Whether or not you are aware of it, you already play a role in currency trading. The simple fact that you have money in your pocket makes you an investor in a nation's currency. By holding US Dollars, for example, you have elected not to hold the currencies of other nations. When a currency is traded, the transaction is carried out on the Foreign Exchange market (also referred to as the Forex or FX market). The Forex market is the largest financial market in the world, with over $1.9 trillion changing hands every day!
Unlike other financial markets that operate at a centralized location (i.e., the stock exchange), the worldwide Forex market does not have a central location. It is a global electronic network of banks, financial institutions and individual Forex traders, all involved in the buying and selling of national currencies. A major feature of the Forex market is that it operates 24 hours a day, corresponding to the opening and closing of financial centers in countries all across the world. At any time, in any location, there are buyers and sellers, making the Forex market the most liquid market in the world.
What is Forex? Traditionally, access to the Forex market has been made available only to banks and other large financial institutions. However, with advances in technology over the years along with the industry's high leverage options, the Forex market is now available to money managers and individual Forex traders.
With some initial capital (as low as $200 with CMS Forex), and a computer with an internet connection you can become a participant in this global and liquid financial market.
Or, you can test the market with a practice account that does not involve real money. Just fill out a simple form here to receive a username, after which you will be prompted to download VT Trader, our trading software.
This Forex Overview continues with a quick, but detailed explanation of how forex trading works. You can continue by clicking on Next Page or use the navigation on the top of this page to skip ahead.
If you are looking for a more robust educational resource, please visit our Online Forex Course.
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How does a forex fund work?
Although the name still sounds exotic to some, a forex fund in the United States is typically a private investment partnership set up so as to allow it to remain exempt from the registration requirements federal and state law imposes on publicly traded funds. When set up outside the United States, a forex fund is usually set up as an exempt limited company in a low or zero tax country, such as the Cayman Islands.
As a private fund, a forex fund cannot legally advertise either in the United States or abroad and it can only accept investors “known” to the fund manager. However, a fund manager may have a website to advertise its advisory business in most cases and the fund manager may offer access to the forex fund's daily performance through a password protected website. Many countries have rules similar to those of the United States in this regard.
How much could I earn running a forex fund?
Most forex funds are quite small. Many who start forex funds also keep their “day jobs.” Whatever the size, one real advantage to starting a fund is that the fund manager can legally accept compensation for his services. This compensation may provide a good supplement to the manager’s other income or it may allow him to manage the fund on a full-time basis.
The compensation for a fund manager usually consists of a management fee and a performance allocation, which is a share of the profits. A management fee of 1% and a performance allocation (or performance fee) of 20% is well within global industry standards. Of course, the fund manager also receives the profits on the money he himself has invested in the fund.
Assume the following:
• Management has $1 million under management in his forex fund;
• A 1% management fee;
• A 20% performance allocation;
• The fund began operating on Jan. 1; and
• Fund has returned 15% YTD.
The forex trader (now forex fund manager) would have gross income of $40k resulting from a $10k management fee ($1M x 1% = $10k) and a $30k performance allocation ($1M x 15% return = $150k x 20% = $30k) Using the same assumptions, a fund manager with $3 million under management would earn $120k and a fund manager would earn $400k with $10 million under management.
Prospective investors in the fund like to see that fund manager has invested his own capital in the fund. Assuming that the fund manager has indeed invested a significant portion of his own cash in the fund (and since the fund manager will not charge fees on his own investment in the fund), he earns an additional money from the 15% return on his investment.
How do I set up a forex fund?
Starting a forex fund means hiring a lawyer with the proper expertise to prepare all of the required documents and provide you with tax and regulatory advice. The forex trader starting the fund will have to work closely with his lawyer to prepare of some of the documents, especially the private placement memorandum (PPM), which is the description of the fund provided to investors. The whole process can be done in as little as 4 weeks, at a cost of around $10,000. In some cases, the cost is even less.
For a trader to enjoy such success, he must set up the correct infrastructure. The desire to pool assets in a way that is proper, both from a business and a legal standpoint, has led many forex traders to start their own forex funds. For a successful forex trader, a forex fund is an efficient, legal, and professional way to trade your own money along with the money of those who want to benefit from your expertise.