FOREX Manager Costs and Fees

Two types of costs are associated with a managed FOREX account: those incurred in the process of the manager making trades on your behalf and those incurred by the manager.

Transaction Costs

Your manager will have selected a broker-dealer with whom to do business. Prima facie, if the manager is happy with them, so should you. Ideally, spreads have been negotiated, most typically pips and lot fees, to the minimum.
After all, the more the broker takes, the smaller your profit and the manager's fees.

FOREX Manager Fees

Managers may charge any one or a combination of three fees:
  1. Performance Fee—This is a percentage of profits. It typically runs from 15.0 percent to 50.0 percent. How large is reasonable depends much on what other fees are involved and how good the manager is at what he does. Managers who have a 5-, 10-, or 20-year track record of success can command much higher fees than someone with several months of real-time performance.
Tip: Be sure new performance fees are always calculated from a previous high-water mark which is precisely defined in the contract. Suppose in the first quarter, the account makes 15 percent, in the second quarter the account loses 5 percent, and in third quarter it makes 7 percent. The third quarter performance fee should be for 2 percent, not 7 percent. Management fees should be deducted before profits are calculated. They are costs to you. Does the manager make a fee off any interest uncommitted funds accrue? How are account additions and withdrawals calculated? Wording on such issues may be quite tricky; read carefully.
  1. Management Fee—This is the cost of doing business with the FOREX manager. They range from 0.5 percent to 4.0 percent—again depending on the total mix of fees.
  2. Pips—Some managers take one or two pips off every transaction made in your account. There is nothing inherently wrong with this—with the caveat: Is it disclosed, how much does it add to costs, and does it encourage over-trading? If the program trades very short term, one or two pips may represent a lot of money to someone. In a period of poor performance the manager may still make a profit from your account if pips are part of the fee structure. Be wary of your capital becoming someone else's income.
Tip: This is sometimes the hidden fee in a managed program. If it is not mentioned in the contract, you need to ask the manager if he participates in transaction costs, or pips. It should be in writing, either way.

The debate over management fees or performance fees has raged for decades. At one time, the SEC frowned on performance fees because they might also encourage overtrading. A manager gets near the end of the fee term and has not made any money. How will the yacht payment get made this quarter? On the other hand, the CFTC encouraged performance fees on the logic of why pay someone for failing at the job for which they were hired? The counter to that, of course, is that trading FOREX, whether by you or the manager, is a best efforts affair. There are no guarantees.

Most managers now charge a combination of management fee and performance fee as a concession to this ongoing debate. The management fee covers expenses and puts at least a few gallons of diesel fuel in the yacht so they do not need to overtrade to take a weekend cruise. The performance fee encourages them to perform. That fellow a few slips down the dock just bought a 70-footer!

Mixed fees in the range of 2 percent management fee and 20 percent performance fee to 3 percent management fee and 30 percent performance fee cover the vast majority of the managed account territory in both currencies and commodity futures. A new manager's fees may be lower to compensate for the risk inherent in a relatively untested trader or trading system.

Performance-only fees are of course higher. They range from 25 to 50 percent of net profits. Some managers offer options of either a mixed fee or performance-only fee. Managers do understand prospective clients have different ideas about costs—just like the SEC and CFTC. I have also seen flat pip fees and flat management fee options recently.

If you participate in a fund, the management of the fund will almost certainly entail additional costs: general partner, cash custodian, and so on. Costs ultimately revert to the client and they only diminish your bottom line.

Tip: If you decide on a pooled or fund participation with a FOREX manager, I strongly recommend legal counsel before committing. Unfortunately, this advice is too often not followed. You are attracted to a pool because you can participate for $5,000.00 or less. That positioning makes it difficult to justify $1,500.00 for legal advice. Sadly, the unscrupulous operators know this exactly; that is why small investors are exposed to the most risk in any investment.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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