A Percentage Allocation Money Management (PAMM) account is an investment program in which an investor gives the trading rights of their investment to an experienced trader in order to grow the account and earn returns. Profits from this trading activity are shared between the investor and the trader/account manager.
Those who decide to invest are usually investors who are not very experienced or who are likely to have a day job or other activities that do not give them enough time to trade the financial markets. Trading is an engaging activity and if a trader doesn’t have the time to give it the attention it deserves, the account will suffer.
How does a PAMM account work? In order to achieve greater commitment and accountability for the account manager’s account, the account manager must make a cash contribution to the PAMM account he will be managing. The manager handles all trading activities 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 then trades that account for some time to create a trading history that could be used as his track record. To illustrate these steps, let’s take the example of a manager we’ll call John Doe who opens a PAMM account with $1,500.
Once the account manager has created a trading history and is listed in the PAMM rankings, he makes a public offer asking investors to join his PAMM account and stating the compensation he has to pay from the investors. As investors join, the account grows and the manager can now start full PAMM trading. For example, let’s say John Doe increased the account from $1,400 to $2,000 and this positive result attracts two more investors, Greta and Jackson, bringing in $5,000 and $3,000 respectively. Account size is now $10,000.
Withdrawal cycles are predetermined and settlement dates are set. Once the settlement date has been reached and profits have been made, profits are shared according to the percentage of equity each investor has brought to the table. The manager is then compensated according to the agreed profit-sharing formula. The Account Manager may also take profits from his own equity, however, he may not consume his manager’s equity. So if our manager, John Doe, has a 50% return on this account, he has made $5,000 in profit and the account is now $15,000. Winnings will be split 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%, Greta will pay John Doe $500 and Jackson $300. In addition to his own $1000 profit from the trade, John Doe will receive a total of $800 in compensation 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 an opportunity to use the manager’s trading skills without having to devote time and energy that he may not have on the trading activities, and the account manager has an opportunity to generate profits by trading larger volumes on an increased account size and from the compensation it receives from the investors of the PAMM account.
So what should the investment mentality of those participating in PAMM accounts be like? Some PAMM account managers are more aggressive than others when it comes to generating returns. Aggressive trading comes with higher risk. There are larger drawdowns and greater loss potential with aggressive trading techniques. It is preferable to place smaller amounts of money with more aggressive PAMM account managers and larger amounts of money with more conservative traders. This will help the investor spread their risk more fairly.
How many PAMM Account Managers can a trader use? There is no limit to the number of PAMM accounts an investor can register with. It all depends on how much the trader has at their disposal and what returns they want to make.
For a PAMM account to appear in public ratings, it must meet the following conditions:
- The account should be registered.
- The account manager should be verified.
- The manager’s equity must be at least $100.
What should potential investors look for when looking at a PAMM account’s public ratings? Some of the criteria are as follows:
- 1 month return
- 3 months right of return
- 6 months right of return
- 1 year right of return
- Equity account
- drawdown percentage
- capital of the manager
What if a trader wants to exit a PAMM account before the next settlement date? The trader can do this but must fulfill their obligations to the account manager.