Hedging DARWIN Portfolio Risk with $DWC

In this blog post, we’ll discuss how DARWIN Investors can diversify away some of the excess risk posed to their portfolios by Loss Aversion, a common and well-researched phenomenon in behavioural finance.

In particular, we’ll discuss why it makes sense to include DARWIN $DWC in a portfolio that’s partially or entirely composed of loss averse DARWINS.

But first,

  1. A quick recap on what Loss Aversion is,
  2. Why even the most perfectly diversified portfolio of DARWINs can be susceptible to unforeseen shocks due to loss averse behaviour,
  3. What DARWIN Investors can do to hedge this risk.

Loss Aversion (Illustration)

Loss Aversion (Illustration)

Loss Aversion:

Simply put, traders are said to be loss averse when they hold on to losing trades for extended periods of time, but take quick profits on winning trades.

It yields two main outcomes:

  1. Returns growth looks fairly steady during periods of profitability, small profits smoothing the curve.
  2. Major drawdowns however, are disproportionately larger – sometimes leading to prior profits being wiped out by the closure of large losing trades that were being held on to for a long period of time.


Granted, a diversified portfolio of reasonably uncorrelated DARWINs has its advantages in terms of minimizing overall portfolio risk.

However, if it contains DARWINs with poor scores for the Loss Aversion attribute (La), it may still be susceptible to shocks during:

  1. Periods of market turbulence,
  2. Deep unforeseen movements,
  3. Unusually volatile news releases,
  4. Black swan events, etc.

.. where diversification benefit temporarily breaks down, owing in part to losing trade closures that distort the portfolio’s original risk profile.

What can DARWIN Investors do to protect themselves?

In one of our recent posts – $DWC – A Real Time Sentiment Index & Security – we highlighted the fact that DARWIN $DWC replicates the opposite of the Darwinex trader collective’s behaviour.

GBP Flash Crash (October, 2016)

GBP Flash Crash (October, 2016)

It typically rises during times when loss averse traders experience undiversifiable risk.

For example, $DWC profited from the GBP Flash Crash.

Undiversifiable risk also frequently presents itself when loss aversion eventually leads traders towards margin calls, causing sudden, unexpected volatility in the overlying DARWINs.


In such situations, portfolios that contain DARWIN $DWC can benefit from DWC hedging away a significant proportion (depending on position management of course) of undiversifiable risk experienced by investors.

When does it make sense to include $DWC in a portfolio?

  1. Investors can include $DWC in their portfolios to hedge against DARWINs with a Loss Aversion (La) score < 4.0 and Capacity (Cp) score > 5.0.
  2. Capacity (Cp) > 5.0 describes DARWINs that primarily trade long term movements. If such DARWINs also have a Loss Aversion (La) score < 4.0, the investor’s portfolio is likely exposed to undiversifiable risk at some point in the future.

    Low Loss Aversion Score

    Low Loss Aversion Score

  3. Check the Correlation of low La DARWINS against the $DWC – If they are negatively correlated, it becomes more likely that $DWC will offset excess risk should the loss averse DARWIN encounter  undiversifiable risk.

    Check Correlation of Loss Averse DARWIN Against DWC

    Check Correlation of Loss Averse DARWIN Against DWC

What composition of assets could well diversified DARWIN portfolios (hedged against loss aversion) contain?

Example Portfolio #1:

  1. 50% Short Term DARWINs (Capacity < 5.0)
  2. 25% Long Term DARWINs (Capacity >= 5.0)
  3. 25% allocation to $DWC as a hedge against loss aversion / undiversifiable risk.

Example Portfolio #2:

  1. 40% Short Term DARWINs (Capacity < 5.0)
  2. 30% Long Term DARWINs (Capacity >= 5.0)
  3. 30% allocation to $DWC as a hedge against loss aversion / undiversifiable risk.

Note: Investors should of course exercise their own discretion in selecting portfolio allocations. The examples above illustrate what such allocations could look like, accounting for multiple timing horizons whilst hedged to a reasonable degree against loss aversion.

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Darwinex - The Open Trader Exchange

Darwinex – The Open Trader Exchange

Introducing DarwinexLabs – Prop Investing DARWINs

Introducing DarwinexLabs

We’re sending our Quant team on a new mission – and what better way to start than a new name?

Introducing DarwinexLabs!

What mission?

DarwinexLabs’ next mission is to openly beat the market leveraging the DARWIN data-set.

Why, and why now?

Re-loaded introduces a new visual interface, but the bigger changes are under the hood. All diagnostic and risk-management algos have been re-factored from the ground up to work better, faster. Informed DARWIN managers now enjoy good enough trader choice and tools to beat the market – or at least that’s our strong belief.

Because nothing beats walking one’s talk, we’ll openly take up the DARWIN prop investing challenge.

On that note, what does “openly” mean??

Read on for an explanation, including the strategic soul-searching that led to DarwinexLabs!

Open Trader Exchange – re-visited

To date, the Open Trader Exchange was open to anyonebut us. Proprietary investing in a limited capacity asset seemed a conflict of interest best avoided.

DarwinexLabs marks a shift in the thinking, for 3 reasons.

The first is that Darwinex is traders first. What pleases a trader more than investors queuing to back his strategy?

Sure, proprietary investments by Darwinex in a hypothetical capacity constrained marketplace could lead to conflict of interest. Until then, traders welcome every investor.

DarwinexLabs’ first mission is to saturate capacity… once saturation is accomplished, we’ll send it on another (capacity optimization?).

The second is efficiency. Optimizing investor performance accelerates the model.

More winning investors viralize AuM acquisition – our core trader value proposition. Investors making sub-optimal use of the available trader base and toolkit slow everyone down.

If winning more is possible, why not publicly commit to it?

The third is strategic. Any party reaping more dividends from the trader movement than Darwinex could compromise the Open model.


Open Trader Exchange – securing long term independence

Because, the better a strategy, the higher its ratio of trading profits to trading commissions.

A large, knowledgeable investor might earn more from DARWIN investor profits than Darwinex books in brokerage revenues (which is little, after rolling out diversification rebates).

If one believes – as we firmly do – that the movement’s individual and collective property is edge to beat the market… we must invest for profit.

Yes, Darwinex has an edge in that we charge everyone for execution – so we’ll have to manage a conflict of interest, but we’ll cross that bridge when we get there.

So, in a nutshell.

DarwinexLabs: the first step to close the Exchange and become a Hedge Fund?


DarwinexLabs means we’re:

  1. Sending our best assets (people & capital) to earn our best traders’ trust (THANKS), leveraging 5 years of technological development.
  2. Publicly committing to the DARWIN asset, by being first to invest meaningful capital in the DARWIN community.

And we’re doing so staying within the vision for an Open Trader Exchange.

DarwinexLabs – investor backing DARWINs

The “DarwinexLabs” investor will back DARWINs:

  1. For profit – unlike Darwinia ,  DarwinexLabs is about maximising returns. Rise of the fittest. Period.
  2. As a bog-standard user – it will enjoy no preference in access to DARWINs or execution prices,
  3. Transparently – DARWIN providers will see DarwinexLabs investments in the exact same way they see for other investors,
  4. Openly – DarwinexLabs will publish our learning curve – when we lose as well as when we win

DarwinexLabs’ only edge will be beta testing.

DarwinexLabs will be first to use any functionalities we come up with… with an Open commitment to release for public use any tools DarwinexLabs leverages profitably (of which there’s a ton cooking 🙂

Put it another way: we can’t expect people to back our asset unless we back it ourselves. So here we go.

Open Investment – How about community data?

This is another potential avenue for DarwinexLabs – a more complex, but potentially promising option.

The trader movement gathers momentum. The first investable traders has attracted more traders – and this creates community data. We thought all along that community behaviour is an edge facing the market… and Hedge Fund offers to market the community data validate the thinking.

However, before leveraging the data, a number of questions must be answered:

  1. Could this information be used for profit?
  2. If it canshould it be used?
  3. Whose information is it, anyways?
  4. Who could access it?
  5. Who could invest in it – if there are capacity constraints?
  6. Should any strategies leveraging community data command a success fee?
  7. If success fees accrue – whose bank account should receive them – given the community is an abstract entity?

These are non-trivial questions, and we appreciate getting the answer right is key for the movement – as a matter of fact, we’d like you to look at these & write up your own answers before reading on.

If, after reading ours, you disagree, we’d love to hear your take.

DarwinexLabs – trader leveraging Community Dataset

They’re tricky questions. If Darwinex is all about protecting trader intellectual property – shouldn’t community data be off-limits?

After quite some soul searching, “traders first” was the key guiding principle, and we hope you agree that our answers are indeed “traders first”:

  1. The trader movement could use trade-flow information, it would be naif to believe otherwise for institutional counterparties highly value it,
  2. The movement not only could but should use it. Winning strategies formulated from collective behaviour stand on a firmer statistical foundation, are more likely to attract investment in the DARWIN asset class (expanded to include collective data), which is good for traders long term,
  3. Whilst it’s Darwinex that kick-started the trader community, the community data is the community’s. Darwinex leveraging it for proprietary benefit would be “traders second”.
  4. Publicly granting access to the information would compromise trader IP – once published, there’s no way to collect success fees from investors. Which is why:
    • Short term, DarwinexLabs will be the only party with access
    • Medium term, we’re open to technological options letting data scientists leverage the data, without accessing it (more on this in the coming months)
  5. Strategies will be open for investment. Should they become capacity constrained, “traders first” will apply
  6. Waiving success fees on said strategies would disadvantage individual DARWIN providers – which is why DarwinexLabs will collect 20% success fees on its DARWINs…
  7. Because the data are the community’s, not DarwinexLabs’, success fees will be paid out to the DARWIN provider community.

All of which introduces an additional question: how should success fees be split?

We still need to figure out the best option – ideally with community feedback. For now our inclination is merit based. Rather than split e.g. EUR 100.000 success fee amongst 30.000 users = 3 EUR / user, it will definitely be top heavy.

Can collective & individual IP conflict?

If you’ve read this far… you’re probably wondering: where to draw the line between trader & trader community?

It’s obviously a tough one – so DarwinexLabs will ALWAYS stay well clear of any potential conflict of interest. The last we’d do would be compromise trader trust – our most sacred asset.

For that reason, and in line with “traders first”, we’re handing the decision over to a community member. The person in charge of DarwinexLabs will be Ali – Darwin provider Integracore2

We can’t think of a better option than Ali’s know-how, commitment to the vision and community contributions to get DarwinexLabs off to the best start. Further, we hope you’ll take our appointing a member of the trader ranks as proof to our commitment to integrity.

As ever, any suggestions on how to transparently put traders first will be most welcome!