The Capacity (Cp) Investable Attribute evaluates how the returns of investors in a DARWIN are impacted by additional investment in the DARWIN.
What is it?
The Capacity (Cp) Investable Attribute evaluates how the returns of investors in a DARWIN are impacted by additional investment in the DARWIN. The better the score, the more likely it is that the DARWIN can sustain substantial levels of investment without suffering divergence that negatively impacts investors.
The Cp score is measured from 0 to 10 and takes into account the last 12 D-Periods of Experience (Ex), with a heavier weighting applied to more recent periods. The score can go up and down and is only calculated once a DARWIN has been created.
Generally speaking it can be said that strategies with longer average trade durations and wider Take Profit and Stop Losses, will have a greater Capacity.
Where can I see the information?
As with the rest of the Investable Attributes, you can access Pf information for a DARWIN via the icons in the top right of the DARWIN profile:
or by clicking through the ["Investable Attributes" / "Cp"] path with the DARWIN profile.
Sensitivity to divergence
The sensitivity to divergence graph compares the return of a DARWIN with the return that would have been obtained in hypothetical situations where the DARWIN suffered slippage from 0.2 to 2 pips per trade.
This difference in return is what we call investor divergence, a situation ordinarily caused by the volume of capital invested in a DARWIN which in turn means larger market orders which can exhaust liquidity.
In addition to the Sensitivity to Divergence graph there are a further three graphs within the Cp tab.
1. Capacity: Maximum allowed divergence (in pips)
This graphs shows the maximum slippage in pips beyond which divergence exceeds 0.5% on a monthly basis.
This chart details the average leverage per trade for the DARWIN. The lower the leverage, the smaller the volume sent to market and the lower the impact of divergence will be for investors.
3. Capacity: Maximum estimated investment (DARWIN)
The 3rd chart represents the estimated maximum AUM for a DARWIN without exceeding the threshold of 0.5% monthly divergence.
Examples of Capacity (Cp) scores
Let's take a look at some examples of a good, average and poor Cp score and explore the reasons behind the score.
This DARWIN has a Capacity score of 8.7 where return would hardly be impacted by slippage to the extent that it is estimated that it can absorb 107mn in AUM.
This is as a result of the underlying trading strategy where it can be observed that the average trade is open for almost 2 days. Additionally, the traders average winning trade makes 46pips while his average losing trade loses 44pips, indicative of fairly wide Take Profit and Stop Losses.
This DARWIN has a Cp score of 5.1 which equates to being able to absorb 5mn in AUM without suffering excess divergence.
Average trade duration is around 6 hours while the average winning trade makes about 21pips and the average losing trade -34pips.
And finally a DARWIN with a very low Cp score of just 0.2 meaning it can barely absorb any AUM - just 140K in fact.
An average trade duration of just 32minutes, an average winning trade of less than 3 pips and an average losing trade of 11 pips.
Additionally we can see that this DARWIN habitually operates during periods of low liquidity where spreads widen ( 20:00 y 23:00 GMT)
1. Capacity for investors
Market liquidity is not infinite. If a DARWIN starts to accumulate substantial investor capital, the prices at which it executes trades in the market can be negatively affected due to a lack of liquidity meaning that investor orders can be filled away from Top-of-Book, leading to divergence.
It is of vital importance that you take note of a DARWINs Cp score so that you are cognisant of how returns might be impacted as investor capital grows. Divergence affects all investors - and not just the most recent investors - as all DARWIN investors get the same execution.
2. Capacity for traders
Capacity is what will determine the maximum AUM you can expect to manage with your strategy. It therefore directly impacts your earning potential as you earn 20% performance fee on profits generated for investors.
Want to know more
If you want to learn more about the Cp attribute, we recommend listening to the Introduction to the Investable Attributes webinar. Juan Colón talks about Pf from minute 22:50