The Darwinex Risk Engine is an algorithm that manages the risk of DARWINs independently of the risk taken by the trader.
The risk engine is the mechanism that lies in between the underlying strategy and the DARWIN, and regulates the investors' risk making sure that the target risk of all DARWINs is the same, 6.5% monthly VaR.
Why is it necessary?
Thanks to the Risk Engine Darwinex reaches the following goals:
1. Fulfill the FCA regulations
We fulfill our obligations as an Asset Manager regulated by the FCA (UK) providing our investors with an asset whose risk they know beforehand.
2. Standardise the risk
All DARWINs have a similar statistical risk level and their risk oscillate in between a monthly 3.25 and 6.5% VaR, equivalent to that of an equity index.
3. Add an extra layer of security to our investors
The risk manager adds an extra layer of security protecting our investors' capital from any erratic or irrational behavior by the provider in terms of their risk management.
4. Provide traders with the legal coverage so they can earn performance fees LEGALLY
Darwinex provides all its traders with the legal coverage so they can legally earn a 15% performance fee of the profits generated by their investors.
The formula of the Risk Engine
Lev (investor) = Lev (trader) * (target VaR/strategy VaR)*f
As a reference period and, in order to evaluate the underlying strategy's value at risk (VaR), the algorithm uses the last 45 days in which the trader has remained exposed to the market.
Target VaR and VaR Ratio
To determine the DARWIN's target VaR, historical VaR data is taken into account, starting with the most recent data with a look-back window of 6 months max, until the ratio between the maximum and minimum VaR is 2:1.
Should the DARWIN never exceeds this 2:1 ratio in the last 6 months, Darwinex will take into account the last 6 months.
Then, the current VaR of the DARWIN is divided by the maximum VaR calculated before.
Lastly, this ratio gets multiplied by 6.5%, resulting in a VaR that will move between 3.25% - 6.5%.
Current VaR: 8%
Maximum VaR: 12% one month ago
Minimum VaR: 6% five months ago
Target VaR: (8%/12%)*6.5% = 4.33%
Current VaR: 9%
Maximum VaR: 14% 2 months ago
Minimum VaR: 8% in the last 6 months
Target VaR: (9%/14%)*6.5% = 4.17%
In summary, the Risk Engine tolerates changes in VaR of up to 2 times (up or down) with the aim to better adapt to how the trader manages its risk.
DARWIN managers can check both their current target VaR value and the VaR ratio in the Asset Management section.
VaR Ratio = (Target VaR/Strategy VaR)
VaR Ratio is the leverage ratio between a DARWIN and an underlying strategy.
For instance, if the VaR Ratio is 2, it means that the DARWIN is trading with a leverage 2 times higher than the underlying trading strategy. On the other hand, if the VaR Ratio is 0.5, it means that the DARWIN is trading with half the leverage when compared with the underlying trading strategy.
The Risk Engine works on two levels
Every time a trader sends a market order 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 target risk level that Darwinex guarantees all its investors.
While the trader's position remains open in the market, the Risk Engine ensures that the position does not go above the maximum leverage.
This additional control measure does not allow the D-Leverage of any DARWIN to exceed in any case the following thresholds:
- Maximum D-Leverage of 16.25 for positions of less than 15 minutes.
- Maximum D-Leverage of 13 for positions lasting between 30 and 60 minutes.
- Maximum D-Leverage of 9.75 for positions that last more than 60 minutes.
Past changes to the Risk Manager
- 2020 - Why Max. 6.5% monthly VaR
- 2019 - Change from fixed VaR to variable VaR in the DARWIN assets
- 2017 - The New Risk Manager Part 1, Part 2 and Part 3