An attractive Managed Account should make investors:
A) 10% a Year
B) 20% a Year
C) 10% a Month
D) 20% a Month
E) None of the Above
What was your answer?
The correct answer is (E), "None of the Above."
Return for a managed forex product cannot be measured in a vacuum. Risk must be taken into consideration as well, something the majority of investors Don't do.
To determine how good a managed program really is, we also need to make sure that an investor's expectations are grounded on Reality, especially when compared to other, more traditional investment vehicles such as stocks, bonds, mutual funds, and hedge funds."
Managed Account Risk
One widely accepted measure of risk in the managed FX industry is "Maximum Drawdown."
Drawdown (or DD) refers to the percentage drop from a peak for an investment in a specific period of time. Maximum drawdown (or Max DD) is the maximum historical percentage decline in value for an investment from any peak.
So how much risk is "too much" risk?
Without comparing risk to return, there's no valid answer to the question.
In the world of alternative investments, a good money manager, trader, or hedge fund manager is considered one whose maximum drawdown is half or less of his annualized return.
For example: If a good manager is making a return of 40% a year, a maximum downside move of 20% or less over time is acceptable.
If we knew what a particular investor's risk tolerance was in terms of maximum drawdown desired, we could work backwards to determine what return would be an attractive one for that investor.
For example: If the client does not want to see his account fluctuate to the downside by more than 10% at any given time, he should not expect annual returns above 20%.
The Magical Money Making Machine called "Managed Forex"
Excess speculation and blind greed has caused investors more financial pain in the last two decades than during most periods known to modern man. Why?
The answer is simple; Unrealistic Expectations. Investors wanted to have their financial cake and eat it too, without any understanding or acknowledgment of the REAL risk behind their investments. Expectations were just not grounded on reality! Stock and real estate market investors pumped so much hot air into their portfolios, that few of them survived when the bubble burst!
Most investors in managed FX are no different. "Magic" is what they seem to expect from foreign exchange, and they also want their lofty returns delivered on a silver platter with an impossibly low amount of risk.
Folks, forex is not a savings or money market account! Believing the opposite can only set an investor up for future disappointment.
What makes this even funnier is the following contradiction:
While many of these same investors accept much lower returns from their traditional investments in comparison to managed forex, their tolerance for traditional investment pain is way higher.
This is a Fact! Otherwise, why would the majority invest in the stock market, settling for 10% a year or less (if they're lucky), while withstanding downhill rides of over 50% in value (as has happened over and over with stock market averages all over the world)?
It is true that at the hands of an experienced and skilled portfolio manager, a managed account can produce excellent, risk-adjusted returns; but investors need to use the same yardstick they measure other investments with and bring their expectations out of fairy tale land.
Only then would they be able to find attractive managed programs and improve their overall investment portfolio.
So what return do you consider attractive for managed accounts? Let us know what you think by leaving your comments below.