Forex Funds Demystified – How Are They Setup?

The name Forex funds indeed sounds exotic!  However, in the USA, a Forex fund is typically just a sort of private investment partnership established in a manner to remain exempted from the registration requirements applicable to publicly traded funds.  In other countries, especially where the tax rates are low or zero, a Forex fund is typically established as an exempt limited company.

What is a Forex Fund?

Forex funds (also known as Forex funds hedge, Forex hedge funds, or managed Forex funds), are started by Forex fund managers who execute spot currency trades on behalf of their clients.  Of course, for this service, they collect a fee.  The Forex fund managers who run managed Forex funds may have a website to advertise their advisory business, and may as well provide password protected access to the daily performance of their Forex managed funds through the website.

How is a Forex Fund Set Up?

Starting a Forex fund usually means hiring an experienced lawyer with good expertise and exposure in preparing all of the required documents, as well as providing relevant tax and regulatory advice as appropriate.  The Forex broker or trading intending to set up a managed Forex fund needs to work closely with his lawyer to prepare the necessary documents, especially the private placement memorandum which is provided to prospective investors as a description of the fund.  The whole process can be completed in 4 weeks or less, at an approximate cost of around $10,000.

The desire to pool together assets for Forex trading that can be profitably deployed in a manner that is proper, both from legal and business standpoints, has led to many Forex traders starting their own Forex funds.  For a successful Forex trader, a Forex fund is a professional, legal and efficient manner to trade their own money funds along with the money of their investors who wish to benefit from the trader’s expertise.  However, a Forex trader must set up the correct infrastructure to enjoy such success.

Potential Earnings from a Forex Fund

Most Forex funds are small when they are initially capitalized.  Regardless of the size, the Forex fund managers can accept compensation for their services legally.  The compensation for a fund manager typically consists of a management fee and a performance allocation fee based on a share of the profits.  Current industry norms in this regard are typically about 1% management fee and 20% performance fee, and the Forex fund managers also receive the profits on their personal investments in the fund.

Potential investors in the fund prefer that the Forex fund managers invest their own capital in the fund, and since a fund manager will not charge fees on his own investment, he gets to earn additional money from the return on his investment.

Best Forex Funds – The Use of Leverage Accounts

Of course, determining what the best managed Forex funds are must be determined by the track record of the fund, just as with determining the best mutual funds.  You also need to understand the concept of leverage of account funds when deciding upon what Forex funds managed broker to invest with.  As the chart below details, currencies are the least volatile asset class when compared to stocks and bonds when no account leverage is used.

This is a graph from MerkFunds, which does provide manage currency funds for investors.

Understanding the nature of leverage, then, a managed Forex fund that uses a lot of leverage is going to realize greater revenues and greater losses than a company that does not use leverage.  Therefore, a company may have large profits during one year and large losses another.  An example of this is Mulder FX Managed Accounts. By using a leverage of 1/100 (this  means that the broker can trade $100 in currency for every $1 in the fund), the managed account had a cumulative return over 189 percent in 2009, but had a cumulative return of -77 percent in 2010.  A company that does not use leverage will have smaller returns in good economic times, but will also have smaller losses during more difficult trading periods.  Based on your risk aversion level, you may opt for a more aggressive company or a more conservative company – this based upon their use of leverage, the expertise on staff, the capitalization and bond rating of their company, etc.

Another criterium to look for in choosing the best Forex funds, as well as using any Forex broker, is what regulatory agencies have oversight over the company.  Forex trading is not nearly is regulated as stock investments, so having a governmental agency in the local jurisdiction that you live in is important if you fell that the company if you have problems.  For example, if you visit the Harvest Managed Accounts (Taylor Growth) website, you will see that they proudly display their National Futures Association (NFA) member number on their web page.

The Athena Managed Forex Account advertises the following performanc statistics:

If these are accurate results, which I assume they are, this appears to be a good company for you to look at as you investigate Forex managed funds.