In today’s investment market, there are plenty of options from which portfolio managers can choose to fill their portfolios. Some of the most appealing are managed accounts. Regardless of your own trading style–if you trade at all–there are markets, time frames, and risk profiles to suit your attempts at proper diversification.
Throughout history, portfolio diversification has been achieved through spreading investments across mutual funds, stocks, and bonds. Unfortunately for this plan, however, today’s portfolio theory has come to realize that these three types of investments are all subtly linked. Mutual funds, stocks, and bonds are too closely correlated to provide genuine portfolio diversification. To genuinely reduce risk, portfolios must include assets that have no correlation and are completely unrelated.
While alternative investment options abound, managed accounts are solid alternative investments that are worth review. Although many investors are mistrustful of these accounts, this is usually due to the unfamiliarity with the territory. A bit of investigation is well worth your while. Managed accounts have earned a legitimate reputation over years of careful study, successful investments, and even widespread institutional use.
What Are Managed Accounts?
These are investments that may consist of commodities, futures, currencies, stock indexes, and other financial instruments, which are pooled and subsequently managed by professional traders known as CTAs or CPOs. These CTAs or CPOs employ their own personal trade strategies in the hopes of maximizing profits. Much like mutual fund managers, CTAs and CPOs can be hired to trade individual managed accounts or collective investment pools that spread the risks and rewards among various investors.
The Advantages of Managed Accounts
Because certain aspects of managed accounts have been consistently negatively correlated to the movements of regular stock or bond portfolios during times of loss and positively correlated to those portfolios during times of gain, they are becoming known as a way to augment returns and reduce portfolio risk. Additionally, because CTAs are capable of using both negative and positive price trends to turn a profit, these accounts can produce returns in practically any economic climate due to the fact that they deal in many different categories of extremely broad markets and can expand the scope of your investments to a global scale. Besides traditional commodities, they also deal in currencies, stock indexes, options, debt instruments, and hundreds of other markets. Managed accounts can truly add a global scope to your investment opportunities.
Managed Accounts in Comparison with Other Alternative Investments
Managed accounts have much in common with other alternative investments. They all shine when it comes to providing portfolio diversification and expanding investment markets, styles, and strategies. Their returns however, depend not on the markets themselves but on the skill of the managers and traders who handle them.
Managed accounts generally afford a greater degree of transparency, security, accessibility, and liquidity to the investor than hedge funds and other alternative investments. Investors can keep an eye on every trade made by the managers of their accounts. They are in direct control of all of the assets they invest into their accounts, and they can liquidate those assets whenever they choose. They are also more flexible than hedge funds and other alternative investments. Individually managed accounts can be opened and capital can be added or withdrawn at will.
Structure
Managed accounts are individually constructed accounts owned by, and in the name of the investor. The investor gives a professional money manager specific authority to make trades in the account, usually according to a specific set of guidelines. It’s important to note that the money manager does not have access to your account funds. He or she is of course able to make trades on your behalf. When you open a managed account you’ll sign either a Letter of Direction (LOD) or Limited Power of Attorney (LPOA).
Managers will publish their track records so that you can choose which program you wish. Some managers operate multiple programs, such as “Conservative,” “Aggressive,” “Index Funds Only,” “Metals Only” etc. You will be able to see the description of the managed accounts so that you can properly diversify your portfolio and also match your tolerance for risk.
Allocation Software for Managed Accounts
In almost every managed account, the manager trades all investor’s accounts as one large master account using PAMM or LAMM, or MAM software.
PAMM (Percent Allocation Management Module) is software which computes the total sum of gains, losses and fees in a managed account, and assigns each investor a pro-rata (percentage) basis of these amounts.
The LAMM structure is somewhat different than the PAMM. It is based on lot allocations determined by the manager based on your account size and risk tolerance. With a LAMM (Lot Allocation Management Module) the manager has more flexibility in his client relationships. One investor may want to cap leverage at 2:1 while another may be willing to go to 10:1. This can be easily accomplished with the LAMM account.
The MAM (Multi-Account Manager) is a combination of the features found in a PAMM and LAMM, and lists more flexibility to the trader managing investor accounts.
In each of these types of account, investors are typically granted live read only access to their managed account either through an online report viewer or the trading platform. They can then view their account, including balance and activities, however they will not be able to place their own trades on the account, unless they revoke their LPOA, which enables the trader the ability to trade on their behalf.
Conclusion
One should be careful to choose an account manager who is adept at trading, turning profits, and adding diversity to the portfolio. Just as importantly, when considering investing in managed accounts, it’s important that investors are aware of the risks involved.
