, the profits or losses become the fund’s performance.

New investors can clearly see this performance, which helps them decide whether to make an investment.

How to verify a fund

If you are thinking of investing into a fund then you need to ask for access to the fund’s administrator. This is an independent third party that is responsible for making sure everything is correctly documented and reported. The administrator should be a credible company that specialises in fund administration.

You should also ask to see an audit of the fund’s performance. Get a top ten accounting firm to do this. Again, the firm should be well known and easy to research online.

If a fund cannot provide you access to these things, then you should not invest your capital with them.

Remember, your money is under the control of somebody else in a fund structure. This means that if the fund is not legitimate, your money could disappear, along with the so called fund itself.

What is a managed account?

A managed account is very different from a fund.

It allows investors to hold their money in their own trading account (or even bank accounts) at all times. This makes it more difficult for someone to steal funds.

However, managed account programmes come with other risks.

For instance, a trader can make money from broker trading commissions. Not through making a profit.

Clearly, this could motivate some individuals to trade lots of times per day using leverage. Your trading account could incur severe losses as this takes place.

Because this can be incredibly lucrative for the trader and the broker, there are many traders offering managed accounts online. You must be extremely careful when entering into any kind of managed account programme.

How to stay safe

To stay safe, you should always insist on the following criteria for a managed account programme:

  • The trader must be regulated in a credible jurisdiction (UK, US etc)
  • Your broker must agree in writing to not pay the trader any form of trading volume based commission while trading your account. The fees you pay must come from either profit or fixed management fees that you agree in advance.
  • To further protect your account, you must also instruct the broker to cut the trader off if they breach a pre-agreed drawdown level. For example, if your account hits -10%, then this should trigger an automatic shutdown of the trader.

These things ensure that the trader isn’t tempted to use leverage when trading your account. If they do, the trader is simply cut off.

More managed account tips

There are other steps which can help protect you. One of these is to invest only a small amount of capital as a test. This will let you see the trader’s style before investing more.

You can then compare the performance of your test account with the quoted performance of the trader.

Furthermore, you could insist on speaking to existing clients to get a first-hand account of their experiences.

The importance of an audit

Finally, there should be a credible audit of the trader’s performance. This audit could be from a client account or the trader’s own account.

A credible third party should conduct the audit. They should guarantee that the trader’s performance is 100% real.

Any professional accounting firm will conduct an audit. Remember, the audit should confirm the trader’s performance in a real market environment.

Accountants check this by accessing the tickets for each trade from the broker. This shows the exact transaction and which bank or liquidity provider it was executed through.

To protect yourself, you could hire a firm you trust to conduct an audit. This is expensive but could end up saving you much more in losses later on.

How to invest into Forex managed accounts

Finally, get a second opinion from an expert that has no agenda or bias related to your decision. They will be able to take an objective look at the whole situation.

The performance of the investment is also important. If it’s too low, it might not be worth the fees. On the other hand, if it’s too high, the risk is probably substantial.

Reward is always linked to risk. Always. If someone promised you 100% per year then that means you could also lose 100% per year. Generally, between 10 % to 30% per year is a good target to aim for.

By following these guidelines you will find that almost all ‘investment opportunities’ found online will turn out to be low quality. This might be disappointing, but it’ll be worth the effort when you find a competent managed account programme.

I hope you’ve found this article useful. If you have any questions, please leave them in the comments below. I’ll do my best to reply to as many as I can.

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