Providing a DARWIN
      Back to home
      1. Darwinex Docs
      2. Providing a DARWIN

      How the Risk Engine works

      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 fulfil our obligations as an Asset Manager regulated providing our investors with an investment product 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 behaviour by the provider in terms of their risk management.

      4. Provide traders with the legal coverage so they can earn performance fees

      Darwinex provides all its traders with legal coverage so they can earn a 15% performance fee of the profits generated by investors who invest in the DARWIn that's based on their trading strategy.

      The formula of the Risk Engine

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

      Lev= leverage

      Strategy VaR

      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 exceed 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%.

      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 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 leverage of 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.

      *This ratio is updated once an hour on the platform.

      The Risk Engine works on two levels

      First level

      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.

      Second level

      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