A Percentage Allocation Money Management (PAMM) account is an investment program in which an investor gives over the trading rights of his investment to a skilled trader for the purpose of growing the account and providing returns on investment. Profits accruing from this trading activity are split between the investor and the trader/account manager.
Those who choose to invest are usually investors who are not very experienced, or who probably have a day job or are engaged in other activities that do not give them enough time to trade the financial markets. Trading is an engaging activity and if a trader does not have the time to give it the attention it deserves, the account will suffer.
How does a PAMM account work? In order to achieve a greater sense of commitment and responsibility over the account from the account manager, the account manager is required to make a cash contribution to the PAMM account he will be managing. The manager handles all trading activity and receives a percentage of profits as compensation.
The account manager sets up a PAMM account with a forex broker that offers PAMM facilities. This is a public investment and is referred to as the Manager’s Capital. The account manager will then trade this account for some time in order to create a trading history that could be used as his track record. To illustrate these steps, let us take the example of a manager that we shall call John Doe, who starts a PAMM account with $1,500.
Once the account manager has generated a trading history and is listed in the PAMM rankings, he then makes a public proposal where he requests for investors to join his PAMM account, and states the compensation he is to be paid by investors. When investors join, the account grows and the manager can now commence the full PAMM trading. So let us take for example that John Doe has grown the $1,400 account to $2,000, and this positive result attracts two more investors, Greta and Jackson who bring in $5,000 and $3000 respectively. The account size is now $10,000.
Withdrawal cycles are predetermined, and the settlement dates determined. Once the settlement date is reached and profits have been made, the profits are shared according to the percentage equity investment each investor brought to the table. The manager is then compensated according to the agreed profit sharing formula. The account manager can also withdraw profits accruing from his own equity, but he is not allowed to deplete his manager’s capital. So if our manager John Doe achieves a 50% return on this account, he has made $5000 profit and the account is now $15,000. The profits will be shared in the ratio of 5:3:2 (Greta; Jackson; John Doe). So Greta gets $2,500 and Jackson gets $1,500. If the agreed compensation to John Doe is 20%, then Greta will pay John Doe $500 and Jackson will pay $300. So in addition to his own profit from the trade of $1000, John Doe will receive a total compensation of $800 from the two investors.
The beauty of the PAMM account is that it offers a win-win scenario for both the account manager and the investor(s). The trader has the opportunity to tap into the trading skill of the manager without having to devote time and energy he may not have to the trading activity, and the account manager has the opportunity to compound profits both from using larger volumes on an increased account size as well as from the compensations that he receives from the investors of the PAMM account.
Now what should be the investing mindset of those who participate in PAMM accounts? Some PAMM account managers are more aggressive in terms of bringing in returns than others. Aggressive trading goes along with greater risk. There are larger drawdowns and greater potential for loss with aggressive trading techniques. It is preferable to invest smaller amounts of money with more aggressive PAMM account managers and to invest larger amounts of money with more conservative traders. This will help the investor to spread his risk more equitably.
How many PAMM account managers can a trader use? There is no limit to the number of PAMM accounts an investor can register in. It all depends on how much the trader has at his disposal and the returns he seeks to achieve.
For a PAMM account to appear in the public ratings, it must meet the following conditions:
- The account should be registered.
- The account manager should be verified.
- The Manager’s Capital must be at least 100 USD.
What should potential investors be looking at when viewing the public ratings of a PAMM Account? Some of the criteria are as follows:
- 1-Month Return
- 3-Month Return
- 6-Month Return
- 1-Year Return
- Account Equity
- Drawdown percentage
- Manager’s Capital
What if a trader wants to pull out of a PAMM account before the next settlement date? The trader can do so, but will have to settle his obligations to the account manager.