A managed account allows professional traders or firms to handle your investments, but it still carries risks like any financial venture. While you may not have direct control over trades, there are several ways to minimize risk in a managed account. By understanding the key strategies and precautions, you can protect your investment and maximise potential returns.

Understanding Risk in Managed Accounts

Risk in a managed account arises from various factors, including market volatility, poor management decisions, excessive leverage, and external economic conditions. Since the account is managed by a professional, you rely heavily on their expertise and strategy, making proper vetting and monitoring essential.

Steps to Minimize Risk in a Managed Account

1. Choose a Regulated Manager

• Verify that the account manager is licensed and regulated by a reputable authority in their jurisdiction (e.g., FCA, ASIC, or CFTC).
• Regulation ensures the manager adheres to strict standards, including fund segregation, risk management, and transparency.

2. Understand the Fee Structure

• Review management and performance fees to ensure they are reasonable.
• High fees can erode profits, especially if the account’s performance does not meet expectations.

3. Evaluate the Manager’s Track Record

• Assess the manager’s performance history, including consistency, drawdown levels, and strategies during market downturns.
• Choose a manager with a proven ability to deliver risk-adjusted returns over time.

4. Define Your Risk Tolerance

• Clearly communicate your risk appetite to the manager.
• Ensure their strategy aligns with your comfort level, whether it’s conservative, balanced, or aggressive.

5. Diversify Your Investment

• Avoid concentrating all your funds in a single managed account or strategy.
• Consider spreading your investments across different asset classes, strategies, or managers.

6. Monitor Leverage Usage

• Excessive leverage can amplify both profits and losses.
• Work with a manager who uses leverage responsibly and within limits that match your risk tolerance.

7. Request Regular Performance Reports

• Ensure the manager provides detailed and transparent reports on the account’s performance.
• Regular updates help you track progress and identify potential issues early.

8. Prioritize Risk Management Strategies

• Ask the manager about their approach to risk management, including:
  • Stop-loss orders
  • Position sizing
  • Hedging techniques
  • Diversification of trades

9. Set Realistic Expectations

• Avoid managers who promise guaranteed returns or overly optimistic outcomes.
• Understand that all investments carry risks, and there will be periods of loss.

10. Use Segregated Accounts

• Opt for segregated managed accounts where your funds are held separately from other investors.
• This provides greater control and protection against fraud or mismanagement.

11. Test with a Small Investment

• Start with a smaller amount to test the manager’s performance before committing larger sums.
• This allows you to evaluate their strategy and risk management practices without significant exposure.

12. Establish Exit Strategies

• Agree on clear terms for withdrawing your funds if performance does not meet expectations.
• Check if the account allows partial or full withdrawals without penalties.

Practical Tips for Ongoing Risk Management

• Stay Informed: Educate yourself about market conditions and the strategies employed by your manager.
• Communicate Regularly: Maintain open communication with the manager to stay updated on their decisions.
• Review Contracts: Ensure the managed account agreement includes clauses that protect your interests.
• Avoid Emotional Reactions: Trust the long-term strategy and avoid impulsive decisions during market volatility.

FAQs

What is the main risk in a managed account?

The primary risks include market volatility, poor management decisions, and excessive leverage, which can lead to significant losses.

How can I ensure my funds are safe?

Choose a regulated manager, use segregated accounts, and ensure the account operates under a reputable legal framework.

Are returns guaranteed in a managed account?

No, forex trading and other investments carry inherent risks, and returns can never be guaranteed.

What should I look for in a managed account manager?

Check their regulatory status, performance history, fee structure, and risk management practices.

Can I lose all my money in a managed account?

While unlikely in a well-managed account, significant losses are possible if poor strategies or high leverage are used.

What fees should I expect in a managed account?

Common fees include a management fee (percentage of assets) and a performance fee (percentage of profits).

How do stop-loss orders reduce risk?

Stop-loss orders automatically close trades at a predetermined level to limit losses in volatile markets.

How often should I review my account performance?

Regular reviews, ideally monthly or quarterly, help you monitor progress and address concerns early.

Is diversification necessary in managed accounts?

Yes, diversification reduces the risk of losses by spreading investments across different strategies and asset classes.

Can I change managers if I’m unhappy with performance?

Yes, but review the contract terms to understand any penalties or restrictions on withdrawing funds.

Conclusion

Minimising risk in a managed account requires careful selection of a regulated manager, clear communication of your risk tolerance, and active monitoring of performance. By diversifying investments, setting realistic expectations, and prioritising transparency, you can protect your funds while taking advantage of professional expertise. Always conduct thorough due diligence and stay informed to make the most of your managed account.