From time to time, when we’re scrolling through our various social media feeds, we come across posts on money management. These posts fall into two main categories: the first involves folks promoting themselves as Forex money managers, while the second consists of those searching for a “reliable” money manager or a signal provider to emulate trades. It’s quite common for these so-called “money managers” to spice up their posts with screenshots from their trading platforms. Typically, these screenshots showcase a handful of profitable trades. The aim? Well, it’s simple: to “wow” people and encourage them to invest with these managers.
In today’s article, our focus will be on deciphering the reliability of a money manager. Therefore, we’re here to equip you with the right questions and critical aspects to consider. We aim for you to finish this article with the skills to interview money managers like seasoned pros. Notably, this article holds insights for our demo traders out there, too. We’ll dive into why relying on just three, five, or ten profitable trades doesn’t signify readiness for switching to a live trading account.
How do you conduct due diligence?
No matter if you are looking for a “reliable” signals provider or someone who can trade for you. In our industry, people who manage other people’s money for a fee are called forex money managers, forex fund managers, or forex portfolio managers. If you let someone manage your money for you, you will risk your hard-earned money and rely on someone else’s skills and experience. The least you can do in this situation is to ensure they have these skills and experience. The “checking ” process is commonly called “due diligence.” A good practice to start your “due diligence” process is asking your potential money manager as many questions as possible. But what to ask if you don’t have much experience yourself and don’t understand the process? Fear not. We are here to help you. So, where do you start your due diligence? Start by asking the following questions.
Are you a licensed money manager? What is your professional background? What makes you qualified to manage my money?
Why asking this question is important? Well, for one thing, forex portfolio managers are legally required to be licensed in reputable jurisdictions like the UK, the US, and Europe. Additionally, they must have a strong educational and professional background. Understandably, these requirements may differ worldwide, which may be absent in your particular area. However, if someone wants to manage your money and you consider their services, asking this question won’t hurt.
Why should I invest with you and not with someone else?
As a diligent investor, you should do your best to understand why you should invest with this particular money manager. Even if you lack the knowledge and skills necessary to understand the intricacies of their trading strategy, it is a good practice to ask and see what they answer. It allows you to compare the qualities and merits of your money manager against potential alternatives. When you ask this question, you prompt them to articulate their unique selling points and advantages. Ultimately, it will help you make a more informed decision. Furthermore, the response can provide information on handling risk and protecting your investments. This is crucial to understand if your investment manager can safeguard your capital. Additionally, it challenges the manager to prove their credibility and competence. If they can provide a convincing answer, it instills more trust in their abilities.
What makes your strategy unique?
Asking your forex money manager about their strategy is also part of your due diligence. It helps you understand how they manage your investments. Based on their answers, you can decide if their approach suits your financial objectives and risk tolerance well. Remember, asking all these questions is a standard practice. Therefore, this question should not phase your money manager under normal circumstances. Ultimately, you are not asking them to disclose the details of their trading strategy and investment process. Instead, you want to gain a general understanding.
How are my funds protected?
Their answer will significantly help you evaluate the safety measures in place to mitigate risks effectively. This, in turn, allows you to ensure that your investments are handled with the utmost care and security. Moreover, it’s worth noting that some financial institutions even offer insurance or protection against certain types of losses. Your money manager may have arrangements in place to provide added security too. Knowing what contingency plans are in place, such as a business continuity or disaster recovery plan, can reassure you that your investments are resilient against unforeseen events.
How do you manage risk?
When discussing risk management with your money manager, ensure they clearly explain their approach. Avoid money managers who downplay risk or promise unrealistic returns without addressing risk mitigation. Your aim is to invest with someone who can navigate the complexities of the forex market while safeguarding your capital. Again, you don’t need a minute description of their risk management methods. A general description would be sufficient to put you at ease. A competent money manager will utilize sound risk management techniques, including stopping-loss orders and responsible leverage management.
Speaking of unrealistic returns: A shoutout to all those who think that turning USD 100 into USD 100k overnight is a realistic return target. No, it is not.
Do I deposit directly to your account or become part of your PAMM, MAM account?
The answer to this question clarifies the structure of your investment. A PAMM (Percent Allocation Management Module) or MAM (Multi-Account Manager) structure involves the money manager pooling and managing multiple investors’ funds. In this arrangement, they don’t have a direct access to your funds. In contrast, depositing directly to the manager’s account implies a different arrangement. Exercise extreme caution if an unregistered, unlicensed money manager is asking you to transfer money directly to them. Be especially cautious if they insist on you making a transfer in cryptocurrency.
Do I deposit via bank transfer or crypto?
By asking this question, you ensure you are comfortable with the deposit process and can select the method that aligns with your preferences, security considerations, and regulatory requirements. It’s vital to set up your investment with the forex money manager. Cryptocurrencies offer enhanced privacy and security, which can attract some investors. From an investor’s viewpoint, a bank transfer is a safer choice. Banks, being financial institutions, adhere to stringent regulations. To elaborate on this, when engaging in a bank-to-bank transfer, it’s essential to have the recipient’s name and bank account details on hand. Essentially, these bank transfers establish a traceable paper trail, which is advantageous for you. In the unfortunate event of fraud, it offers authorities crucial information to pursue the case further.
What is the minimum investment period?
The minimum investment period often relates to the money manager’s strategy. It can impact your flexibility if you want to exit early but are subject to a longer period. Knowing the terms in advance allows you to plan accordingly. It’s essential to know how long your funds will be tied up. If you foresee needing access to your capital within a shorter time frame, a longer minimum investment period might not align with your financial goals. By asking this question, you gain clarity on the commitment required and can make an informed decision that aligns with your financial objectives and liquidity needs. It’s a critical query to discuss with your prospective forex money manager.
What is your weekly, monthly, and yearly return target?
It’s essential for money managers to be transparent about their return targets. This question encourages open communication and sets clear expectations between you and the manager. By knowing the targets, you can later evaluate the manager’s performance. It could be a red flag if their actual returns consistently fall short of their targets.
What is your track record?
Inquiring about their track record allows you to evaluate their past performance. This includes their success, consistency, and ability to meet their stated goals. A strong track record is a positive sign that the manager can deliver results. A history of consistent performance is essential. It demonstrates that the manager can deliver returns over time rather than relying on a few exceptional months. Consistency is a sign of a well-structured and disciplined trading approach. When discussing their track record, request detailed performance data, including returns, drawdowns, and other relevant statistics over different time frames.
Be cautious of managers who are hesitant to share this information or promise unrealistic returns without evidence to support their claims. Assessing a money manager’s track record is crucial as a fundamental step in making an informed investment decision. A longer track record is preferable in statistical terms as it enables us to calculate various trading statistics with greater precision. These statistics include volatility, average return, mode, median, drawdown, and the Sharpe ratio. Notably, the short trading history is meaningless because all these statistical metrics will be biased. To give you an idea, let’s look at a simple example. Let’s say someone is showing you a week of profitable trades: USD 10, 15, 10, 20, 13.
If we sum all these up and divide by the number of observations, we will get our average of 13,6. So, on average, we can expect this manager to make USD 13,6 on any day of the week. Looks good, doesn’t it? Not so fast. What if next week our manager experiences a loss of 30? In this case, our average drops to 6.3. Which is still good but not as good as 13.6. The purpose of this example is to demonstrate how one loss can distort an otherwise “idyllic” picture.
This simple example illustrates how significant losses impact your investment portfolio statistics. Next time someone shares a screenshot from their MetaTrader 4 or 5 app with numerous trades to impress, request a few months of trading history. As a rule of thumb, longer histories are more informative. A more extended history helps assess whether the person possesses skill or experiences a temporary winning streak without replicating their performance.
The bottom line is to avoid managers unwilling or hesitant to disclose their trading history or whose history is too short.
How does your fee structure work?
Understanding the fee structure is crucial for financial transparency, cost assessment, and making well-informed decisions when choosing a forex money manager. Forex money managers very often use a fee structure known as the “2/20 fee structure.” This means they charge a 2% fee on the total assets under management (AUM) and a 20% fee on profits generated. However, fee structures can vary, and clarifying the specific fee arrangement with your money manager before investing is essential. Sometimes, this fee structure will have a “high watermark” provision. The high water mark is your account’s highest net asset value. The money manager will only charge fees on profits that exceed this high water mark. If the account’s value drops below the high water mark, no fees are charged until the account surpasses the previous peak.
Conclusion
IMPORTANT! We strongly advise you not to transfer funds to unlicensed, unincorporated managers. If you deposit money with a natural person (private individual), you cannot recover your funds later.
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