The acronym PAMM refers to Percentage Allocation Management Module. In a PAMM model the investor can allocate their money in the desired proportion to a Manager or Money Manager that he or she chooses.
The Manager or Money Manager can operate multiple accounts using his own capital and of his investors in order to generate profits.
Let’s imagine that there are 3 investors: Carmen, Raúl and Sara. All of them are interested in trading Forex but they do not have the time to trade or do not have the necessary knowledge to operate.
We also have an experienced trader who has several years of experience managing client accounts named Hernán.
Carmen, Raúl and Sara decide to work with Hernán and they want him to manage their accounts through a PAMM account. For this, they sign an LPOA (Limited Power of Attorney) in which they grant permission to Hernán so that he can carry out operations on his accounts. In this LPOA (contract), it is also established what Hernán’s profit will be for managing the accounts, which is usually a % of the profitability that he generates on the accounts.
Hernán decides to charge a 10% commission on the profitability that he generates on the accounts.
Once everyone is ready to start we have that the capital contribution will be as follows:
If we want to measure the contribution that each one has on the total capital we will have to:
Now let’s imagine that Hernán carries out a series of operations over one or two months and manages to generate a profit of 30% on the total capital. This means that he generated a profit of US$ 4,500.
Hernán takes his 10% commission (as stipulated in the contract), that is, he takes US$ 450 as payment for his management. The remaining US $ 4,050 must be distributed among the other investors based on the percentage of participation that each one has in total capital.
• Carmen = US $ 4,050 * 26.67% = US$ 1,080
• Raúl = US$4,050 * 23,33% = US$945
• Sara = US$4,050 * 16,67% = US$675
• Hernán = US$4,050 * 33,33% = US$1,350
The sum of this distribution will give us US $ 4050 and in total we will now have a capital of US$ 19,050 (the original US$ 15,000 + the US$ 4,500 profit – the US$ 450 commission from Hernán).
And this is how a PAMM account works when working with a Money Manager.
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