What Are Managed Forex Accounts?
A managed forex account is a type of currency trading account in which a professional money manager makes trades and transactions on behalf of a client for a fee, usually charged as a percentage of profits.
Individual investors who are not experts in foreign currencies but still want exposure to this asset class may consider a managed forex account. Managed forex accounts are also often chosen as sub-advised funds for money managers who want a currencies component to their portfolio but do not specialize in foreign exchange (FX) trading.
Key Takeaways
- A managed forex account involves placing funds 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 from stocks or bonds.
- Managed forex accounts are high-risk, high-reward investments.
- Both individual investors and professional managers who aren't FX experts can make use of managed forex accounts.
- Forex account managers charge high fees that typically range between 20% and 30% of a trade's earnings.
Understanding Managed Forex Accounts
Managed forex accounts are designed for those who want exposure to the potential returns from leveraged forex trading, are willing to take serious risks, and want to have professionals do the work of selection and trading. It involves putting money in a forex account and having a professional trade those funds in the highly leveraged foreign exchange markets. Investors who opt for a managed account have the hope and expectations of large gains with the understanding that they could also experience severe losses.
Managed forex accounts offer exposure to an asset class that differs greatly from stocks or bonds. Unlike these more traditional securities, which deliver returns in the form of share appreciation, interest payments, or dividends, forex trades gain in value when one currency rises or falls in relation to another. Investors in currencies typically do so to hedge risk in international markets or as speculators who recognize the opportunity for large shifts in pricing and values between international markets.
Individual investors and speculators typically open forex accounts and attempt to trade based on their own ideas. Many amateurs find this to be notoriously difficult, though the few that succeed are able to make solid returns—sometimes, notably higher than average returns on equities. Using the services of a professional manager is a way to avoid the extra time, effort, and eventual losses that happen to most inexperienced traders. The hope is that a more seasoned professional can be trusted to deliver profitable returns.
Managed forex accounts are similar in purpose to managed futures accounts, a type of alternative investment vehicle that focuses on futures contracts, stock options, and interest rate swaps. They are permitted to use leverage and can also take both long and short positions in the securities they trade.
Safety and Costs of Managed Forex Accounts
Foreign exchange markets are commonly used by sophisticated traders, who take advantage of their highly-leveraged nature. Forex has more liquidity and trades at a much faster pace than stock and bond markets—in fact, forex is the most active market in the world with average daily volumes of $7.5 trillion, as of April 2022. It also has relatively low transaction costs, making it a popular forum for those who enjoy the thrill of speculation.
At the same time, forex markets can be dangerous even for experienced traders, not to mention beginners, who may lack a sophisticated understanding of the effects of high leverage on their positions. Newer traders may also not have a full grasp on how different news events, like economic releases or central bank monetary policy decisions, affect currency prices.
By using a managed account, ordinary investors can take advantage of the expertise of experienced and proven forex traders. The downside is that the best managers typically charge high performance fees of between 20% and 30% of any profits.
By comparison, money managers of individual stock or bond portfolios typically charge annual fees of 0.50% to 5% of the assets under management. Hedge fund managers charge "two and twenty": an annual management fee of 2% of assets, and an incentive fee of 20% of profits.
Special Considerations
When opening a managed forex account, an investor should evaluate a prospective account manager's historical risk/reward profile. An example would be looking at their Calmar Ratio, a performance gauge that compares the average annual compound rate of return of their trading fund to the maximum drawdown (the portfolio's greatest movement from a high point to a low point) over a period. The ratio is typically measured over a three-year period. The higher the Calmar Ratio, the better the manager’s risk-adjusted return has historically been. Conversely, the lower the ratio, the worse their risk-adjusted return results are. It is also worth noting that past performance does not guarantee future results.
How Does Account Management in Forex Work?
When you open a managed forex trading account, an account manager (or a team of traders) will trade your capital alongside other investors' capital, buying and selling currencies. They have discretionary power over the funds: they’re free to make the decisions without consulting you. They will usually charge a performance fee and only get paid if they make you money.
How Do I Fund my Forex Account?
Most forex brokers offer several ways to deposit funds into a forex account. Investors can log in to their respective Forex accounts and type in their credit card information. Credit card deposits are generally posted in about one business day. Investors can also transfer funds directly from an existing bank account, send a wire transfer, or an online check. Clients are also usually able to write a personal check or a bank check directly to their forex brokers, though these methods take longer to process.
What Is the Best Account Type for Forex?
The standard trading account is the most common. This account gives the user access to standard lots of currency each worth $100,000. This does not mean that you have to put down $100,000 of capital in order to trade. The rules of margin and leverage mean that as low as $1,000 needs to be in the margin account for one standard lot to be traded.
Mini accounts, however, may be a better choice for beginners, more risk-averse traders, or those with limited funds. They reduce the maximum lot size to just $10,000. Most mini accounts can be opened with $250 to $500, and they come with leverage of up to 400:1.
