The Ultimate Guide to
Managed Accounts – PAMM & MAM
Managed accounts are segregated accounts, owned by a trader, but with the trading decision-making function delegated to a fund manager. Managed accounts differ from mutual funds as in a mutual fund, contributions from traders are pooled together in a corpus, which is managed by the fund manager: the trader holds a portion of the portfolio and has no practical ownership of the underlying securities.
Two of the major modes in which managed accounts operate are Profit Allocation Money Management (PAMM) and Multi- Account Manager (MAM).
PAMM and MAM both allow fund managers to manage multiple segregated accounts through a single account, without the need to create a trading fund. Client managed accounts are all connected to the manager’s main account and all trades made by the manager are distributed proportionally among account holders. Similarly, the gains or losses arising out of a fund manager’s performance get proportionally distributed among the segregated account holders.
Profit Allocation Money Management (PAMM)
A PAMM account can be considered as a large main account whose total capital is the sum of individual segregated sub-accounts of customers. The management module feature of a PAMM ensures distribution of trades made on the unified account amongst individual managed accounts based on allocation percentages. For example – a 100 lot trade is made on EUR/USD, and this trade is distributed among sub-accounts based on proportional equity contributions. So in the case where an individual sub-account contributes 1% of the total capital in fund managers PAMM account, the size of the trade for the account holder becomes 1 lot based on the 1% contribution.
Benefits of using PAMM
- Allows traders to take advantage of sophisticated trading strategies without a large capital requirement
- Gives the trader an opportunity to diversify tradings by taking services of multiple trading managers through different PAMMs
- Being fully computerised and automated, the PAMM platform reduces the risk of fraud in the distribution mechanism
Multi- Account Manager (MAM)
MAM accounts provide more complex and sophisticated managed account services by allowing the fund manager to assign higher leverage for particular sub-accounts. MAM also allows the fund manager to regulate and adjust other risk management features across sub-accounts based on the individual trader’s risk profiles, thereby giving them the flexibility to execute complex trading strategies. Although the basis of distribution continues to be a percentage allocation, by using a MAM, the fund manager can take advantage of greater flexibility to allocate trades on the basis of risk allowed by each sub-account. If a particular sub-account holder is considered by the manager to have a higher risk appetite, then they can assign greater leverage for the account, thereby increasing the risk of individual trades. If the higher risks pay off, there could be greater rewards. However, this flexibility could be a double edged sword and could bring exceptional losses if markets go against the fund manager.
Benefits of Using MAM Accounts
- Allows fund managers to execute trading strategies which are more in tune with the varying risk appetites of individual account holders
- Allows better representation of individual trader’s risk appetite in fund manager’s trading strategy
- Gives the trader an opportunity to diversify tradings by taking services of multiple trading managers through different MAMs
- Being fully computerised and automated, the MAM platform reduces the risk of fraud in distribution mechanism
PAMM vs MAM
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PAMM
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MAM
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Method
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Egalitarian, distribution directly based on individual contribution |
Sophisticated use of leverage and distribution is a function of both contribution and risk taken |
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Structure
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Single managed account aggregating all the trader contributions. |
Multiple accounts split across brokers |
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Withdrawal
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At rollover |
At rollover or at end of trading period |
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Minimum Deposit
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Varies from vendor to vendor |
Varies from vendor to vendor, but generally used by traders with high risk appetite |
Risks associated with PAMM and MAM
- Trading in these instruments is risky as a wrong decision of fund managers could lead to large capital erosions
- With the PAMM account system, the managers trading style may not be very transparent. This makes it difficult to make informed choices
- Leads to complete dependence on fund managers skills and does not allow the trader to build their own expertise
- Trades may not be completely liquid and could involve exit loads
Regulated brokers providing PAMM/MAM services
AvaTrade MAM – Key Features:
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- Good liquidity
- Allows trading subgroups for variety of strategies
- Client allocations starting from .01 lot
- Provides for MT4 order types stops, limits, trailing stops, close all, etc.
- Leverage up to 400:1
- Prompt monthly payments
Conclusion
Managed accounts have allowed traders to benefit from sophisticated trading strategies provided by professional fund managers for their individual accounts. They also allow traders to harness the benefits of diversification based of varied trading strategies. These instruments provide an alternative to traditional pooled asset trading funds. However, all this sophistication comes with its own set of risks, hence for margin trades like forex, traders must be cautious while using managed accounts.
