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How the risk manager works

The Darwinex risk manager is an algorithm that manages the risk of DARWIN assets independently of the risk undertaken by the provider.

The risk manager is the mechanism which, positioned between the underlying strategy and the DARWIN, regulates the investors' risk.

Why is it necessary?

By means of the Risk Manager Darwinex reaches the goals below.

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 DARWIN assets have a similar statistical risk level. All DARWINs are listed with a monthly 3.25-6.5% target 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 behaviour by the provider in terms of their risk management.

4. Provide traders legal coverage to be able to get paid for profits

Traders at Darwinex have legal coverage to be able to get paid a success fee of 15% of the profits generated for their investors.

The formula of the Risk Manager

Lev (investor) = Lev (trader) * (target VaR/strategy VaR)*f 

Lev= leverage

Strategy VaR

In order to evaluate the underlying strategy's value at risk (VaR), the algorithm uses the last 45 days of a trader's open trades as a reference period.

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 maximum 6 months, until the ratio between maximum and minimum VaR is 2:1. Should there be no 2:1 ratio in the last 6 months, the maximum in the last 6 months is taken into account.

The current VaR then gets divided by the maximum VaR calculated before. Last, this ratio gets multiplied by 6.5%. The resulting VaR will move between 3.25% and 6.5%.

Examples

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 Manager tolerates changes in Var up to 2 times (rises or falls) with the aim to better adapt to the tarder’s risk management.

DARWIn managers can go to their Asset Management terminal to their DARWIN's target VaR at any moment of time.

They'll also see anothe value called VaR Ratio.

VaR Ratio = (Target VaR/Strategy VaR)

VaR Ratio will be the ratio of leverage between DARWIN and underlying strategy as long as f=1 which is when the risk manager does not intervene. E.g. if VaR Ratio is 2, the DARWIN will trade with double the leverage than the strategy.

The risk manager works on two levels

First level

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 target risk level that Darwinex guarantees investors.

Second level

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. This additional control measure does not allow investors’ D-Leverage to exceed in any case the 16.25-13-9.75 threshold for 15 min-30 min-1 hour positions. This restriction mainly affects short-term DARWINs, or DARWINs that use short-term leverage peaks.

Past changes to the Risk Manager