The Darwinex risk manager is an algorithm that manages a DARWIN's risk level independently of the risk undertaken by the trader.
What is it?
The Darwinex risk manager is an algorithm that manages a DARWIN's risk level independently of the risk undertaken by the traders.
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 the same statistical risk level. All DARWINs are listed with a monthly 10% VaR, equivalent to that of an average share.
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 trader in terms of their risk management.
4. Provide our traders with 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 20% of the profits generated for their investors.
The risk manager is the mechanism which, positioned between the underlying strategy and the DARWIN, regulates the DARWIN's 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.
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.
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.
- All DARWINs, regardless of their returns, have the same statistical level of risk.
- 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.
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 recording.