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Friday, March 19, 2010

How PAMM Services Operates?

Trader A opens a PAMM account and becomes its Manager. The Manager’s Capital is 10 000 USD. Then he makes a proposal to potential Investors to invest in his PAMM account. At the end of every Trading interval (a month or a quarter) Manager A proposes to share the profit between the Investors (including the Manager) and pay the profit to Manager A in accordance with the Manager’s Offer.

Let the Offer parameters be: 30/5/10 - 6/4 - 10 000/1 000/100, Selected Trading interval - 1 month. So, at the end of every Trading Interval, the Manager is paid 30% of the profit that exceeds the 10%.

So, the PAMM account deposit equals to 50 000 USD among the Manager and investors



At the end of the month as a result of the Manager's successful work the PAMM account profit amounted to 50% (25 000 USD) of the initial deposit (50 000 USD), and the total balance of the PAMM account amounted to 75 000 USD.

Thus Investor 1 got the profit equal to 50% (12 500 USD) of his own investments (25 000 USD). In accordance with the Offer Parameters the Minimum Performance constraint is 10% (2 500 USD), therefore Performance Fee is calculated from the following amount:-
  • 12 500 USD (Profit) — 2 500 USD (Minimum Performance constraint) = 10 000 USD.
  • Investor 1 paid the Performance Fee of 30% from 10 000 USD (3 000 USD).

Investor 2 got the profit equal to 50% (7 500 USD) of his own investments (15 000 USD). In accordance with the Offer Parameters the Minimum Performance constraint is 10% (1 500 USD), therefore Performance Fee are calculated from the following amount:


  • 7 500 USD (Profit) — 1 500 USD (Minimum Performance constraint) = 6 000 USD.
  • Investor 2 paid the Performance Fee of 30% from 6 000 USD (1 800 USD).

The Investor’s balance at the end of the Trading Interval is:-
Current Balance = Initial Balance + Profit – Performance Fee

So,
For Investor 1: Current Balance = 25 000 + 12 500 - 3 000 = 34 500 USD;
For Investor 2: Current Balance = 15 000 + 7 500 - 1 800 = 20 700 USD.

The Manager’s balance at the end of the Trading Interval is:
Current Balance = Manager’s Capital + Profit + Performance Fee 1 + Performance Fee 2.

So, for Manager A
Current Balance = 10 000 + 5 000 + 3 000 + 1 800 = 19 800 USD.
Manager A's work on the PAMM account during the first Trading interval resulted the net profit of 25 000 USD:
Investor 1: 12 500 – 3 000 = 9,500 USD;
Investor 2: 7 500 – 1 800 = 5 700 USD;
Manager A: 5 000 + 3 000 + 1 800 = 9 800 USD (5 000 of profit, 4 800 of Performance Fee).



At the beginning of the second Trading interval Manager A withdrew the profit (9 800 USD), Investor 1 completely reinvested (reinvestment building-up of the earlier placed investments using the profit realized of these investments) all the funds (34 500 USD), Investor 2 withdrew 700 USD and reinvested the remaining funds (20 000 USD).

Another Investor 3 joined the PAMM account and invested 5 500 USD.


Thus at the beginning of the second Trading interval the balance of the PAMM account is equal to 70 000 USD.

At the end of the second Trading interval as a result of the successful work of Manager A, the PAMM account profit amounted to 100% (70 000 USD) of the initial balance and the total PAMM account balance amounted to 140 000 USD.

Thus Investor 1 got the profit equal to 100% (34 500 USD) of his own investments (34 500 USD). In accordance with Offer Parameters the Minimum Performance constraint is 10% (3 450 USD), therefore the Performance Fee is calculated from the following amount:
  • 34 500 USD (Profit) — 3 450 USD (Minimum Performance constraint) = 31 050 USD.
  • Investor 1 paid the Performance Fee of 30% from 31 050 USD (9 315 USD)

Investor 2 got the profit equal to 100% (20 000 USD) of his own investments (20 000 USD). In accordance with the Offer Parameters the Minimum Performance constraint is 10% (2 000 USD), therefore the Performance Fee is calculated from the following amount:


  • 20 000 USD (Profit) — 2 000 USD (Minimum Performance constraint) = 18 000 USD.
  • Investor 2 paid the Performance Fee of 30% from 18 000 USD (5 400 USD)

Investor 3 got the profit equal to 100% (5 500 USD) of his own investments (5 500 USD). In accordance with the Offer Parameters the Minimum Performance constraint is 10% (550 USD), therefore the Performance Fee is calculated from the following amount:


  • 5 500 USD (Profit) — 550 USD (Minimum Performance constraint) = 4 950 USD.
  • Investor 3 paid the Performance Fee of 30% from 4 950 USD (1 485 USD)



The Investors’ balances at the end of Trading Interval are:


  1. For Investor 1: Current Balance = 34 500 +34 500 – 9 315 = 59 685 USD,
    Performance Fee = 9 315 USD (30% from 34 500 USD).
  2. For Investor 2: Current Balance = 20 000 + 20 000 – 5 400 = 34 600 USD, Performance Fee = 5 400 USD USD (30% from 18 000 USD).
  3. For Investor 3: Current Balance = 5 500 + 5 500 – 1 480 = 9 515 USD, Performance Fee = 1 485 USD (30% from 4950 USD).
  4. The Manager’s balance at the end of Trading Interval is: Current Balance = 10 000 + 10 000 + 9 315 + 5 400 + 1 485 = 36 200 USD.

Manager A’s work on the PAMM account during the second Trading interval resulted the net profit of 70 000 USD:


  • Investor 1 — 25 185 USD;
  • Investor 2 — 14 600 USD;
  • Investor 3 — 4 015 USD;
  • Manager A — 26 200 USD (10 000 — net profit, 16 200 — Performance Fee).


Source quoted from FXOpen