Risk Stability Attribute

Risk Stability (Rs) measures how stable the DARWIN’s underlying strategy’s risk is. The higher the score, the more stable the risk, hence:

  1. The more proportional the DARWIN’s behaviour vs. its underlying strategy, and
  2. the more likely the DARWIN will trade with a 10% VaR target risk.

Risk Stability Chart

This chart can be accessed by clicking on the Risk Stability (Rs) score on the DARWIN's page.

Rational investors back risks that fit their appetite. If they ignore the risk involved, they don´t know if it fits their appetite, so they don´t invest. All of which makes stable (=known!) risk investable.

NB: stable risk is a necessary but not sufficient condition for investability. Rational investors will question what holds risk stable, and won't invest without evidence for position level leverage consistent with the strategy level risk appetite.

What’s in it?

Plots evolution of risk over time, as approximated by the evolution of 95% monthly VaR.

To highlight changes in risk, an additional area around the plot is shadowed:

  • Above, by the maximum Risk / VaR in the last month and
  • Below, by the minimum

What’s the point?

Investable strategies trade with stable risk: if risk fluctuates, it does so slowly and gradually, with small volatility around maximum and minimum risk in a given reference period (=narrow shadowed area!).

The Rs score punishes recent fluctuations more than distant ones.

What’s NOT the point

What matters is stability: this is NOT about risk level. 

Stability matters because investors with 4% VaR risk appetite can replicate strategies with 30% VaR by adjusting position level leverage, provided VaR stays stable at 30%!

That’s why the vertical axis has logarithmic scale: it penalizes relative VaR changes - investors struggle more in replicating a strategy whose VaR scales from 4% to 8% (risk doubles!) than they do with a change from 24% to 28% (risk “just” grows by 16%).

Should you want to know more about how our risk manager works, do not hesitate to visit our blog (tag risk manager).

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