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Strategy Focus: Managed Forex Accounts

October 15, 2007

 

Managed Forex? What is that? Is it a new type of trading strategy? A new type of account structure? A CTA who only does Forex trading? Would you believe a mixture of all of the above.

Managed Forex rather simply describes a class of investing, where a Forex trading account is managed by a professional advisor. That is, an advisor makes all of the trading decisions for the account, rather than the individual investor deciding when to buy and sell, how much, and how often. In return for this management service, the advisor usually receives an annual management fee around 2% and an incentive fee of 20% to 30%.

In this way, Managed Forex is very similar to managed futures, which refers to a futures account which is managed by a professional Commodity Trading Advisor, or CTA. The fact that the advisor is paid a portion of the profits is also very similar to a CTA investment.

You may be saying, what's so new about this - there have been Forex advisors who manage accounts for years. And you would be right, there have been and continue to be loads of advisors and managers who trade your Forex account for you for a fee. But there haven't been any managed Forex programs Attain has recommended, until now.

You may be saying, so what? But when you consider that Attain has not recommended any Managed Forex programs until now because we have not been unable to verify most program's past performance or because our due diligence pulled up some skeletons in the manager's closet, the fact that we can now recommend the following trio of advisors should carry a little extra weight.

Past Performance is Not Necessarily Indicative of Future Results

Program	YTD return	Avg. Ann. ROR	Max DD	Initial Capital (000's)
PFG K 3 Forex Program	32.70%	44.70%	14.70%	$5
Wallwood FX Program	10.90%	15.60%	33.90%	$100
PFG FIT FX Program	-11.40%	26.80%	17.50%	$5

The problems we have had in the past finding good Forex managers has mainly stemmed from two causes. One, Managed Forex program and their managers/advisors are not required to be registered with any regulatory body.

Because no registration is required, managed Forex programs have been, and continue to be, the wild, wild west of the investing landscape. What do we mean by that? Well, to quantify it - we believe more than 75% of the performance you'll find doing a simple Google search for "managed Forex" is unregulated and probably NOT TRUE. Compare that with less than 1% for the data you'll find when Googling managed futures, and you get a very good argument for the regulation of Forex dealers and hopefully an idea of how cautious you should be when venturing out into the Managed Forex "wild west frontier."

The second problem with finding good Forex managers has been they are all too big already. Nearly every manager we could find who had a long track record, consistent results, low drawdowns, and all the other qualities we look for - had already parlayed that success into large amounts of money under management. With hundreds of million of dollars under management, these managers were now catering to institutional money with minimums for new accounts usually between $1 Million and $20 Million.

These two issues when taken together meant that the only advisors you could afford to invest in with low minimums were usually unregistered Forex "traders" who were either deliberately trying to deceive, or were legit, but had only made money trading a personal account or on a small amount of money, and didn't know how to replicate that success when managing other people's money.

In short, there were very few professional advisors who were regulated, whose results could be confirmed, and who at the same time had low minimums. This was a prime opportunity for someone to move into, and our preferred FX clearing agent, PFG smartly filled this void.

PFG's Role

Enter into the equation PFG's Forex division, which had the very good idea of pooling investor money together to meet the otherwise very high minimums of Forex managers with long track records and good returns. For example, the successful K3 program listed above (performance chart below) is run by an advisor called King’s Crossing Capital Inc., who is currently managing $215 Million and has a $Million minimum for new accounts from individual investors. But the minimum for PFG - K3 through Attain is just $5,000.

The different regulations and structure of Forex accounts allows PFG to pool investor's money together, while at the same time keeping the money in separate accounts for each investor. To understand this, imagine pooling together money on the futures side, and then needing to split up 1 Corn contract between 4 different accounts. You can't do it, as you can't split a futures contract below a single lot. But in Forex, splitting the $100,000 trading unit normal in F/X trading among four accounts is not a problem, as the trade amount is merely split in 1/4s and each account is shown as having traded $25,000.

There are some downsides to this arrangement. One, you can't use notional funding as you can in managed futures trading - meaning a $25,000 investment will require a full $25,000 deposit. Further, you can't cross marginal your Forex account balance with your futures account, and you can't buy T-Bills in the Forex account - so there's no additional interest income like in a managed futures account.

In addition, your individual account is not being managed by the advisor, but rather he is managing a pool of accounts. This pool of accounts may achieve different performance than that of the overall program, and that is the reason that Attain lists the K3 and Fit F/X programs with the prefix "PFG", as we are listing the performance of the PFG pooled account rather than the composite performance of the advisor.

The Wallwood program above is an exception to this. Wallwood is available through the same pooled arrangement at PFG for just a $5,000 minimum, but we don't yet have the track record of the PFG accounts. The main program has a minimum of just $100,000 for an individually managed account, however, thus we have listed the composite performance for the program.

It is important to note that PFG does execution for many Forex managers, and that Attain does not blindly recommend all of these programs, and instead does their own due diligence on them. Many have and will not make it past our due diligence review, while others are still in our due diligence process.

Attain's Recommended Programs:

The following three programs are the best of the managed Forex programs Attain has come across in 5 years, and represent a great opportunity in our opinion for portfolio diversification for those investors currently invested in CTAs and trading systems.

The programs are systematic, and do operate on some of the same markets sectors (betting on foreign exchange rates), but they do represent a different kind of access to that sector, through the cash market instead of futures. In addition, there are few if any trading systems and/or CTAs who focus exclusively on this sector.

In our opinion, whether you're invested in a stock index option seller like Zenith or a commodity option seller like FCI - each of these Managed Forex programs represent a nice opportunity to get exposure to a sector not directly affecting your portfolio, while adding a long volatility component to your portfolio.

Lastly, at just $5,000 minimums for each, its quite easy to allocate amongst all three at the same time, creating a portfolio within the Managed Forex sector for less capital than you would normally allocate to a single advisor or system on the futures side.

K3 -

The K3 program is run by King's Crossing, and their manager: Richard Whelan, who managed $12 Billion in assets for the Ontario Pension Fund until 2002. He left and developed a similar model for a private Hedge Fund that he and another partner ran, then sold out his share in 2004 and went back to work for the Ontario Teachers Fund. He left there in 2006 to start Kings Crossings.

PFG K3 Forex Program is King's Crossing's institutional program using 3 times leverage. The trading is done through PFG. The performance targets for PFG K 3 are 48-60% return, 33% volatility and 6% drawdown. Trading is done 24 hours per day and is purely systematic, trading 7 currency pairs, including the majors (Euro, Pound, Yen, Canadian, Dollar), Aussie Dollar and South African Rand. The strategy trades 2 different models - one short term (2-5 day hold time) and one long term (50 day hold time), will measure volatility and trail stops, and may spend up to 10% of the open trade profits to buy options as protection in addition to trailing stops.

King's Crossing is currently managing over $215 million, and is registered with the NFA, but is not registered with the CFTC as a CTA.

Fit F/X -

FIT FX program is being offered by Fitrol Investments who is a CTA from Europe. FIT FX is an offshoot of Fitrol’s managed futures program and they currently have approx. $35mm under management in this program. The program is a day trading FX program that only trades the European and NY market sessions. So each client will be flat by the NY close (4 pm CST) and there is no trading during the Aussie / Asian sessions.

The only markets currently traded are EURUSD, USDCHF, USDJPY – although other markets can be traded if needed for liquidity purposes. Fitrol has been in business for 8 years, and manage in excess of $300mm across all of their futures & F/X programs. Fitrol is registered with both the CFTC and NFA.

Wallwood -

Wallwood was founded by Mario Kelly and Daryl Swain in May 1998 and specializes in systematic currency trading. Mario has been employed in the currency business since 1989 and Daryl has been involved in the currency market since 1990.

Wallwood's strategy is a medium term trend-following system whose goal is to establish a position in a persistent market move and stay with the move until it is exhausted and reverses direction. If the trade becomes sufficiently profitable, the system declares a trend to be in effect and it relaxes the reversal point to allow the market more room to move.

The strategy currently trades the USD/YEN and EURO/USD, and typically trades only about 15 times per month. Wallwood is registered with both the CFTC and NFA.