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Divergence between Darwin return and actual return

Hi All,

The ‘back tester’ on SCS for example shows a 20% divergence from when they joined end July 2018 - giving 4% to an investor rather than the 24% the darwin got,

Is the only way to get this info via the backtester?

The monthly divergence & Latency on the dashboard is at only -0.11 which makes me wonder how its calculated?

Thanks!

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The figure you have described is the current divergence. The historical divergence can be seen from the Investors tab (tick the Divergence box).
You can see from the screenshot that the divergence went to a massive -8% back in March (to howls of protest from some Investors).

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Very informative - thanks!

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Hello,

I am using this threat to not have to create a new one. Hope that’s fine.

I am trying to understand my tools to measure Actual Past divergence:

This is a 1year backtest of the Darwin PME from 7Feb19 to 10Feb20.

QUESTION - Is the following correct?

There are only two things that differenciate the theoretical Darwin’s return (+23.21%) from my simulated return (-16.82%):

  1. Performance Fee. Which would have costed me -116.80 Euros. Which is calculated based on my real (diverged) return, not based on the theoretical Darwin’s return.
  2. Divergence. Which explains the rest of the gap between the Darwin’s return (+23.21%) and the return I would have had -16.82%.

Is there another tool to measure past real divergence? This gives me a good indication but doesn’t give me the exact % of accumulated divergence I would have “paid for”. Is the following calculation correct?

Performance fee was -116.80 euros. 116.8/10000 = 1.680%. Meaning of the total return I would have got of -16.82%, -1.680% was due to Performance Fee.
Therfore the gap between the Darwin’s return (23.21%) and what remains of my negative return (16.82%-1.680%) is the accumulated divergence (?). That would be 23.21+16.82-1.680 = 38.862% of accumulated (negative) divergence if I would have invested in PME during such period.

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You don’t pay performance fee if you lose because of divergence, it is calculated from your net profit for each 3 months after divergence.

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Thanks for your reply! I understand in the case I am posting I would have paid formances fees during the 1st quarter because during the first three months there was net profit (around May19). From there the return went negative and I would not have paid performance fee for the other 3 quarters.

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I don’t have a better calculation for divergence than yours at the end of your first post.

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Dear @Qaytarlah,

Thanks for your query.

The best way to evaluate a given DARWIN’s divergece is by checking their divergence chart under the “investors” tab.

I hope this proves helpful!

Best,
Ignacio

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Thanks Ignacio,

Surely that chart is the best option to see someone’s Divergence… But strictly speaking I don’t care about Divergence itself, I care about its effect on my return… And that’s the piece I was missing.

This was my (noob) thought process: I felt like I had no way to quanitfy (nor even remotely guess) the actual impact of divergence in the return. Actually, I was very surprised to discover that PME’s accumulated divergence for a year (Feb19 to Feb20) was -38% (huge)!!! I was expecting a lot less (for some reason)… By looking at the chart, the divergence stays around the -1.5% threshold most of the time, so I thought maybe the impact is not that bad.

I am glad @IlIlIlIlI validated my “past real accumulated divergence” calculation, I feel like I’ll be using it.

So what do you guys think of this idea?

In the monthly returns table…

To add, through a pop up, the return already shown, minus the “real past divergence investors suffered”, on each monthly/yearly return. An alternative would be to add another column, to the right of Total with the yearly return minus divergence.

Has something like this ever considered before?

IMO, it’d be serving three main purposes

  1. Educational: I feel like it’d be a very visual simple way to explain Divergence’s nature and why it is important: “Whatever it is, it’s something that turns some green return numbers, into red ones” so I must understand it.

  2. Transparency: “Darwin is an investable asset. So when I see the past returns of a Darwin in its mainpage, I’ll be prone to thinking that’s the return of the asset I can invest in, hence this would have been my returns.” I feel like this is a very likely way of looking at it when one is new. I know Darwinex spends a lot of efforts in making sure no money is invested without understanding the basics of the platform. This idea would be contributtig into those efforts.

  3. A tool for investors. A friendlier and much faster version of the backtesting + calculation discussed above - (Which is what brought me here in the first place and then I ended up spending way too much time writing this hahaha)

I am not in a position to suggest anything, this is for the sake of speculating/discussing/brainstorming :smile:. I am very interested in anyone’s thoughts.

I want you to notice that PME cannot be bought (only sell button) and there are no investors.
I think the reason is indeed this high and wild divergence.

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Thanks for your reply, @Qaytarlah!

I would highly recommend the comment I posted a while ago:

As explained back then, divergence disclosed in a DARWIN’s section does NOT refer to divergence experienced by investors in the past , it is an estimation of the divergence that is likely to take place in the future, based on divergence data from the 100 most recent orders.

As an investor, you should rather care about the information disclosed in the investors tab (which actually reflects the exact divergence experienced by investors) rather than the estimation calculated based on current divergence figures.

I hope this helps!

PS: As correctly mentioned by @CavaliereVerde, PME is closed to investors precisely to avoid users investing in a DARWIN with such a great divergence.

image

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I should have added I have no interest in PME itself, I am just trying to get my head around divergence and I used it as a random example for my “study”… My bad haha.

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Hey Ignacio,

Thanks a lot for your reply. I’ve read carefully your comment and the linked article, as well as wathced the video there. I am clearer now.

My mistake, I has missed this chart!!! I have spend a number of hours exploring Darwinex and I never knew this chart was there, my bad. That’s exactly what I needed, and turns out I had it alreday.

One last question, in regards of the chart showing Divergence and Invested Money. Is the last data point of such chart always going to coincide with the number displayed in the main page of the Darwin?. -0.41% for THA 17feb20.

I assume yes, which would mean that such chart is not a representation of the real past divergence on each day, instead is a chart where each daily data point is the estimation of divergence based on recent trades. Am I correct?

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Thanks for your query, @Qaytarlah!

The best way to track real divergence would be through the Backtest feature (https://www.darwinex.com/darwins-backtest).

Please note, however, that such tool accounts for performance fees, too, so you’d need to check periods shorter than 3 months to track divergence (without the effect of performance fees).

I hope this proves helpful, please do let us know should you need further assistance!

Best,
Ignacio

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Hey Ignacio, thanks for staying with me here. Apologies for what’s ahead hehe:

Let’s zoom out. In my last post I (thought) understood the tools to look at past divergence (“backtest” + “investors’ tab divergence chart: Divergence in %”) so I was asking about a different thing: The “divergence-investors chart”.

Back to my initial question which hasn’t been answered.

  • QUESTION 1. What is this chart representing?

    I understand this is NOT displaying the past daily divergence the Darwin had in each day, so then i wonder, what is it displaying then? What does each data point mean? For example, for THA the chart says:
    14 feb: 0.42%
    17 feb: 0.41%
    18 feb: 0.41%
    19 feb: 0.41%
    20 feb: 0.41%
    Is it connected at all with the “monthly divergence displayed in the main page of a darwin”? I have noticed, in most cases the last value of this chart, coincides with it.

  • QUESTION 2. Now I am getting confused so I need help validating something…


The “Monthly divergence” is an estimation of the Future divergence for the next month (next 20 trading days?), correct? During the next 20 trading days, Darwinex estimates, THA will suffer an accumulated divergence of -0.41% for that period. Am I interpreting it correctly?
One way I am using this number is to have a rough calculation on the estimated future annual divergence: I would do -0.41%*12 (monthly estimated divergence * 12 = yearly estimated divergence)…

  • QUESTION 3 (related to your last reply). This is what I understood so far: There are two ways to look at past real divergence for a Darwin, Backtest and “investors’ tab divergence chart named [Divergence in %]”. What I understand from your last reply is that, of these two tools, backtest is more reliable/accurate, correct?

The next findings are a bit confusing, may be a got something wrong, apologies if that’s the case. Since you implied one method being more reliable than the other, I wanted to see the differences:

A) Backtest: From 14thJan to 11thFeb shows THA had, as Divergence, the difference between 2.15% and 1.85%: -0.30% Divergence.

B) “investors’ tab divergence chart named [Divergence in %]”: From 14thJan to 11thFeb shows THA had a Divergence of -0.97%. More than 3 times more than the other method.

If I do the same comparison but on a period of a year (making sure I substract the performance fee, in the Back test method). The difference is much smaller but still significant:

A) Backtest method: -7.63%


Calculation: The difference in % between the backtest and THA’s performance is 10.18% (19.47%-9.29%), of which -2.5534% correspond to performance fees. Hence, the past divergence through this method would be the difference of both numbers: -7.63%

B) “investors’ tab divergence chart named [Divergence in %]”: -10.10%