Percentage Allocation Management Module : Explaining What a PAMM Account is All About

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)

Print Friendly
You can leave a response, or trackback from your own site.

6 Responses to “Percentage Allocation Management Module : Explaining What a PAMM Account is All About”

  1. Maurizio says:

    Hello Daniel, your idea to create an Asirikuy community managed account is genial and the PAMM seems to be the ideal solution for it. I have just a general question about the broker. When I will present the investment to friends or people I know, they surely will ask about where the money will be deposited and if it is a safe place. On today’s times this is a major concern and fear source, as we see that also big banks can fail and “nothing is safe”. I live in Switzerland and I see for example that people from the nearest countries tend again to deposit their money in Swiss banks because they consider them safer than letting them in the EU. What is your opinion about Fxopen? What are the elements that we could bring to reassuring potential investors? Which “guaranties” could we give to them regarding Fxopen? From the website it seems that they have their main and legal offices in Cyprus. Would people trust a company from Cyprus?
    Thank you. Kind regards.
    Maurizio

    • admin says:

      Hello Maurizio,

      Thank you for your comment and kind words :o) Regarding the safety of funds, FXOpen is one of the largest brokers in the world with 217K live accounts and more than 65 billion dollars in monthly traded volume. I have been with them for a long time and they are one of the few trustworthy brokers I know who accept customers from all around the world (included the US) allowing PAMM accounts using MT4 and automated trading. That said beyond the above there is no explicit guarantee for the safety of funds. If a person is not comfortable with this and desires to have other risk prevention measurements such as account segregation or government insurance then this is probably not the best investment for them. The best thing however is to tell people to give it a try with a small investment (100 USD) if they are worried about how the broker operates, after a while if they like the broker then they can add more funds or quit overall.

      That said it is worth mentioning that most brokers who offer segregated accounts only do so after a 100K deposit and government insurance is probably only limited to the UK and then to accounts no larger than 250K. I believe that FXOpen is trustworthy due to their experience, history, client number and traded volume, the safety of funds is equivalent to NFA brokers for that matter.

      However in my mind you should do no effort beyond whatever evidence is available to “convince people” to use a given broker, if you explain trading and investment conditions clearly and they do not like them then you should respect their choice. In the future we might add PAMMs with other brokers that do account segregation or have accounts insured by government if this first venture is successful (I didn’t do this in the first place because I wanted to start with a single PAMM account ANYONE could join and brokers which implement these additional safety measures do not accept US citizens, at least those I have found who offer EA enabled MT4 PAMM accounts). I hope this answers your comment :o)

      Best Regards,

      Daniel

  2. Maurizio says:

    Thank you for your clear answer Daniel. I think that the possibility to have different brokers to choose from would be more suitable for some potential investors and this will allows also a better differentiation in the sense of a “broker portfolio”. For example I’m working with 3 brokers now, and soon I will add one more, all of them strictly regulated and with segregated accounts. I also know that you work with several brokers. But you are right, at the beginning better keeping things simple and technically easier. Anyway if this project will be successfully as I hope, I think the that brokers choice and diversification will be an important concern for investors.
    Thank you.
    Kind regards.
    Maurizio

    • admin says:

      Hi Maurizio,

      Thank you for your reply :o) Without a doubt broker diversification is important and if this first PAMM is successful we will certainly start accounts with at least 3 more brokers I have found who offer MT4 enabled PAMM accounts. From those two have segregated accounts but only 1 accepts US citizens. As you say, broker diversification is important and this will definitely happen as the project evolves. Thanks again for your comment Maurizio,

      Best regards,

      Daniel

  3. Gary says:

    Are you guys aware that FXOpen was kicked out of Mauritius for un-savoury activities? And have you read the forums regarding the difficulty of withdrawing funds? I am having problems as I write!

Leave a Reply

Subscribe to RSS Feed Follow me on Twitter!