You will see that some Forex / CFD brokerages, usually the larger ones, offer a “PAMM Account”. What is this type of account? Simply put, “PAMM” stands for “percentage allocation management module” or “percentage allocation money management”. In other words, a PAMM account is basically a managed account where one trader trades on behalf of others through his or her account. PAMM accounts work by the Forex / CFD brokerage using a software application which allows the brokerage’s clients the ability to assign part or all their account to management by a particular trader. The managing trader then trades his own money but piggybacked onto that is the money of other clients, who each receive a percentage share of the profits or losses made by the trader into their own accounts.
Example Illustration
Let’s imagine that you are a retail trader with your own account and other traders with the same broker ask you to manage their accounts. Let’s say that you have $10,000 of your own capital and that Trader B gives you $40,000 to manage and Trader C gives you $50,000 to manage. You are now trading a total of $100,000 with your percentage allocation being 10%. Trader B’s allocation will be 40% and Trader C will be allocated 50% in line with the percentage contributed to the total fund by each trader. You put in an order to buy 1 full lot of EUR/USD. Your broker will allocate the order between the parties for this trade as follows: 0.1 lot to you, 0.4 lots to Trader B, and 0.5 lots to Trader C.
Advantages of PAMM Account
A PAMM account allows a trader to manage other people’s money with ease, just by trading normally through his existing platform. The PAMM software makes all the required calculations. There is effectively no limit to the number of “clients” the holder of a PAMM account can manage money for. The account manager can profit from their own trading and take a percentage of the profits from the money he or she manages as well. When the trading goes well and is profitable, it is a win-win all round.
One special advantage that a PAMM account has for the investor is that the investor knows that the trader is risking their own funds, and has “skin in the game”, which would tend to increase confidence that the trader will be working in the style they truly believe in, to the very best of their ability.
PAMM accounts are policed by the broker, and investors have peace of mind as they know that the money manager has no power to access the actual funds contributed as a withdrawal from the brokerage. Contrast this with a situation where the investor must write a check and hand it over to a money manager, and you’ll instantly see a big advantage of a PAMM account.
Disadvantages of PAMM Account
The most obvious disadvantage of the PAMM account is that all the parties involved must be clients of the same Forex / CFD brokerage. Most of the larger brokerages offer PAMM accounts, but there are other solutions available in the market which achieve the same result but can bridge between different brokerages and trading platforms, such as copy trading software, or other brands which offer PAMM-style set-ups but which have bridges so can connect to accounts at most brokerages. However, there is often in practice a small but real technical advantage to having all the parties working through the same brokerage and platform, reducing the risk of latency problems or communication errors.
How Does it Work?
Many brokerages offering PAMM accounts maintain a detailed list of their PAMM money managers so that investors can do some research and decide who they want to manage their funds. The lists usually include details of each trader’s historical performances and more information about who they are and what their trading philosophy is. The broker provides a Limited Power of Attorney (LPOA) document which both parties sign which gives the money manager the right to manage the investor’s money under agreed terms and conditions: the investors may of course terminate it at any time and have control of the trading of their funds transferred back to them. Monitoring, review, record keeping, etc. is all facilitated by the brokerage offering the PAMM account.
Can I Open a PAMM Account or Invest in One?
The short answer is “yes” – if you already have a Forex / CFD broker which you are happy with, just ask them if they offer PAMM accounts.