How does order allocation work when investing in funds?

In Portfolio Management, Investors’ money is pooled into one fund account created by a Portfolio Manager (PM). The PM then trades from this account on the invested capital. Orders are allocated to each investment by investment equity share.

Find out what is a fund and compare the differences between strategy and fund.

How Portfolio Management works

Let us first take a brief look into how the process of Portfolio Management works:

1. A PM creates a fund and invites Investors to join the fund.
2. An Investor opens an investment in the fund.
3. The invested capital is reflected in the PM’s fund account.
4. If there are any current open orders, the orders are not allocated to the new investments made.
5. The PM opens new trades, these orders are immediately allocated to the Investor’s investment account using the same opening price, calculated by investment equity share.

Investment equity share

Investment equity share determines how orders are allocated to exact investments within a fund.

When the Portfolio Manager trades with the invested capital pooled in a fund, the orders open are allocated to the investments based on the investment equity share.

Calculation formula

                   Equity Share = Investment equity / Sum of all investments equity in a fund

Investment equity refers to the amount of money an Investor has in their investment account, plus or minus any profit or loss from open orders.

Minimum order allocation

Although the minimum order volume is 0.01 lots for a PM, the minimum lot size that can be allocated to an investment is 0.0001. This has been done to ensure that Investors receive orders even if the PM opens minimal order volumes.

Order allocation calculator

For Portfolio Managers, the order allocation calculator is also a special tool to calculate the allocation of orders between investors. It is located on a tab of the fund page.

Scenarios

Order allocation can vary depending on the number of investments, the number of investors, the investment amount by investors, as well as the order made by the PM.

• Different shares
• Equal shares
• Small shares

Scenario: Different shares

Let’s first look at a normal scenario to illustrate how order allocation and investment equity share work together.

A PM starts a fund. He does not deposit his own funds into the fund and invites Investors to open investments in the fund.

• Investor 1 invests 1000 USD.
• Investor 2 invests 1500 USD.

The invested capital of USD 2 500 is reflected in the PM’s fund account.

The PM then opens a 2 lot order.

The equity share and order allocated for each investor are calculated as follows:

The PM starts a fund, and 3 investors invest USD 1000 each.

The equity share for each investor is equal and is calculated as follows:

(1000/3000)% = 33.33%

If the PM opens a 1 lot order.

• Investor 1 is allocated 0.3333 lots.
• Investor 2 is allocated 0.3333 lots.
• Investor 3 is allocated 0.3334 lots.

Even if all investments are equal, a 0.0011 lot is left. This 0.0011 lot will be allocated to the latest investment, meaning Investor 3 who recently opened an investment will open with 0.3334 lot.

Scenario: Small shares

The PM opens a fund and has 2 investors.

• Investor 1 has USD 14860 invested.
• Investor 2 has USD 140 invested.

The PM then opens a 0.01 lot order.

• Investor 1 is allocated 0.01 lot.
• Investor 2 is not allocated any order.

Depending on the investment amounts from investors, the PM should consider opening orders of more than 0.02 lots to accommodate both investors.

Important: If the resulting volume is lower than the minimum lot size of 0.01 lot, the Investor will not receive the order.

How partial closing works

Partial closing of orders can happen if an Investor manually closes, or through stop out automatically closes an investment.

Important: When a fund is stopped out, all the active investments in the fund are closed and the fund archived. You can view the funds in the Archived Funds tab.

Here’s an example:

PM opens a 1 lot order.

• Investor 1 invests USD 4 000.
• Investor 2 invests USD 6 000.

Investor 1 closes the investment.

• Order volume is close partially = 0.04 lots.
• Remaining order volume = 1 - 0.4 = 0.6 lots.

If Investor 2 closes the investment.

• Order volume closed = 0.6 lots.
• Remaining order volume = 0.6 - 0.6 = 0 lots.