On yesterday’s post I introduced my Asirikuy Investment Project which is an effort to develop a community of knowledgeable, responsible and ethical money managers working together to help their clients achieve their financial goals while benefiting only from performance fees. The central point of this project is the use of Percentage Allocation Management Module or PAMM accounts which allows us to gather investors safely and legally without having to register or get permissions from any authority. On today’s post I will explain what a PAMM account is, what its main benefits are and why it is such a safe and sound option for investors when seeking someone to manage their money.
When you want to manage other people’s capital there are actually several options you can take. The first one is to take people’s money directly and manage it through accounts in your name, this is illegal – as it puts the money under the direct power of the manager – unless you have adequate registrations as legally required by the country where the investor is.
The second one is to trade the money directly on a client’s account using a Limited Power of Attorney or LPOA which grants you legal consent to perform trading operations. Even though this method is very safe – as it doesn’t give the manager power to withdraw or use funds in any other way besides the execution of operations – it does require to comply with certain registration requirements depending on the investor’s country of origin. For example when dealing with US clients you cannot handle more than 145K USD or 15 clients, whichever comes first.
The next solution available – which is the most practical – is the use of a PAMM account. In this case the client does not make any agreement with the manager but with the broker such that the broker is authorized to use the client’s money to duplicate the operations done on the manager’s main account. The manager “sees” the investor’s capital as part of his PAMM account and executes positions transparently through a single platform, gains and losses are then distributed in proportion to each investor’s participation in the account, meaning that percentage gains/losses are equal for all investors.
When you decide to join a PAMM account you make an agreement with the broker to participate in the trading operations of another account (the manager’s account). For example if you join a PAMM account – that had 9K USD – with 1000 USD and the account makes a 1000 USD profitable trade you will get assigned exactly 100 USD which would be 10% of your initial investment while the rest of the PAMM will get assigned 900 USD (10% of 9K USD). As you see the gains or losses as percentages of investments are exactly the same for all investors.
The PAMM structure also allows the broker to automatically deduct any performance fees when new equity highs are reached at the end of a given trading period (which can be specified to be daily, monthly or quarterly on most brokers). For example if your investment reaches a 20% profit and the performance fee is 10%, 2% will be automatically deducted from your account to pay the manager. However if your account then goes down to 10% and then up to 16% you won’t pay any fees as a new equity high hasn’t been reached. It is important for any investor to read the full PAMM agreement documentation so that he or she understands exactly when and how performance fees will be deducted. These fees will then become part of the manager’s capital which can be kept on the account or withdrawn at the manager’s discretion.
As you see the PAMM account structure benefits everyone in the picture. The manager gets a lot of benefit as he or she doesn’t need to pay or incur any formal registration fees or expenses to manage accounts – since the agreement is done strictly with the broker – while the investor also gets the safety of having their money being totally safe from being withdrawn or used by the manager in anyway besides the intended investment. The fact that the broker controls the PAMM and monitors its performance also allows the user to see transparently what is going on and how the manager is using his or her funds. The investor can also withdraw funds at anytime (sometimes with a penalty if the withdrawal is not scheduled, depending on PAMM terms). You can read more about PAMM accounts and how they work here under the “How PAMM Account Works” tab.
Of course if you would like to learn more about my work and you would like to learn how to build, design and trade your own likely long term profitable automated trading systems please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to automated trading in general . I hope you enjoyed this article ! :o)