PAMM accounts: what are they?
A Percentage Allocation Money Management (PAMM) account is an investment program where an investor gives the trading rights of their investment to an experienced trader in order to grow the account and provide a return on the investment. Profits accrued from this trading activity are split between the investor and the trader/account manager.
Those who choose to invest are usually investors who do not have much experience or who probably have day jobs or are engaged in other activities that do not give them enough time to trade the financial markets. Trading is an engaging activity and if a trader does not have time to give it the attention it deserves, the account will suffer.
How does a PAMM account work? In order to achieve a greater sense of commitment and responsibility regarding the account from the account manager, the account manager must make a monetary contribution to the PAMM account that he will manage. The manager manages all trading activity and receives a percentage of the profit as compensation.
The account manager creates a PAMM account with a forex broker that offers PAMM facilities. This is a public investment and is called Managerial Capital. The account manager will then trade that account for a period of time to build up a trading history that can be used as his record. To illustrate these steps, let’s take an example of a manager we’ll call John Doe who opens a PAMM account with $1,500.
After the account manager has generated a trading history and is included in the PAMM ranking, he makes a public offer asking investors to join his PAMM account and specifies the compensation to be paid by investors. When investors join, the account grows and the manager can now start full PAMM trading. So let’s take as an example that John Doe increases the account from $1400 to $2000 and this positive result attracts two more investors, Greta and Jackson, who bring in $5000 and $3000 respectively. The account size is now $10,000.
Withdrawal cycles are predetermined and settlement dates are set. Once the settlement date is reached and profits are realized, the profits are shared according to the percentage of the capital investment that each investor brought to the table. The manager is then compensated according to the agreed profit sharing formula. The Account Manager may also withdraw profits accumulated from his own capital, but is not allowed to deplete his manager’s capital. So if our manager John Doe achieves a 50% return on this account, he has made a profit of $5,000 and the account is now $15,000. The profits will be split 5:3:2 (Greta; Jackson; John Doe). So Greta gets $2,500 and Jackson gets $1,500. If the agreed compensation for John Doe is 20%, then Greta will pay John Doe $500 and Jackson will pay $300. So in addition to his own profit from the trade of $1,000, John Doe will receive a total compensation of $800 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 the opportunity to tap into the manager’s trading skills without having to devote time and energy that he may not have to the trading activity, and the account manager has the opportunity to combine profits from the use of larger volumes with an increased amount of the account as well as from the compensations he receives from the investors of the PAMM account.
What should be the investment mindset of those participating in PAMM accounts? Some PAMM account managers are more aggressive about taking profits than others. Aggressive trading goes along with greater risk. There are larger drawdowns and greater potential for loss with aggressive trading techniques. It is preferable to invest smaller amounts of money with more aggressive PAMM account managers and to invest 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 in which an investor can register. It all depends on what the trader has available and the returns they want to achieve.
In order for a PAMM account to appear in the public ratings, it must meet the following conditions:
- Account must be registered.
- Account manager must be verified.
- The manager’s capital must be at least 100 USD.
What should potential investors look for when reviewing PAMM account public ratings? Some of the criteria are as follows:
- 1 month returns
- 3 month payback
- 6 month returns
- 1 year payback
- Absorption rate
- Managerial capital
What happens if a trader wants to withdraw from a PAMM account before the next settlement date? The merchant can do so, but will have to settle its obligations to the account manager.