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Investor Return and Risk (risk tolerance)

Understand the concepts of Capital at Risk and Maximum Risk.

Investing in DARWINs is not available for Darwinex Global (FSA regulated) clients.

Contents

 

Profitability vs. Risk

Profitability and risk are indissolubly linked.

That is why every investment decision requires not only an assessment of expected returns, but also an analysis of potential risk.

It would not be advisable to invest without being prepared to accept the risks inherent in any investment.

Therefore, it is essential to understand the risk of investing in DARWINs and how you can measure it in order to make a fully informed investment decision.

Evaluating only the potential return is not enough. You must also evaluate the potential risk.

Before making your first investment in DARWINs, we recommend that you understand these concepts clearly.

  • How to calculate risk with VaR. The monthly VaR is the risk measure we use at Darwinex. It is a concept that is important to understand as it measures the probability of incurring a certain loss in a month. On the following pages, we explain how it works.
  • How risky is a DARWIN? On the Darwinex market, regardless of their profitability, all DARWINs are listed with the same target risk level (6.5% monthly VaR). It is essential to consider this risk before investing in DARWINs.
  • How to determine your personal risk. Bearing in mind that all investments carry risk, and that you can use VaR as a tool to measure this risk, you now need to determine the maximum risk limit you are willing to assume when investing in DARWINs.
  • Why is diversification a good idea? The well-known saying ‘don't put all your eggs in one basket’ is particularly applicable to financial investment. Understanding how diversification works, as well as the reasons why it is much better to create a diversified portfolio of DARWINs than to concentrate all your investment in just one, will help you limit your investment risk.

 

What is VaR?

VaR, or Value at Risk, is a way of measuring the risk of an investment that answers the following question:

How much could I lose, with what probability and over what time horizon?

The monthly VaR (95%) is the minimum percentage of capital that I could lose in a month, with a probability of 5%.

A monthly VaR of 6.5% means that, 1 in every 20 months (5% of the months), the minimum expected loss will be 6.5% or more.

However, it is also correct to say that, 19 out of every 20 months - 95% of the months - the maximum expected loss is greater than -6.5%.

 

DARWIN risk level

A DARWIN is a cash financial product, similar to buying/selling any financial asset, which an investor can purchase on the Darwinex market.

Its quotation is determined by the return on the DARWIN, which replicates an underlying strategy, except for risk management, which is carried out by our Risk Engine.

When a trader buys an asset in their underlying strategy, investors who have invested in their DARWIN automatically replicate that purchase.

Likewise, when the trader sells the asset, investors who have invested in that DARWIN will automatically replicate the sale.

Buy/sell transactions are executed without disclosing the details in order to protect the trader's intellectual property.

At the outset, every DARWIN starts with a price of 100, which will rise or fall depending on the absolute cumulative return obtained.

Thus, a DARWIN trading at 140 means that it has a cumulative return of 40% since its inception.  On the other hand, if it were trading at 85, it would have a cumulative return of -15%.

The main difference between the results obtained by the trader and those obtained by their investors through DARWIN lies in the fact that the risk level of DARWIN is managed by a risk management algorithm that is independent of the trader and controls the size of the purchase/sale.

This ensures that all DARWINs have the same statistical risk, protecting our investors' capital from irrational behaviour by traders.

In this way, regardless of the risk assumed by the trader in the underlying strategy, the DARWIN replicates the trader's strategy but applies rigorous risk management.

The target risk level is the same for all DARWINs, i.e. a monthly VaR in the range of 3.25-6.5%.

At Darwinex, regardless of the profitability they offer, all DARWINS operate within the same target risk range: 3.25-6.5% VaR(95%) per month.

 

Your risk tolerance

At Darwinex, we are committed to strictly complying with current financial regulatory regulations.

An investor's risk tolerance represents the level of financial risk that a person can assume, both from an economic and emotional point of view, when making investments. This cannot be changed ‘on demand’, as it is not a momentary preference, but is determined by the investor's risk profile, which is defined based on the information provided when opening the account (financial situation, investment objectives, experience and knowledge of the markets).
In this way, we ensure that the recommendations and instruments used are appropriate and consistent with each investor's actual risk capacity and risk propensity.

We will not automatically sell any DARWINs even if the maximum risk you have defined has been exceeded. However, an investor may place a Stop Loss on the DARWIN.

 

Diversification in DARWINs

To manage portfolio risk effectively, it is advisable to allocate capital across multiple uncorrelated DARWINs rather than concentrating investment in a single DARWIN, regardless of individual performance potential. Diversification among uncorrelated assets enables the construction of a robust portfolio, optimising the balance between risk mitigation and long-term return expectations.

A single DARWIN offers a monthly VaR(95%) of max. 6.5%.

However, if you invest in several of them, which are also uncorrelated, the VaR of your portfolio will be significantly reduced, which means that you will be lowering the risk level of the portfolio.

Diversifying across multiple DARWINs helps reduce portfolio risk, as losses in one may be offset by gains in others, supporting more stable investment results.

 

Tips

  • Indicate the maximum risk. Your risk tolerance is defined as explained above. This will also help you maintain an informed attitude towards the risk you are taking with your investment.
  • Diversify. Do not invest everything in a single DARWIN, no matter how attractive it may seem. That way, when bad times come, you can offset them with the profits from other DARWINs.
  • Give DARWINs time. It is a common mistake not to give DARWINs enough time to generate returns. However, if a DARWIN accumulates excessive losses for you, sell it without hesitation. There are many more to choose from.