A double risk management can cause noticeable differences between a DARWIN's return and that of its strategy.
What is it?
Due to the existence of a layer of risk management placed between the trader's strategy and its associated DARWIN, the results of each one can differ.
- The risk manager is a mechanism placed between the underlying strategy and the DARWIN.
- Thanks to the risk manager, we fulfill our responsibilities as an Assets manager and we standardise the risk of all DARWINs to a 10% monthly VaR, so all investor can know beforehand their investment's level of risk.
How does it work?
The risk manager works on two levels.
Every time a trader sends an order to the market, and depending on the market conditions at that moment in time, the algorithm calculates the size to be opened for the investors in order to meet the objective risk level that Darwinex guarantees its clients.
While the trader's position remains open in the market, the algorithm carries out a second level of risk adjustment ensuring that the position does not go above the maximum leverage. In order to do so, the risk manager takes into account the market conditions throughout the positions lifespan, as well as its duration. This means that the risk manager can act at any moment in time to partially close the position so that the DARWIN's objective risk live is always a 10% monthly VaR.
A double risk management can cause noticeable differences between a DARWIN's return and that of its strategy.Case study
In order to better understand how the risk manager works, it is important to know how to differentiate between the results of a strategy and those of the DARWIN associated to it.
On a strategy's return graph we can se that, during the months of February to May in 2017, the trader had a few months of important consecutive losses from which they have still no recovered. The VaR during these months fluctuated between 40% and 65%.
However, the previous strategy's associated DARWIN's return shows a much more contained loss in the same period of time, thanks to the efficiency of Darwinex's risk manager. This has allowed the DARWIN to recover much more easily. In the case, the risk level taken on by the DARWIN has always been the same, in other words, a 10% monthly VaR.
The difference between a strategy's results and those of its associated DARWIN are exclusively down to the risk manager.
- The algorithm manages and standardises the risk but doesn't take it away. The investor ought to be the one who mininises their portfolio of DARWINs' risk through diversification.
- Due to the fact that a DARWIN's return and that of its underlying strategy can differ, do not choose DARWINs solely based on their strategies' return. Pay attention to the DARWIN's quote price.
Do you want to learn more?
If you want to learn more in depth about the differences between DARWINs and the strategies which they replicate, we explain everything in this webinar: