Let’s begin by discussing what MAM and PAMM accounts have in common. MAM stands for ‘Multi Account Manager’ and PAMM stands for ‘Percentage Allocation Module Management’, and both are ways for a manager to manage the funds of other traders or investors across multiple accounts. Managing money via a hedge fund or trust structure is extremely expensive (legal fees for setup often run to in excess of $60,000) and big firms spend millions each year on regulatory compliance and reporting. MAM and PAMM accounts both offer a streamlined and cost effective structure for money managers to run money, with all trades executed through a single brokerage “master account”, and the back office processes handled by the brokerage firm. Beyond this, however, the nature of MAM and PAMM accounts differ, and the differences can have significant implications for investor’s profits.
PAMM Accounts
Starting with the simplest structure, PAMM accounts work by pooling the “sub accounts” of participating investors at a brokerage firm, traded together as one “master account” by a money manager who has limited power of attorney over the account. Granting a manager limited power of attorney (LPO) over an account’s gives them the authority to make trading decisions on your behalf; the funds in the account, nevertheless, remain yours, as do any profits and losses. The master account has the total equity of all the sub accounts combined, and profits or losses can therefore be simply attributed to each sub account according to its contribution to the total equity – hence ‘percentage allocation’. This is perhaps best understood with an example.
PAMM Account Example
Consider a PAMM account where you are Investor A, one of three investors. The equity contributions of each of you are: Investor A: $3,000 Investor B: $14,500 Investor C: $500 The total combined equity in the manager’s master account is therefore $1800. The percentage contribution made by each of you is: Investor A: 16.7% Investor B: 80.5% Investor C: 2.8% Now suppose that the manager executes a trade in the master account and secures a net profit of $950. This total profit can be broken down and attributed the individual accounts of you and the other investors as follows: Investor A: 16.7% of $950 is $158.65 Investor B: 80.5% of $950 is $764.75 Investor C: 2.8% of $950 is $26.60 All of this process is handled by the broker’s PAMM software systems, which ensure the correct apportionment of profit and loss on the percentage allocation model, as well as handling the complexities that arise when new investors enter or exit the pool.
Advantages of PAMM Accounts
Some of the main advantages of a PAMM account are:
- Enables managers to
- All back office processes are handled by the broker’s software.
- Investors retain full control over and responsibility for their funds, which remain in an account in their own name. They are able to withdraw from the pool when they wish.
MAM Accounts
While these structures work well, they also have some limitations. All sub accounts are treated as equal in the master account; managers are not able to designate lot sizes to specific accounts, nor trade some sub accounts with more leverage than others. This lack of flexibility means that the money manager cannot adapt their approach to fit equity level or risk profile of individual investors. The Multi Account Manager model addresses these issues, resulting in a setup that more closely resembles the feeder account structure of hedge funds. It provides virtual total flexibility, and theoretically allows the manager to trade all accounts as though they are individual units. It would be possible, for instance, for you to agree with the manager that no positions in the Japanese Yen are to be taken in your account (the manager would realize this by specifying a lot size of zero to your sub account in all Yen trades he makes). In this example, if the manager closes out a profitable position in Yen, no profits would be allocated to your account, even though you might be a large contributor to the MAM by percentage of equity allocation. Though the calculations involved in allotting profits are determining the returns for individual sub accounts are far more complicated for MAMs than in our percentage allocation example above, it’s all handled by the brokerage’s software systems and requires no input from either the investor or manager.
Advantages of MAM Accounts
The main benefits of MAM account structures can be summarized as follows:
- Allow a high degree of flexibility around the requirements of individual sub account holders.
- Suitable for investors with a higher appetite for risk.
- May allow the account manager to achieve higher rates of return.
- Offer most of the potential benefits of fund investment with significantly lower barriers to entry, and all within the secure and regulated structure of your brokerage account.
Costs of MAM & PAMM Accounts
Just like managers in the hedge fund space, the managers of MAM and PAMM accounts specify the compensation that will be due to them. As a guide, expect a manager with a good track record to charge a management fee of around 20%, once again this echoes fund manager fees. There are, however, two significant differences:
- Unlike the majority of fund managers, MAM/PAMM managers are only compensated as a percentage of the profits they achieve for their investors. They do not receive the standard 2% fee that most hedge funds charge (regardless of whether or not the fund has made you a profit!).
- Secondly, the broker will require, as a standard procedure, that the money manager make a significant investment of their own equity in the account. This investment is irredeemable during the life of the account.
Both of these conditions ought to help to ensure that the manager acts responsibly and in your best interest, as this is directly shared in both his own interest in the account and in the compensation he may earn.
Brokers for MAM & PAMM Accounts
If you’re considering taking advantage of the potential of MAM or PAMM account, either as an investor or as a way to showcase your money management and trading skills, we recommend the following brokers, each of which offer multi-manager and percentage allocation accounts.
About the Author Alexander Pearson is an online financial journalist. He has contributed market analysis, industry news, and educational articles to a variety of sites including Seeking Alpha and ETF Daily News. His background is in quantitative trading and he was educated at the University of Cambridge. Alex’s main specialization is in the brokerage industry, and he is the editor of BestBrokerDeals.com, an online portal for broker promotions providing a wide range of tools and resources to research and compare discount brokerage firms.
