CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 64 % of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Upcoming changes to the Risk Manager

A risk management independent from the trader is one of Darwinex’s most distinguishing features. In the near future, we’ll make our risk manager more flexible without giving up on this feature.

The independent risk manager has been carried out up until now based on a fixed target risk. This has two main aims.

  1. Protect the investor against excessive risk which might be taken on by the trader.
  2. Make it easy to compare the DARWINs’ returns as they all trade at the same risk.

The most solid criticism of the risk manager came from a user through a simile of a road.

I believe that the main complaints are down to the excessive leverage sometimes added by the risk manager. Imagine that we have a route on a stretch of road where there are many accidents, and many people travel along it. It is decided to start a risk manager which limits the speed to 120 km/h, which is based on the quality of the road in average traffic. The system takes into account all vehicles and acts when the limit is surpassed. Those who complete the route in less time win more, and it is estimated they can do x journeys in n time. The problem is that the road conditions change a lot and there are days when it rains. Therefore the more experienced drivers prefer to adapt to these temporary conditions and reduce their speed. They are penalised financially in exchange for safety. What would we think if the system didn’t allow them to reduce their speed because it is considered that an appropriate speed is 120 and not 90 at any given time. And when they complain they were told that as good drivers they ought to know how to drive at 120 in adverse conditions because statistically speaking the accidents on that road have only killed two people, with a probability of at least 2%.

At that time Darwinex responded:

The risk manager is necessary to ‘‘limit’’ the maximum speed. The investors can NEVER go more than 120. The current risk manager sometimes goes beyond its function and acts as a ‘‘cruise control’’, forcing you to go at 120, when it is raining and there are roadworks as well. If this is the case we agree, and we are working on improving this aspect.

We now announce that in the near future, the DARWINs will stop having a fixed target risk, and will start to have a target risk within a range. The maximum value of the range will be 10% (over a VaR of 95%), and the minimum value will be situated between 3-5%. Those DARWINs which stand out will have a greater flexibility after an individual evaluation.

The result of the change will be a greater proportionality between the strategy’s return and the DARWIN’s return. The DARWINs will earn less but the investors will also suffer less.

The fixed target risk tends to affect experienced traders more and benefit beginners. This can be observed for example by LVS. This DARWIN came out of a recent drawdown of more than 20% reaching a new maximum but also losing a lot of investment along the way. The underlying strategy, trading at a risk less than that of the DARWIN, had a much smoother drawdown and, although it has still not recovered, shows a curve which the investors would have hung in for which they did not with LVS’s curve.

We await your feedback in comments.

Related links

11 Likes

This would only be true for underlying strategies that trade lower than 10% VaR themselves right?
Strategies trading above 10% VaR wouldn’t see any change, since the ‘ceiling’ of the revised Risk Manager remains as before?

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Please,explain what it means standing out in this context.
Does individual evaluation mean that , upon the request by the trader,there will be a Commission who will decide to grant different target VaR to darwin instead of usual 10%?Usual,generally applied VaR will still be10%?

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This makes sense. Investors that want lower risk will now only look for Darwins with 3-10% VAR knowing fully well that the Strategy and Darwin will have similar returns.

Traders on the other hand will be more relaxed about VAR going under 10% instead of worrying about what the risk manager will do.

My only question, what now happens with the argument about comparing Darwin returns? No more comparisons?

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I do not like this change in the Risk Manager.
I have spent hours reading and learning how this risk manager works and i have also spent many hours thinking how to trade in my underlying strategy in order to achieve the best results in my Darwin. Now i will have to spent even more time trying to learn how will the new risk manager works and how to translate this to my underlying strategy. It seems that now i will have to double my risk in my underlying strategy in order to get the same results.
It seems to me that this measure is aimed for certain Darwins so they can get better results (i.e lower drawdown) but as Bianka says this change means lower drawdown and lower profits.
I do not think all investors want less drawdown and less profits.
Darwinex is the people´s broker, meaning that it provides an easy and affordable way to invest for all people (those who have money and those who have much less money but they want to invest also).
If some investors want less risk (less drawdown) they can simply invest less money, however if Darwinex makes this change in the risk manager, some people who want more risk (more drawdown and more profits potentially) wont be able to have more risk because the do not have more money to invest.
As a Darwin provider it is my responsibility to think what i want my darwin to do and to implement the actions needed in my underlying strategy to get that. If i low my risk in my underlying strategy (because i want to lose less money in case things go wrong) i have to bear in mind how that will translate to my Darwin and i have to know that if i reduce the risk in my underlying strategy that means that my Darwin will amplify any drawdown.
This also works in the other side… If i want my darwin to have better profits and i reduce my underlying strategy risk i will have to bear in mind that any profits will be amplified but also any drawdown.
So it seems to me that Darwinex has taken part for some Darwins and not for the whole community.
Another issue with this change is what Asgardian1 says: How will Darwinex compare the Darwins´s results with this new change? It will be more difficult for the investors to compare the results of the darwins. For me, this change will make things more complicated for the investors.
Just my opinion.
Best regads.

3 Likes

As a Darwin provider, I broadly support this change.

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When can we expect this feature to be implemented?

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I’m very pleased to read those changes in the RM!
Now I’ve to return my VAR to less than 10…

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Fully support this change, sometimes VaR of 10% is definitely too high especially when volatility suddenly picks up after a prolonged low volatility period. As a Darwin provider, its good that we can be in control of the Darwin VaR during these periods.

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As Darwin’s supplier, I fully support the change in the risk manager. We will now have the ability to continue as before or better adapt to market (or road) conditions, especially in order to contain risk in our investment product.

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@bianka I may have missed this but is the setting of the VAR at the discretion of the investor (max 10%) and set by each investor so that 1 investor may have 5% VAR and another 10% VAR?

I presume it is not set by the provider since changing VAR would impact existing investors and would require their consent?

It is not to be set by investors neither by traders, instead of “target var 10%” darwins will have a range like “target var 4-10%”

Oh, I thought the trader will be the one setting the VaR of the Darwin, from a range of 4~10%. So the trader can have a control in the risk of the Darwin?

This is the link you can see in spanish…for me it is clear the manager of the Darwin choose the VAR.
There are several juicy things, but the phrase related to risk manager is:
Dar al gestor flexibilidad : que pueda personalizar el gestor de riesgo dejando el nivel de riesgo a su elección y que pueda elegir también los precios a cobrar al inversor.
Translation: the manager will be capable to customize the risk manager setting the level of risk of his choice, and that he can also set the fees to charge to the investor¨

https://blog.darwinex.com/primeras-pinceladas-private-label/?lang=es&utm_campaign=Weekly%20Roundup&utm_source=hs_email&utm_medium=email&utm_content=78534136&_hsenc=p2ANqtz-_bJCyglCIsxP5r_NhT-Xf4JisTd_3__j_zkcL_n8OW3_CAw-Jy4E3myb1hDfiFnvYI8n2Y2mQM6Po23V8bbknJUw4n5w&_hsmi=78534136

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I listened also the podcast, and my opinion is that the idea is to let the provider customize the VAR, but always bellow 10%, and to let him customize the fees, but always bellow 20%.

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That’s why we need the english translations. There would be no reason to start a premature shitstorm if your translation is correct…

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It will be DARWIN managers / providers (not investors) who’ll be able to set up VaR inside the 3-5% - 10% range.

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When will it be up and running?

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I have been reading about this change in the risk manager and it seems I misunderstood the upcoming changes according to the user´s answers.
So I thought that with the new risk manager, if my underlying strategy´s Var drop to i.e 5% automatically my darwin´s Var would drop also to a 5%.
But reading the answers here, I think that I would be able to set my desired Darwin Var between a band fluctuating from 3-5% to 10%. So that if I have set my Darwin´s Var to 10% and my underliying strategy´s Var drop to 5%, my Darwin´s Var will not drop also to a 5% and will stay at my desired 10%.
Can someone confirm me is that right?
Thank you.

The way I understood it, we as providers can choose either 10% or flexible 3-5% VAR. The question I have is how Darwinia will work with this change

1 Like