Capacity Manager: Optimize & Manage Investor Capital

16 May 2018
Jesús Domínguez

This post sheds light on the new Capacity Management tool, designed from the ground up to give traders more control over the capital invested in their DARWINs, while offering total transparency to investors.


What does a Trader need to make a living off his passion?

There is no easily applicable magic formula to achieve this, since otherwise, everyone would become a trader and the indispensable zero-sum game needed to speculate in the markets would vanish into thin air.

However, there are a number of sine qua non conditions to become a professional trader such as:

—> Talent: it seems obvious that to live off your trading, you need to be systematically better than your counterparts, building a proven track record that can attract …

—> Investor Capital: enabling you to obtain a 20% performance fee on investor profits as observed in the Hall of Fame. However, if you take a look at the first DARWIN on this list – THA – you will see that it currently remains closed to new investors due to its …

—> Capacity: which measures if a DARWIN’s percentage performance falls as the number of investors grows. The better the Capacity (Cp) grade, the more likely it is that a DARWIN will be able to manage a larger volume of investment capital, without its divergence affecting performance.


In other words, once talent has been certified by our algorithms and investors begin to queue up to invest their hard earned capital in a DARWIN, traders face a new challenge:

..addressing the limitations imposed by their DARWINs’ Capacity.

Two examples of such DARWINs are THA and VTJ, assets that we had to close to new investors at some point since the capital invested in them began to cause systematically negative divergences.

This outcome broadened the difference between the DARWIN’s return and that yielded to its investors, to the detriment of both parties.

Remember, a DARWIN provider only gets paid if investors generate profits.

Therefore, it is entirely possible that certain DARWINs with positive return curves, yield returns to neither their providers nor their investors as a result of systematically negative divergence.


Tough Challenges, Innovative Solutions

After the closure of new investments to DARWINs THA and VTJ, it became apparent that:

  1. We need to offer our DARWIN providers a tool to manage the Capacity of their DARWINs autonomously,
  2. The manual process used so far was completely discretionary, which erected a barrier of opaque glass between the trader and its investors,
  3. ..we needed to break this barrier down.

Capacity Manager for DARWIN Providers

The Capacity Manager incorporates various configuration options, enabling DARWIN providers to specify the conditions under which the closing / reopening of investments in their DARWINs can take place.

These options include:

1) Maximum Divergence Accepted

Closure:

If the DARWIN exceeds the divergence threshold set by the trader, it will close to new investor capital.

However, regardless of the divergence selected by the DARWIN provider, Darwinex will still cap the maximum divergence permitted, at -1.5%.

Therefore, the trader has the option to select a maximum divergence ranging between -1.5% and -0.5% with a 1 decimal granularity.

The default value will be -1.5%.

Opening:

The DARWIN will reopen to new investments if the divergence decreases by -0.1% with respect to the threshold established by the DARWIN provider.

 

2) Maximum Investor Capital (optional)

Closure:

If the DARWIN exceeds the capital under management threshold set by its provider, it will close to new investor capital.

Traders can set the maximum amount that they want to manage with the DARWIN, in USD.

However, the value must be greater than $300,000 and in multiples of 100,000.

This condition will not be taken into account if the field remains empty, which is the default option.

Opening:

The DARWIN will reopen to new investments if the maximum capital selected by the trader decreases to 98%.

In order to manage a DARWIN’s Capacity, traders will have to go to its main profile and click on the cog wheel icon located next to the “TRADE” button, as circled in yellow in the image below:

DARWIN Configuration Settings

DARWIN Configuration Settings

Once there, they will need to click on the “divergence limit” section where the two options explained above will be displayed.

In summary,

DARWINs will close to new investor capital when at least one of the two requirements are not met, and reopen when all the conditions set out above have been fulfilled.

With the launch of the Capacity Manager, the following DARWINs have been closed to new investors.

  • PAX
  • THA (had been already closed before)
  • APZ
  • ZZQ
  • FFA
  • JJY
  • DZQ
  • JHJ
  • JFI
  • CHS

What happens when a DARWIN is closed to new investors?

Once the DARWIN is automatically closed to new investor capital, both investors – including those with a buy limit order – and DARWIN providers, will receive an email notification.

In addition, the “TRADE” button will be replaced by “SELL” and conditional orders will not be allowed.

Should a buy limit order previously placed get triggered, it will be discarded and a notification sent to the investor concerned.


Capacity Traffic Lights

The new Capacity Manager comes together with a traffic light equipped with three horizontal lines to enhance the understanding of the current state of the DARWIN’s Capacity.

Capacity Management - Traffic Lights Icon

Capacity Management – Traffic Lights Icon

Like a conventional traffic light, it will come with the following range of colours:

  • 1 green line: the DARWIN is still far from reaching the Capacity limit set by its provider.
  • 2 yellow lines: the DARWIN is close to reaching the Capacity cap set by the trader.
  • 3 red lines: the DARWIN has already reached its Capacity limit, and is closed to new investments.

You can hover the mouse over the traffic lights to learn more.


Capacity Manager: Next Steps

In addition to this release, we’re already hard at work engineering several improvements that we hope to announce as soon as possible.

What we can tell you is that the next version of the Capacity Manager will also include a tool that will show DARWIN providers the divergence per order.

This will enable them to optimize the management of their trades (fraction them into smaller trades for example), since we believe that most strategies can significantly increase their Capacity with this information.


Conclusion:

We hope that the Capacity Management tool will mark a turning point in your career as a trader and, together with your remarkable talent and discipline, help you become one of the best traders in the world.

We hope to see you soon at the very top of our Hall of Fame!


You may also wish to read:

Buying and selling DARWINs

Conditional orders

Divergence

Performance fees

WebinarManaging Capacity


The next webinar at Darwinex on May 24th, 6PM London Time will be dedicated to trading single stock CFDs – it’d be great if you attend!

Register For The Webinar