What Is A PAMM Account And What Are Its Benefits?10 Jul 2013, 14:50
PAMM account has become one of the most preferred asset management methods in Forex trading. Its name stands for Percent Allocation Management Module, also known as Percent Allocation Money Management. But its abbreviation PAMM is widely used.
What is a PAMM account?
A PAMM account is a Forex managed account which is handled by an Asset Manager. Anyone can join a PAMM account and the minimum required amount is usually a few hundred dollars, depending on the broker. The profits and losses are calculated proportionally to the share of each individual investor.
How does a PAMM account work?
Let’s take a PAMM account with two investors as an example. Investor 1 has credited the PAMM account with $ 7000 and Investor 2 has decided to fund the account with $ 3000. The Asset Manager can trade with the entire capital of $ 10 000, but without being able to withdraw the money. He manages to make a profit of $ 1250 and at the end of the trading period he takes a commission of 20% (which equals $ 250). The rest of the profit is allocated to the investors, based on their share of the investment pool. Thus Investor 1 will get $ 700 and the account of Investor 2 will be funded with $ 300.
As you can see from this simple example the investors do not have to make trading decisions or manage the transactions. All they need is a successful money manager who takes care of the entire trading process. Immediately after you have transferred the funds into the PAMM account, they become operational which means that you don’t have to wait for a rollover to credit your account. This is due to the fully automated mode in which the module controls the PAMM account. Each trading interval starts from the moment when you deposit funds into your investment account and ends with the next Rollover. The Rollover consists of several procedures that are implemented by the Forex broker and guarantee that the terms of the offer are equal for all participants in the PAMM account. This is the time when the manager’s fee is calculated.
The transaction volumes are also automatically adjusted according to the investment ratio and your investment account’s rate of return becomes identical to the return of the PAMM account. This fully automated mode allows the Asset Manager to concentrate solely on trading without the need to calculate and adjust the volumes of the invested funds. The Asset Manager is able to trade efficiently without taking into consideration the number of investors who leave or join the account and can also use trading advisors without modifying them every time.
Transparency and Convenience
One of the greatest advantages of PAMM accounts is that investors are allowed to deposit or withdraw funds at any time, and most brokers, do not charge any fees for early withdrawals. Additionally, operations are managed automatically, which means that non-trading operations will not affect the manager’s account balance.
Investors are able to monitor all PAMM accounts and sort them by managed capital, profitability, lifetime etc. Managed accounts are regularly reviewed and the statistical data necessary for the description and analysis of the manager’s work is always up to date.
Safety of Usage
The investors’ accounts and the funds kept in them are accessible only to the investors themselves. The Asset Manager cannot use these funds as they are not transferred to his private account. All trading activity is conducted in this account and is instantly replicated to all investors’ accounts that are connected to the PAMM account without any delays. This also includes the manager’s own trading account and guarantees that he/she is trading responsibly since his own money is also at risk.
Furthermore, each investor has the right to manage their risk and set a maximum drawdown level and profit amount. Hence, when one of these requirements is reached, the current amount of the investment will be automatically withdrawn.
Diversify your portfolio
PAMM accounts are often used by investors who wish to diversify their portfolios. Managed accounts can be used for hedging by reducing the probability of drawdowns. What is more, PAMM accounts give you the chance to diversify your investment portfolio by giving you access to markets that are different from equity and fixed income investments.
Investors are able to check the performance of all PAMM accounts available within the broker. This way they can compare and choose the best PAMM account based on several criteria. Likewise, the Asset Managers follow strict risk reduction procedures that aim to achieve a smooth growth of the investor’s account. The Forex leverage is also used reasonably in order to ensure an appropriate risk management level and at the same time maximize profits.
This post was provided by LiteForex, a leading Forex and CFD Broker.