The transition from 20% to 10% of the monthly VaR

2 April 2017
The Market Owl

As we have already explained in our previous articles, one of the main changes in Darwinex reloaded is the reduction of the monthly VaR of the DARWINS to 10%.

At the time of introducing the new DARWINS with the the new risk profile, we have had to face up to various operational challenges: What do we do with the actual DARWINS of 20% VaR? What happens with the investors that stay open in the “old” DARWINS?

In this article we explain the principal unknowns that have been presented to us, and the solutions that we have adopted to introduce DARWINS with 10% monthly VaR.

What historical data de we exhibit in the DARWIN

Imagine that DARWIN AAA which from 2015 until 2017 was quoted with a 20% VaR. In March of 2017 it is recalculated and converts to the new 10% format. The doubt is: What history do we exhibit in the graph of DARWIN AAA from now on?

After a lot of thought, we have opted to recalculate ALL the DARWIN  history at 10% (i.e in the future the data of the DARWIN is going to exhibit like it has always been quoted since it’s inception at a VaR of 10%)

  1. Taking into account that the calculation of the attributes has changed, the old graphs of the 20% VAR calculations based on the old attributes  would not offer an accurate image of the 10% DARWIN’s function and they would confuse future investors
  2. To launch the tools to backtest the DARWINS, the data has to be uniform, in terms of the calculation of the VaR and the D-Score. To do backtests using the old 20% VaR data would not give out consistent results.

As an example , we are using the graph of BLI with 10% VaR , and the new risk manager.

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What is going to happen with the investors that remain open in the old 20% DARWINS?

The investors in the 20% VaR DARWINS will carry on figuring in the investor’s portfolios that have remained open and these will be closed but there will not be any further investment in those DARWINS. On the other hand, from the launch date of Darwinex reloaded, the DARWINS in the portfolio will behave like the new 10% DARWINS, but with a leverage of 1:2 (in fact they continue to operate as with a 20% VaR).

We hope that the following example will be helpful. Let’s imagine that you have the DARWIN BLI with 20% VaR (old DARWIN), in your portfolio since 2015. At the end of March 2017, the DARWIN is calculated with a base of the new attributes, and is converted to the 10% VaR (new DARWIN ). What will you see in the portfolio?

In your portfolio you will see the old DARWIN BLI accompanied by a red dot to remind you of the investment in the old version of the DARWIN.

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From  the inception date of the new DARWIN, your capital will be invested in the new 10% DARWIN but with a leverage of 1:2, so that the volatility of your investment will carry on being a 20% VaR. Important: if you want to invest in the new version of the 10% BLI, you would have to close your inversion in the old BLI and invest it in the new BLI. Unfortunately, for calculations of the high watermark they cannot coexist in the same investment portfolio in the old form of the DARWIN and the new at the same time. This way, we are to maintain the current high watermarks for all DARWINS and investors.

For those who use our mobile app to invest, they would have to close the inversion in the old  BLI from the portfolio section of the app , because the search engine will show by default only the new version of the DARWIN, and it will not permit investment in it, if the old investment has not been closed.

At the time that the inversions in the old DARWIN have closed, we recommend closing the investment in the moment that the DARWIN doesn’t have any open positions  to therefore avoid associated commissions in the closure of open positions.

For your information, those of you who want to maintain a 20% VaR, in the new Darwinex reloaded, an option exists to use the 1:2 leverage like an investor to replicate the new 20% VaR DARWINS.

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What will happen with the DarwinIA prizes?

Those DARWINS that accumulated prizes in previous editions of DarwinIA will keep the prizes invested in their DARWINS and their watermarks will remain the same. What has arisen here is the necessity to adapt the investment to the new level of risk (the profitability changes on reducing the VaR to 10%,so what would be fair would be to double the investment so as to maintain the conditions of the prize).

To adapt the investment in the DARWINS that had obtained prizes in the past, it will be taking into account the open equity in DarwinIA at the launch date of Darwinex Reloaded and will duplicate the invested quantity.

We are going to use an example to explain it. Let’s imagine that DARWIN AAA had won a prize in DarwinIA of 100,000 EUR in February. We arrive at the launch day of Darwinex reloaded in March and the DARWIN had lost 10%: there would be 90,000 EUR left invested from DarwinIA. Given that the new DARWIN AAA operates with half of the VaR from before the launch of the reloaded version, what would be fair would be to double the investment in the DARWIN that operates at 10%. Given that 90,000 EUR invested at 20% remain  the solution that we have adopted is to duplicate the investment at 10% VaR, resulting in our example in an investment of 180,000 EUR (2 x 90,000 EUR)

We are sure that thousands of questions will arise with the launch of the new web, but we hope that this article will help to resolve the main doubts

As always, in info@darwinex.com we are always at your service for whatever doubt you may have!