Thanks a lot for raising this topic, @SATFX!
There are several reasons why DARWINS are listed at the same risk level.
To begin with, the fact that DARWINS’ risk is normalised makes them apples-to-apples comparable with each other. Investors can compare returns and drawdowns between different DARWINS at a glance, which comes in handy when you have to pick among almost a 1000 strategies!
Secondly, normalised VaR allows investors to know in advance how much they stand to lose: if you are willing to risk 100 GBP in the worst month, you know you should not allocate more than 500 GBP to a given DARWIN at a 20% VaR. With a 10% VaR, you’d need to invest a 1000… in a way, a higher VaR allows you to diversify your portfolio with a smaller amount.
Thirdly, and more important, please note that we are the asset manager who needs to take care of the investor, so we need to be in full control of risk exposure. Most of the traders are not regulated as asset managers, so there would be legal issues in allowing people to replicate their decisions without them being regulated. The way we built it, we as asset managers are the ones in charge of protecting investors from sudden changes by the traders.
Let me use ERQ as an example. The underlying strategy trades roughly at a 0.25% monthly VaR… He’s trading very well. Let’s imagine Investors like his low-risk trading style and invest 100,000 in him. The returns are fairly good (0.8 % in a year with a risk close to zero…). Following your suggestion, our risk manager is not intervening because the trader is trading below 20%.
Now, imagine the trader all of a sudden starts trading at a 19% VaR and markets turn against him. As per your suggestion, we are not intervening. Investors were replicating a strategy they expected to trade at a 0.25% VaR and all of a sudden they have lost in one single day 10 times what they earned during the last year!
Believe it or not, there are bunch of quite clever people working here and we have invested a lot of time (and money) to find the best solution. This does of course not mean that we are right… but you can trust we have found several cases where things could have gone very wrong if our algos hadn’t intervened!
There are several features in the pipeline that would not be possible in case of non-normalised DARWINS (backtests, filters, etc.). All in all, we deem the reasons to have normalised DARWINS outweigh the cases where conservative strategies are turned into a completely different animal. BTW, there are also several cases where “aggressive strategies” are turned into smooth DARWINS
That being said, please note that we have been working on a major improvement to our risk manager for a couple of months now: the way it is currently set up, it is being too conservative when replicating some types of strategies. This is a crucial change that can only be implemented when we are 100% sure it will work like a swiss clock. Please be patient!
Looking fwd to hearing your thoughts!