Investing through Managed Forex
Managed Forex is a new and growing subset of the alternative investment space in which foreign exchange traders manage individual forex, or FX, accounts for investors in much the same manner as a commodity trading advisor manages a futures account for an investor.
Managed forex differs from online forex trading, forex platforms, and nearly all other F/X related investments most people see advertised in that the managed forex manager actually manages each client's individual account, placing trades in the clients' accounts directly on their behalf, like their own personal forex trader.
Most managed forex programs have terms similar to managed futures programs and hedge funds, with a 0% to 3% annual management fee, and 15% to 30% incentive fee, which means they take around 20% of the profits they make you. While some investors scoff at having to pay a portion of profits to the manager, we like the alignment of interests that presents - as the manager doesn't make the bulk of their money unless the client makes money.
Still Unpolished... and Unregulated:
Unfortunately, the managed forex space remains very unpolished and unregulated - making it a marketplace where there is a definite need to proceed with caution. View our newsletter: Managed Forex still the Uncharted Territory of Alternative Investments by clicking here.
Despite the unbelievable growth of the Spot FX marketplace there still seem to be relatively few viable managed forex investment options for individual investors. The research team at Attain has looked high and low for viable Forex programs to offer to clients over the past five years, with very little to show for it.
There are a few factors at play causing Managed Forex issues in our opinion:
First is the lack of segregated accounts available to US investors investing in Spot FX. Most managers trade in the Spot market as they are attracted to the tight spreads and deep market liquidity available on many Forex platforms. And while these platforms do provide for a better marketplace (especially in the middle of night) than exchange traded futures - they do not come with the assurance that your funds will be segregated from the operating expenses of the overall firm. This means that your funds can be used to pay creditors during a bankruptcy or institutional failure situation. In contrast - accounts trading exchange traded futures have their capital held in segregated accounts providing additional protection.
The second factor is that Spot FX is an interbank marketplace, meaning all trades are done directly between the banks and not on a central exchange like the Chicago Mercantile Exchange (www.cmegroup.com) or EUREX (www.eurexchange.co). This lack of an exchange or middle man means that there is nobody to guarantee the trade and "giving up" trades becomes very difficult. 'Give ups' are a staple of the managed account industry, allowing managers to do one trade for all of their clients at various firms through one executing firm, and then having those trades 'given up' to each clients clearing broker. Without 'give ups', forex managers must execute trades for clients on the trading platforms provided by their brokerage firms. In theory, this trading on multiple platforms should not be a problem as long as the manager has the technology and/or people to manage it; but we have found that this is rarely the case. We have seen cases where a manager is profitable at one firm, while losing money at another as well as additional odd factors such as a larger account receiving more favorable fills because of the sheer size of the trade being executed.
One of the most important pieces of due diligence you can do on a managed forex manager, therefore; is to request client statements supporting their reported performance from an existing client ON THE PLATFORM you will be having your trading executed on.
Unfortunately, this is usually where we see the performance of most managed forex programs break down - with them unable to prove their performance on the platform available to individual clients. The normal story is that the manager worked at a large bank and built a track record trading for an institutional client or the bank itself on the bank's institutional trading platform; then created a managed forex program to solicit individual investors using that performance history. Problem is, that performance is tied to the bank's institutional platform (and often to the large trades able to be placed by the manager as well), and that performance may be different on the retail platform an individual investor would have his or her account traded on.
This sort of thing is not a problem within the managed futures space because 1. There is a centralized exchange on which all trades are executed (meaning essentially one platform), and 2. The managers are regulated by the NFA and CFTC - meaning if they are audited and client performance does not line up with reported performance, they will be shut down.
Will Managed Forex Investment Opportunities Improve?
Regulators are often criticized for misunderstanding and over regulating financial markets, but in the case of Forex trading, we are very encouraged by the amount of effort regulators are putting into improving the potential viability of the Forex market. Beginning October 31, 2008, the CFTC (Commodity Futures Trading Commission) made their first attempt to reduce the number of "fly by night" FX dealers (i.e start up FX dealers who allow investors access to FX markets) by raising the minimum firm capital requirements.
In addition to the above regulatory changes, effective November 30, 2008 it was determined by the CFTC that any NFA Member who actively manages Forex accounts on behalf of customers is required to provide prospective clients with a disclosure document that has been filed with the NFA prior to use. While this does not apply to everyone managing Forex around the world; this is music to our ears as it should solve some of the issues raised above. We highly recommend an investor considering managed forex check the registration status of any manager you are considering, and if they are not registered terminating the conversation or research.
Do Investors Really need to trade Spot FX?
With all the above extra risks associated with Forex trading, we could also argue that having a manager dedicated to trading FX is probably not necessary for most investor portfolios. First, most Commodity Trading Advisors (CTA's) (especially trend followers and short term momentum traders) already have exposure to the major currency pairs and will trade foreign currencies as conditions warrant via exchange traded currency futures. .
For those investors saying, "I need the Spot Forex market to hedge my currency risk" - please note that it is worth acknowledging that Attain clients are free to hold any portion of their account funds in the major foreign currencies like the Euro, Aussie Dollar, Japanese Yen, Canadian Dollar, and Swiss Franc in their futures account. Additionally, if appropriate, investors can use exchange traded futures to hedge their dollar exposure if they so choose.
It is important to understand Managed Forex trading is a new and growing marketplace where there is a need to improve the basic level of due diligence. If you don't already know the NFA link for tracking the registration status of the manager you are researching, here it is again http://www.nfa.futures.org/basicnet/. While this seems like a simple task, we've found that using registration status as your initial filter will eliminate nearly 50% of all potential managers from your list. If after this point, you are still curious give us a call or send us an e-mail to firstname.lastname@example.org and we'd be happy to look into the manager in more detail.
Looking ahead, we expect the next 12-36 months to see even greater advancements within the Managed Forex space. Our challenge will be to continue to interview managers and research managed products in hopes of finding talented FX mangers to add to our stable of alternative investment products.
To learn more about Managed Forex, email or call us at 800.311.1145. We're here to help and happy to answer any questions you may have about the challenges involved with F/X trading and managed forex. We answer the phone in One (1) ring every time - try it.