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Advantages and Disadvantages of Segregated Account

Segregated AccountForex service providers and brokers use a segregated bank account to ensure their clients' funds are kept in a separate bank account with little chance of fraud. A segregated account has ultimately no relationship with the brokerage firm's bank account or the bank itself. Investing in segregated accounts means holding securities at a custodian in an individually managed portfolio. However, unlike a managed account, the client's investment remains in the hedge fund vehicle, and the hedge funds are purchased or sold under the nominee's name.

Functions of a Segregated Account

In the securities industry, segregation means that customer assets and investments held by brokers or financial institutions are separated from those held by the forex brokers or organizations themselves.

However, securities owned by brokerage firms can be traded or invested by their clients as well. Assets of each type must be separated from one another. Keeping the books separately is also necessary. In addition to assets that must be tracked separately, segregation could also be applied to assets whose accounting needs require it.

Separate accounts also have different responsibilities and privileges than accounts held generally by a larger group. Further, the majority of portfolio models, for instance, will be applied to most assets under management by portfolio managers. It may be necessary to introduce discretionary accounts for investors with different needs like- investment objectives and risk tolerance etc., from other investors in the portfolio. The portfolio manager can diverge from his or her usual approach to these separate accounts, separated from the pool.

Just like the regular retail account, segregated accounts are usually two types, individual and managed. We will discuss the functionality of both types of segregated accounts later in this article.


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The Advantages of Segregated Account Investing

Investing in this kind of account comes with immense benefits. Keep on reading to know all the pros.


An extensive dialog is held to create an exclusive portfolio that adds value within the context of the client's total portfolio. As a result, a dedicated solution is provided rather than something standard. Every client has specific concerns and requirements; however, in general, investors focus their attention on risk appetite/tolerance, exposure preferences, liquidity requirements, and eliminating indirect exposures.


Having complete knowledge about the exact exposures which comprise a client's portfolio gives them confidence. To accomplish this goal, hedge fund positions are summarized in detail, together with detailed analyses of attribution and contribution. Clients can also benefit from meeting their investment managers directly if they wish to gain even deeper knowledge and gain further confidence in their investment portfolios.

Consideration of Individual's Needs

Customers benefit from holding a dynamic portfolio that adjusts to market cycles and progresses as a whole. A critical part of this evolution of exposure is the consideration of the client's individual needs. With increased comfort with a client's investment style, clients can take advantage of modifying their risk tolerance within the portfolio, integrating their long-only investments into their hedge fund portfolio, and creating a core-satellite approach to hedge fund investing.

Insights & Education for Investment Decision-Makers

Reporting for segregated accounts is typically tailored to the client's and stakeholders' needs. As a first step, ensure that the client has regular contact with an investment decision-maker. Also, reporting materials are frequently designed to be comprehensive and cover the exact level of detail that is required.

Low Chances of Information Gap

There is no doubt that this can encompass high-level, high-quality market commentary in addition to more in-depth qualitative and quantitative reviews. In such a setting, the client is better able to appreciate hedge fund nuances and how to most effectively approach the opportunities. This can dramatically reduce, and in some cases eliminate, the risk of information shortage.

Zero Fund Redemption Risk

Clients were able to evaluate their portfolios from an investment perspective rather than based on the fear of being the last in line. Customers with segregated accounts can dictate liquidity preferences at the creation stage and monitor their liquid investment portfolio throughout; a dialogue can be initiated about hedge fund positions. So, the risk can be controlled.

Defending Headline Risk

Having access to information about the names of the portfolios allows clients with segregated accounts to respond to questions immediately. In addition, several core  features of hedge funds underlying can be shared, such as concentration, liquidity,  leverage, and directionality. So, the headline risk is also defended.

Preferences for Structure

Increasing client diversity has resulted in fewer similarities in hedge fund structure, and therefore a less favorable outcome for commingled funds. In addition, the segregated account structure can result in a lower cost structure for the client, depending on the set-up requirements.

Impacting Change

During stressful times, clients of segregated accounts have the opportunity to work alongside their investment managers to implement changes in their portfolios. There can be a result of this in some cases: when there are turbulent times, cash levels may be higher than usual; in other cases, it may result in a consolidated list of quality managers, shifting away from a more diversified portfolio.

The Disadvantages of Segregated Account Investing

However, it has some cons too, which are not that significant if you can focus on benefits properly.


There is a cost associated with every great benefit described above. The initial deposit for opening a segregated bank account is usually between a few thousand dollars and many thousands of dollars. Thus, the initial deposit requirements of a segregated account may be very high depending on the bank through which you open it.

Heavy return Price

For brokerage firms and forex companies, managing these accounts comes with a significant investment, and they expect a high amount on return. The regulatory requirements that surround segregated accounts are another potential issue.

Requirements to Fulfill

For large companies to open segregated accounts, there are many requirements they need to meet. Without the requirements, it is not possible to open an account.

Falling prey to Frauds or Scammers 

Unauthorized offshore accounts that claim to be US-based accounts are one of the most common forms of fraud using segregated accounts. After the trader has been scammed, the broker will use the funds to invest in their business. Also, there are some scammers out there who claim to have segregated accounts but actually do not hold the legal authority needed to operate them. Traders can be fooled into transferring funds to these scammers, where the funds will be misappropriated, and it is much harder to file for chargebacks when scammers have taken the money.

Not Trustworthy Enough

To achieve the trust of traders, some companies will attempt to cut corners when it comes to operating segregated accounts since there is a lot of regulation to follow. Frauds of this type are particularly elusive and dangerous. It isn't something you would anticipate companies doing, but it might happen, and the customers suffer a heavy loss.

Individual Segregated Account vs Segregated Managed Account

The Forex world is divided into institutional and retail investors. While the institutional investors need a huge investment, the retail trader can start forex trading with a small investment. In both cases, the account holder can trade by themselves as well as hire someone to the trader on behalf of them. That is where the managed account term comes.

As we have mentioned earlier, the segregated account separates the clients’ funds from the broker’s fund. Hence, the individual segregated account works for the retail traders. On the other hand, a segregated managed account separates the institutional client's fund or even sometimes the personal investor’s fund if the investor used a managed account to trade.

What is an Individual Segregated Account, and How does it Work?

It is a simple segregated account through which the forex broker keeps the retail client’s fund separately from their company’s account. The individual investor can see the details of their fund from the segregated account.

Through this account, the account holder can use that funded money to continue their trading. Apart from the individual account holder, the institutional trader may also have the individual account if they trade by themselves. The institutional trader can appoint someone to the trader on behalf of the company.

What is a Managed Segregated Account, and How does it Work?

The managed segregated account allows anyone to trade through an expert or the manager. It works with MAM, PAMM or any kind of managed account. However, like the managed account, you will need to pay some fees to the person who trades for you.

You can appoint someone from the broker or from a third-party organization to initiate your trading. Like the regular segregated account, segregated managed account holders can also see the account details as well as the trading details. However, it all depends on the broker. Some brokers don't provide access to the account holder if the account manager is from the brokerage firm.

Which One Should You Choose?

According to the general forex regulations, regulatory bodies across the world want to force the brokers to keep the trader's fund separated from the organization's fund. So, you can choose any type of segregated account depending on your experience. If you are confident enough about your trading expertise, you can easily choose the individual segregated account. On the other hand, if you are a newbie or don’t have the confidence or even don’t have time to trade, you can choose the managed account.

Nevertheless, your funds remain safe in either way. But you have to choose the broker wisely and make sure the broker is regulated. It is because there are many forex scams brokers who will offer you the segregated accounts with all the benefits and afterward don’t provide access to your funds or account.

So, to summarize, Forex trading or segregated accounts are considered high-risk businesses due to their volatile nature. But it has both advantages and disadvantages. Anyone willing to take a risk can open a segregated account, and they are well protected as the account is segregated. The funds are controlled by the company but cannot be used to cover ongoing expenses or invest in. A broker's operation is, however, governed by the regulations under which he or she is registered, which are determined by the country in which they are incorporated.

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