6 Points to Consider Before You Invest in a Managed Account
Do yourself a favor and go through this checklist before you invest in a managed account!
Is the account at least one year old?
It’s not unusual to see very high monthly returns in young accounts. As they age, and the manager takes on more money, usually the returns decline a bit as the manager takes a more conservative approach to risk.Most hedge and pension funds will not consider investing in a managed account until it’s at least a year old.
Additionally, you should look at the manager’s past accounts. Has he “burned through” accounts before? If so, beware. There may be a good reason, but whenever you see an account with limited Assets Under Management “closed to new traders” this could be because the account suffered losses which the manager would just assume that you not know about.
In the US, if you’re dealing with a NFA registered CTA, you won’t have to worry about ghosts from the past. CTA’s are required to provide you with the returns on ALL accounts they have managed in the past. Take a look at these before you invest!
If you look at the historical drawdowns would you be comfortable if they were doubled?
This is not something to worry about when the manager uses very low leverage, of say .5:1 to 2:1. But above that, as risk management takes a back seat to the hunt for higher returns, take a looks a drawdowns. This is extremely important if you’re looking at returns in excess of about 25%/ year.A good rule of thumb is to look at the worst drawdown during the life of an account, then double it. Are you comfortable losing that much money? If not, then look for a lower-return account. It will likely have lower drawdowns as well.
Is the account manager regulated?
Regulation in the United States is the toughest in the world. Money Managers MUST be registered with the CFTC and also become members of the National Futures Association (the NFA). Any NFA member is subject to random (truly unannounced) audits, as well as scrutiny on all marketing materials, web sites, and other forms of solicitation. Publishing incomplete or inaccurate information can result in significant penalties, as well as a “tarnished” image, as reflected in the NFA’s BASIC database, which is open to the public.You can find the database here: NFA BASIC Database
Are you prepared to invest over the long term?
Managed Accounts generally don’t involve investments which offer smooth, regular payments. No money manager can perform consistently from month to month. The economic landscape is simply too complex, volatile, and unpredictable.If you’re expecting to earn higher-than-average returns you should be prepared to go through periods of abundance and periods of loss. Every investor, even Warren Buffet and George Soros has lost money in deals that didn’t turn out like they expected.
Does the account use low leverage?
No serious money manager uses high leverage. By “high” we mean something like 5:1 or greater. It is exponentially more dangerous to trade with higher leverage than with low. Small, unsophisticated investors by the thousands have lost their money to forex dealers offering 100:1, 200:1 and 400:1 gearing. (Gearing = Leverage).Good currency traders can get 20% to 20% a year using no more than .5:1 to 2:1 leverage!
Is the amount of your intended investment 10% or less of your portfolio?
Alternative Investments, which constitute most managed accounts, are generally more volatile (and thus risky) than more traditional investments such as equities. (Although in recent times we’ve seen large declines in the stock market). Setting aside the current economic environment at the time of this writing, you should never allocate more than about 10% of your portfolio in alternative investments. Doing more than this is dangerous!
