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Impacts of Risk Management 2.0 on Darwins

Hello folks!

Hope you are all safe and not too bored in this challenging year.

As new risk metrics affect all Darwins, I’m wondering if traders consider adjusting risk parameters on their underlying strategies.

For example, my Darwin WFB used to have a DD of 5% for a 30% return pa. This has always been the target so I could promote this expectancy to investors. To achieve this I used a 1.5x leverage on the underlying account compared to accounts elsewhere. Now with Risk 2.0 the Darwin’s return dropped to 23% with a 3% DD. So I can’t pitch investors with a 30% return if I use the Darwin as a live tracker.


Before


After

My understanding is that investors’ trading size is now reduced. Anyhow, the general reduction in risk profile across the community may seem appealing, but the impact on providers can be perceived very differently. Previously higher risk/volatile strategies benefit from a perceived lower DD (a 14% DD/50% return strategy looks better than a 20% DD/80% risk-wise), conservative strategies are affected by perceived smaller returns (for investors, a drop in return from 30% to 20% is a bigger deal than a reduction in DD from 5% to 3%). Doesn’t this seem like a bail-out for riskier strategies? Providers are responsible for their own risk profiles, or bear the consequences. An overall reduction is like an intervention into natural selection.

So if I want to return to my Darwin’s previous risk profile of 5% DD/30% return, do I need to increase the leverage in my underlying trading? Anyone looking to change their underlying in the wake of the new metrics?

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I’m pretty sure every serious trader is looking at this, I know I am!
Maybe providers who strive to provide alpha with low divergence and very close replication of their underlying strategies will struggle the most with this?
I’ve scaled back my “rotation” to see what effect it has on the VAR and the nett result is pretty flat for the Darwin.
I asked in a similar vain to your query in the pivot webinar recently and the impression for me is that we have to sit it out and wait and see.
The introduction of 3x leverage gives investors the ability to increase the risk but to me seems to defeat the object of the exercise… although there are bigger wheels turning within Darwinex and we still have a great package to offer investors.
You sound like you are in a similar conundrum as I am. Increase positions and leverage for higher return but how can we calculate that return without knowing how the algo that creates the risk manager will throttle back VAR?
I’m just walking in the dark feeling my way. I’d like to run in the daylight, if you get my drift!

Agree more than 100%.
With the multiplier that can potentially change every day, Darwinex will always attract 95% of traders who think that the risk is only “1% per trade” or “from 0.5% to 2% per trade” because they read so on Babypips.
Promising talents who just graduated in Finance or Quantitative Methods or Mathematics for Finance or Econometrics or anything, in my honest and humble opinion, would never even dream of joining with these conditions on risk management.
I suggest the book “High Frequency Financial Econometrics”, a book that goes beyond the classic “1% per trade”. Can I say it again? Risk management is a fundamental part in trading.

I don’t want to sound too harsh. I’m just a guy who hopes to see something different on the risk management side, because this, in my opinion, is not sustainable for professionals.
Of course, this is just my opinion and it doesn’t mean that I’m right :slight_smile:

You can’t. You increase your risk with the underlying, your VaR will go up and you are at the same point.
From my point of view, the only thing you can do is to alert your investors that risk and potential profits went down due to the new system, but they can use the leverage to compensate.

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You have to decrease your trader‘s VaR to get it back when the Target VaR is reduced now.

That can be done by increasing trading account size by 50% and leaving trade size and frequency unchanged or decreasing trade size and/or frequency.

That means reducing his underlying VAR to around 9-10%? How quickly will such a change reflect on the Darwin’s multiplier? The 45 days needed for VAR calculation or 6 months?

Just need to understand how the multiplier will change with an immediate 50% drop in risk exposure.

Won’t the Darwin’s target VAR just go down to 3.25% first leading to even smaller profits?

This is important to me as well because currently I’m seeing a 0.25 multiplication on my own Darwin which is pointless as we are all here to make money on the Darwin first of all and not the underlying strategy (mostly).

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It is not easy to say.
I have collected results on the multiplier since March 2020 and this is the way it works for me:

  • The multiplier doesn’t change when investors’ VaR changes withing the range.
    For example, you have a VaR of 10% and investors have a VaR of 5%, with a multiplier of 0.50. If your VaR tomorrow goes to 11%, Darwinex tries to keep your multiplier constant at 0.50, so investors’ VaR will move to 5.50%. Just for the record, this is something I like, so thumbs up for Darwinex, at least for this :slight_smile:

  • The multiplier changes when investors’ VaR is at the limit of the range and your personal VaR goes even further than that limit.
    For example, you have a VaR of 20% and your investors have a VaR at the upper limit, at 6.50%. In this case, the multiplier is 0.325. If your personal VaR goes up, investors’ VaR cannot catch up since it is already at the upper limit of 6.50%, so your multiplier will decrease for every day that your VaR increases. If your personal VaR decreases, investors’ VaR will decrease to keep a multiplier constant at 0.325. The only way to increase it, according to my data from March 2020, is to bring investors’ VaR below 3.25%.

In your case, you have a personal VaR at 20.76% and you say that you have a multiplier at 0.25, this means that your investors’ have a VaR at 5.19%, at the moment.
Your multiplier will be the same until your personal VaR stays in a range 13-26%.
If you want to increase it, you have to bring your personal VaR below 13%.
How? My personal opinion is that there is no concrete way to do it.
The ways suggested many times are to risk less or keep the same risk but increase your balance. These methods decrease your VaR and so increase your multiplier, but they also reduce the risk and so the performance with your personal account, so there will be no benefit at the end. In practical terms, it is like making 40% with a multiplier of 0.25 (10% end result for investors), or make 20% with a multiplier of 0.50, that is the same 10% at the end.

PS: good luck for the Darwinia of this month. Very exciting to see the race between you, THA and FFV :slight_smile:

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Thanks for the very detailed and clear response. So in summary, no need to change anything.

And thanks for the wishes… I am just glad to finally be in contention at all. Been 2.5 years coming!

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So what you guys are saying is, the multiplier is bound by the upper VaR limit, higher leverage will depress the multiplier, but instead smaller leverage leads to smaller VaR on my underlying and that allows to maximise the multiplier?

A 50% bigger account will lead to a 1/3 drop in return with the same position in the underlying, but not in the Darwin? Because a higher multiplier will be enough to compensate for that?

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In general, yes, it works like that.
For Asgardian1, it doesn’t work like that.
Increasing his balance by 50%, keeping the same position size, may lead to a cut in the personal VaR by 1/3, which would not be enough to increase the multiplier.
The effect would probably be that he reduces return by 1/3 (and the risk) and there is no compensation by the multiplier.

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I see. Thanks for the replies. Let’s see how that works out.

Thanks for mentioning my Darwin FFV. Hopefully, FFV is going to take the 1st place of DarwinIA allocation this month.