New in DarwinIA: Allocation Linked to Trader’s Equity

29 October 2018
Juan Colón

Since we introduced DarwinIA back in 2015, it has become Darwinex’s most popular URL – especially so as the month closes to settle the final capital allocations.

Like everything Darwinex, DarwinIA has evolved over the years. What started out as a cash prize became today’s 6 month capital allocation at 10% VaR. Allocations have grown to EUR 24 million at the time of writing. Since early in 2018, community data based Darwinian Dividends add a cash pay-out to the allocation.

All this goes to say that DarwinIA has become a cornerstone to the DARWIN asset class over time: it’s our flagship trader acquisition tool. This post explains a new change, to be introduced from November 2018.

The next 700 odd words:

  1. Review the value contribution to traders.
  2. Explain the resulting incentive alignment.
  3. Explain the changes to DarwinIA.
  4. Review the risks inherent to the change.

We’d very much value your input on any of the above, don’t hesitate to engage with us in the comments section or via Twitter!


The Trader USP

The DARWIN Exchange is a Hedge Fund as a Service, bolted onto a competitive brokerage offering.

The component pieces include:

  1. Prime Brokerage in liquid assets
  2. Trading Platforms & Data
  3. Track record certification
  4. Our proprietary investability score / D-Score and 12 component attributes
  5. Independent risk management service
  6. Entry into the DarwinIA Trading Challenge
  7. Regulatory cover to monetize investor success – from investors you bring, and it’s you who introduces investors, or
  8. Capital Intro – currently EUR 50MM AuM track DARWINs, @ 10% VaR
  9. Back-office
  10. Customer support for all investors

Leave aside the fact that a DARWIN is not a Hedge Fund (it remains “just” a managed account for now). The core point is that traders enjoy ALL the above from their first EUR/GBP/USD commission.

This is what makes Darwinex potentially disrupting – virtually anyone gets a shot at managing investor monies, with virtually no risk.


Incentive Alignment

All of which is good – perhaps too good?

Aristotle was first to describe too much virtue as a vice. Isn’t a Hedge Fund as a Service from the first commission letting traders get away with too little skin in the game? What if barely committing any personal equity made aspiring managers and compromised the credibility of the asset class?

This may be the case… and it’s one of the reasons why we created DarwinIA in the first place. We wanted to walk the talk, proving to traders that we believed in them, and to investors that we trusted our diagnostic and risk management algorithms.

That’s when we hit on DarwinIA to:

  • Give visibility to the most investable strategies at any given time.
  • Seed traders with capital and thus, credibility.
  • Offer traders longer term capital – the 6 month capital commitment seeks to insure traders against short term drawdowns / redemption threats.

The key in all the above was allocating with rigour:

  • Darwinex manages VaR for all DARWINs to a 10% risk target – everyone competes in a level playing field for risk – and thus return.
  • All entrants risk live funds – they have skin in their own game.
  • Long term investability (D-Score) drives allocations more than monthly profitability.
  • The Experience attribute in the D-Score penalises short history strategies from meaningful allocations.

Credibility of the DARWIN  asset class

Which brings us to the point of the change to DarwinIA.

A manager value proposition so disruptive to traditional asset management begs for scepticism. The below questions are but the most polite questions many investors pose:

  • How credible is a manager / strategy with infinite investor leverage with e.g. EUR 100 of equity in their trading account?
  • What prevents a data scientist from listing e.g. 20 seemingly plausible algorithms, listed with e.g. EUR 100 equity a piece and getting “free” investor leverage!?
  • What sort of manager/investor alignment do you get with such asymmetric risk taking?

… and to be honest, they have a point.

DarwinIA stands out from run of the mill trading challenges (EUR 1000 for best demo CFD account this month!) … but is that enough to position the DARWIN asset class where it belongs?


Changes to DarwinIA

Thank you for reading this far! Hopefully this lengthy introduction provides context and perspective for the next evolution to the Darwinian concept.

From November 5th, 2018, the allocation will depend on monthly minimum trader equity, whereby each of the 48 allocation slots carries:

  • A maximum allocation, where the actual allocation will be a function of the underlying strategy’s minimum equity (the lowest equity realized throughout the month of the competition), and
  • A multiple to be assigned to each of the 48 slots, whereby the top allocation will be limited to 30x minimum equity and the 48th will be limited to 15x.

… All of which sounds more complex than it is.

Going forward, the winner of the top slot for EUR 300.000 maximum allocation, will be assigned:

  • EUR 300.000 allocation with monthly minimum equity of EUR 15.000.
  • EUR 150.000 for a minimum equity of EUR 5.000 (limited by the x30 multiplicator).

The contest format (6 month commitment, 20% success fee) remains, as does the ranking algorithm. Changes apply from November 5th.


Risks

The long term goal is to seed those really committed to long term success in asset management – because they contribute the most to building the DARWIN asset class.

We’re conscious of the fact that some might interpret this measure as contrary to the meritocratic vision. We’re open to alternative suggestions that further the ultimate goal, with less by-products.

But we’re also relentlessly committed to the ultimate goal and reserve the right to modify the cap level (30x) or even introduce other restrictions.

Thoughts?