Investment funds and high net worth individuals put a lot of trust in traders managing their Forex accounts. So, what’s the secret to a winning formula?
Reading the title of this article, you might think I’m about to deliver some magic bullet to help you or your client strike gold.
I’ve got news for you – that isn’t going to happen.
If it were that easy, neither party would need the other.
However, there are some basic guidelines that can help frame your relationship to get the most out of it.
The fact is, investing in a Forex manage account requires effort on both parties: the investor and the trader. Neither can work in a black box by themselves. Relationships need to be collaborative and open in order to succeed.
So, what does that look like?
Let’s start at the beginning.
Setting The Stage
Any relationship starts with first impressions. It sets the tone for both parties from the outset.
Investors need to define all of the following from the get-go:
- Risk tolerance – How much risk are you looking to take? Can you handle volatility, or would a drawdown of 0.5% of your investment cause you to break out in sweats? Ultimately your risk tolerance dictates the leverage and type of strategy you use.
- Investment timeframe – Are you investing for a year or just dipping your toe in the water to see how things go? Is this something you can leave alone for years and absorb the volatility in between? The longer your time horizon, the more likely you are to achieve your return goals.
- Other assets – Do you own a ton of real-estate in London? What about your equity holdings – do they have a lot of currency risk? Listing what you have and where helps design a strategy that enhances your returns by diversifying your risk.
While this list is fairly small, it encompasses critical information an investor needs to convey. It’s by no means exhaustive and anything you might find relevant should also be included.
But what about from the Forex manager’s side of the table?
Again, the focus is on matching your skills, strategy, and management with those of the investor.
So, you’d want to include all of the following up front:
- Strategy blueprint – While you don’t need to give away the secret sauce, you should be able to convey how exactly you plan to invest their money. That includes available markets, discretionary vs formulaic trades, frequency of trades, etc. The goal is to clearly show your client how you plan to invest their money and what to expect.
- Multi-account management – Quite often, traders will invest on behalf of multiple clients at a time. You should be able to explain how you keep the accounts separate both in terms of order execution and reporting.
- Account requirements – To effectively trade, you can’t have investors treating the account like a bank. Let them know up front how and when they can add or withdrawal funds.
- Track record – Clients want to know why they should trust you. Nothing alleviates concerns like a performance report showing how you’ve been successful over time.
Ultimately, the client needs enough information to make an informed decision. The last thing want is to enter into a relationship with a mismatch in expectations.
Forex investments tend to come in two varieties – technical and qualitative.
Technical trading relies more on mechanics such as chart analysis, order flow, and the like.
Qualitative looks more at macroeconomic trends, central bank policies, geopolitics and the like.
Both have their merits.
One thing that does happen from time to time are outlier events. This include everything from economic recessions like the pandemic to wars and skirmishes.
Quite often, these provide temporary, albeit lucrative opportunities.
Forex managers should have the wherewithal to point these out to their clients. While they may present high risk/high reward situations, each investor should consider them.
If the manager themselves isn’t proficient in this type of trading opportunity, they should have connections with someone who is.
At the same time, investors should consider how much of their Forex portfolio they want to allocate to speculative investments like this. It’s useful to keep some capital firepower available for situations like these.
With a long enough investment horizon, clients can even out the performance of these outliers and use them to enhance their overall performance.
Investing with a Forex managed account shouldn’t be a passive activity for the client. While they don’t need to know about every trade every day, they should be part of a regular review.
There’s a cliché saying in trading – Making money is hard. Keeping it is even harder.
As I mentioned before, part of investing with Forex is the diversification it provides. That can and will change over time.
Both the account manager and the client need to regularly review the allocations to ensure whatever hedging strategy they selected remains appropriate.
Consider for a moment someone with heavy equity holdings in European stocks. They want to maintain 10% of their total assets invested in Forex.
If equity markets surge rapidly, it may be worth reallocating funds towards the Forex managed account. Conversely, a major decline in equities might warrant moving capital out of Forex.
There aren’t any hard and fast rules to abide by. Each investor’s situation is unique. Some may only need to review their accounts every quarter, while others could go an entire year.
Without trust, the entire concept of a Forex managed investment account falls apart.
Clients should trust the traders to work their strategy to the best of their ability and alert them with any relevant information.
Account managers should trust their clients to provide them with accurate and timely information and requests so they aren’t caught off-guard.