Consolidating DARWIN risk levels

27 August 2015
The Market Owl

Major changes will be deployed to our investor platform next week. As part of the upgrade, DARWINs will only be offered with 20% monthly Value at Risk (VaR) going forward.

We have made this decision to:

  1. Align the risk of a well-diversified DARWIN portfolio with that of a Tier-1 stock index (see below)
  2. Simplify all UX interactions in the interface
  3. Align with customer choice: the large majority of customers built portfolios with 20% monthly VaR DARWINs

How to replicate your current risk?

For investors who were investing in legacy 5% and 10% VaR DARWINs up to now, the solution is simple.

Minimum investment per DARWIN stays at 50 EUR/GBP/USD (ever found a hedge fund that allows you to invest that amount?).

To continue risking exactly as much as up to now, all it takes is to:

  1. Invest 50% as much into the 20% VaR DARWIN as invested in the legacy 10% monthly VaR version
  2. Invest 25% as much into the 20% VaR DARWIN as invested in the legacy 5% monthly VaR version

How risky are DARWIN portfolios?

Portfolio VaR for a DARWIN portfolio investing in non-to-low correlated DARWINs is about 10%.

To put into tangible words: if you start any given investment month with a well diversified DARWIN portfolio (typical correlations across DARWINs range between 0 and 20%) and go on holidays to a desert island for a full trading month, on return, you can expect:

  1. On 19/20 months (95% of months), you will do better than losing 10%
  2. On 1 /20 months (5% of months), you will lose 10% or worse

By the way, the bigger the loss, the more unlikely – e.g. if a loss of 10% or more was to happen, the odds for a 20% loss are exponentially lower than those of an e.g. 11% loss.

Monthly evolution of S&P 500

The above odds are roughly similar to what you can expect investing in the S&P 500 or FTSE 100 – e.g. a DARWIN portfolio is about as risky as investing in an equity index – e.g. a risky investment.

(BTW – if you allocate on a Darwinian basis, the odds are possibly better than above, but that’s up to you 🙂