Forex investment funds have become increasingly popular among forex traders. For seasoned traders, they offer a chance to manage other investors’ funds without undergoing the rigorous regulations required for forex brokers. For investors who do not have the time to trade their own accounts, they offer a chance to reap the profits from the foreign exchange trade under the guidance of a seasoned professional. Besides, while starting a forex investment fund may not be for every Tom, Dick, and Harry, the requirements are not so difficult to satisfy.
What is a forex investment fund?
A forex investment fund is a private partnership between a group of investors and an expert forex trader, in which they agree to let the trader invest and manage their funds collectively on the forex market. Usually, this trader invests their own capital in the fund so that their interests are aligned with those of the investors.
In the US, such funds are regarded as private entities, which are not subjected to the rigorous regulations imposed on publicly traded funds by federal and state laws. Outside the States, these funds are set up as a private limited company. For this reason, most fund managers prefer to set up shop in low or tax-free countries such as the Cayman Islands.
Since it is essentially a private fund, the law prohibits fund managers from advertising their services to the public. Essentially, they should only manage the funds of investors known to them. However, such a manager can display the performance statistics of their investment fund on a password-protected website.
How much does a fund manager earn?
The most attractive feature of investment funds to expert traders is they allow the trader to legally receive compensation for their services. If you’re a manager of a small investment fund, you may need to keep your day job as the earnings may not be substantial yet. However, the more funds you manage, the more you stand to earn, which may be enough incentive to turn it into a full-time job.
Usually, fund managers receive a fixed management fee for their services and an additional performance allocation. The latter is essentially a percentage of their total yields, usually capped at 20%. For the management fee, most funds offer 1% of funds under management. In addition, the manager gets to pocket the proceeds of the capital they personally invested in the funds.
For example, let’s assume you’re a forex investment fund manager with $1 million under management. The fund has yielded 15% year to date. Your compensation consists of the aforementioned rates, i.e. 1% management fee and a 20% performance fee. Under these circumstances, you will have gross an income of:
$1,000,000 * 1% = $10,000.
$1,000,000 * 15% yield = $150,000.
20% * 150,000= $30,000.
Therefore, your income that year would be a $10,000 management fee and a $30,000 performance fee, totaling $40,000. Working with the same rates, if, say, you had 3 million dollars instead, you’d earn 120,000 bucks. Similarly, increasing your total investment to 10 million USD would bump your take-home pay to $400,000.
Being a fund manager, you increase your trust rating if you have your own capital invested in the fund. With this in mind, and seeing as you would not charge yourself any fees for your services, you would also be entitled to the entirety of your profits.
How to get investors into the fund
Since investment fund managers are not allowed to publicly advertise their services, one may wonder how they come across enough investors to grow their fund. First, the investor must be someone who understands all the risks involved and is still willing to invest in the fund. For this reason, it is good to start with people well known to you. These could be family members, friends, acquaintances, and other colleagues.
The truth is, there are a lot of investors that are willing to invest in these funds, but they have no way of accessing the managers since they don’t advertise. The best way is to start with those closest to you, and as your success grows and steadies over the years, your investors will definitely bring in more people into the fund. Simply put, your satisfied clients will be your best marketers.
How to set up a forex investment fund
Setting up an investment fund involves hiring a lawyer to help you with all the regulatory and legal advice. Additionally, you’ll need their help preparing a Private Placement Memorandum (PPM), which is a document disclosing material information about the fund’s activities to the investors. This document should contain:
- Extensive details on the investment strategy you intend to employ.
- All the risks are associated with the above-mentioned strategy.
- How you intend to allocate investor capital.
- Background information on all fund managers in the firm.
- Compensation criteria for all managers.
- Audited accounts of the fund.
- The track record and trading history of the fund.
This whole process takes a duration of around four weeks. The cost of carrying it out depends on a variety of factors, but a ballpark figure would be around $10,000.
In a nutshell
A forex investment fund involves an expert trader, who is referred to as a fund manager, investing the funds of a group of investors in the forex market. Such managers differ from brokers in that they are not subject to the stringent regulations imposed on publicly traded funds. This is because fund managers invest for clients personally known to them. Thus they act as a private investment firm. In some countries, such as the Cayman Islands, these managers get to enjoy low or even zero tax for their services.
These investment funds carry the advantage of allowing expert traders to legally receive compensation for investing theirs and other investors’ funds. For investors, it helps them enjoy profits from the forex market without having to dedicate their time and resources to studying the markets.
