10 rules for DARWIN investing

2 months of live money DARWIN investing taught me some valuable lessons…

When prepping my best friend for his first DARWIN investment, this got me thinking: why not share my 10 rules for DARWIN investing?


Before listing them, some  disclosure to set my moral conscience right:

  1. I’m head and shoulders into Darwinex: I’m not as neutral about it as you ought to be.
  2. The more DARWIN providers and investors win, the better Darwinex does, and that includes me.
  3. Being a Darwinex employee doesn’t make me a good DARWIN investor.

Having said that, I’ve invested real savings in DARWINs earlier than most, so this should hopefully help as you get going.

As ever, your feedback will be most welcome.

10 (CEO-subjective) rules for DARWIN investing


10 guidelines for investor evolution

1. Control your expectations

A high risk DARWIN portfolio will NOT consistently yield more than 20-30% p.a., at best. If you’re looking for 1000% in a month, DARWINs are NOT for you.

PD: If you EVER meet anyone consistently making 20%-30% p.a. scout him/her to Darwinex at once!

2. Do your homework

DARWIN investing is NOT simple. We’ve done our best to keep things as simple as possible, but you must do your homework before investing live monies, starting by investing DEMO for a couple of weeks before you take the leap.

This Youtube Channel contains material to help you understand 1) how risk is managed and 2) how the investable attributes are rated. We will also run webinars in several languages going forward (language suggestions welcome!).

3. Risk real bucks

Just as you should NOT invest live monies before investing demo, you should NOT overrate the demo learning experience. Nothing focusses your investing mind faster than real bucks.

There’s a reason soldiers with battle-field experience beat video-game stars in wars. Financial markets are no different. If you’re serious about it, fund a very small live account (50 euros per DARWIN is the minimum investment).

4. Undercut your risk appetite

EVERY DARWIN has had drawdowns in the past, and EVERY DARWIN will have them in the future. Trading is is a numbers game: DARWIN providers win some, and lose some.

Set the risk parameters realistically: what’s the point of demo-ing 50.000 EUR with risk appetite of 15.000 if you sell out 100 Euros down into a 1000 Euro investment?

Remember: your gut, not your brain, defines “realistic”. Start small and only scale if/once you’re comfortable.

5. Control your exposure

Long-tail belongs in your investment portfolio: it transforms short term market volatility into consistent, uncorrelated upside.

BUT: just as long tail investing belongs in your portfolio, it should NOT be your portfolio. As an investor, I would not invest more than 5-10% of my net wealth in DARWINs.

(Disclosure: I’d love it if you invested 20%: 99% of my net wealth is invested in Darwinex 🙂

6. Trace provider DNA

DARWINs have a limited shelf-life: their performance eventually fades. DarwinIA algorithms detect skill and monitor performance, which provides early warnings to re-balance.

Indirectly, they do something better: they uncover DARWIN providers… and many good ones have multiple strategies up their sleeves.

No Adrian Newey bred F1 car ever dominated F1 for longer than 1 season, but his F1 cars CONSISTENTLY contend for every year’s title. Hardly a coincidence, is it?

7. Diversify

No two DARWINs are the same. None performs amazingly all the time, nor in any market circumstance. Some are approaching the prime of life, others are at their prime, as others approach the end of their working-life.

Build portfolios of homogeneous weightings with several DARWINs. Personally, 10 is about right: few so you care about each, but enough to average out individual drawdowns.

8. Stick to your guns

Once you’ve done your homework (research, set your risk appetite, controlled your exposure and diversified), the die is cast.

Remember: there WILL be drawdowns. If markets didn’t move, DARWINs wouldn’t make money in the first place.

It’s a long term game. Don’t give up on the first go.

9. Don’t speculate

The fact that you can buy or sell DARWINs any time does NOT mean that doing it all the time is any good.

Once again: skilled traders with sound risk management can make consistent money, but DARWIN “traders” LOSE out to transaction costs and slippage.

10. Re-balance

You can monitor the live performance of your DARWIN portfolio any time, and soon on your mobile. Bear in mind that monitoring performance does NOT amount to influencing it: if you find yourself checking your account more frequently than once a week or so, it’s time to enjoy real-life, until your monthly DARWIN monitoring check-up is due.

When the scheduled check-up is due though, if there is a consistent downward trend in the investable attributes, re-balance. It’s all part of the evolutionary investment cycle.

Introducing Long Tail investing

The most re-assuring lesson Darwinex founders have learnt is that traditional investment firms will never “steal” our concept.

Reading would have saved us anxiety: smart innovators actively encourage start-ups to disclose everything… if it’s really an innovation people think you’re nuts!

“Institutional” asset managers seem to agree: when they hear about DARWINs listing independent traders, two objections invariably come up:

  1. Retail traders are a bunch of losers
  2. Ok, even if “a few” win consistently, their strategies don’t scale

Darwinia and the DARWIN Leaderboard tell a story very different from 1.

How about the scalability objection? Does it hold?

Do winning “retail” strategies scale?

As a general rule, no. Most consistent DARWINs don’t scale beyond a couple of million assets under management.

Beyond low Assets under Management (AuM) thresholds, execution slippage eats into most profitable strategies, at speed.

BUT, is that really bad news?

Depends. It is if you’re Wall Street, but we think it’s the best evolution that skilled traders and investors ever dreamt of.

Here’s why.

Long tail, meet financial markets

Large prop traders are in the elephant hunting business. Even uber-traders struggle to come up with more than a handful of strategies, so they focus on those scalable enough to yield millions of absolute P&L. They better find them for trading floors are Darwinian eco-systems: you meet targets until someone else takes your chair.

(Actually, bulge bracket investment banks trade abusing information asymmetry… but for now let’s assume GS did trade on a level playing field with the rest of the market.)

Now, there’s not one but several large prop-trading books competing for large market inefficiencies and this limits their number and size… in a volatility boom, Wall Street employs more traders, who then come up with more strategies to milk more trading profits… until bonanza collapses and bonuses fade.

The Internet & technology rocks this boat. “All of a sudden” (in evolutionary terms), smaller and smaller fry (Tier 2 banks, boutique Hedge Funds,  even inferior “retail” traders!) joined the fray. With weapons ever approaching  the big guys’ (better, cheaper trading technology) they get by on smaller strategies structurally BELOW the Goldman Sachs radar: when trading from home, overheads are not a problem, so small becomes nimble.

Plenty of strategies below Wall Street's radar

Plenty of strategies below Wall Street’s radar

If the Long Tail hypothesis holds, small, non-scalable strategies might not be such a bad thing.

Could this be why more and more managers go independent, creating nimbler hedge funds? And if things really HAVE changed, is change over?

If not, what’s the new stable state? Time will tell. For our part, we’re convinced the Long Tail is whipping financial markets into shape!

The independent trader perspective

Let’s run some numbers.

Making 20% p.a. on 2 million AuM is a LOT easier than on 200 million. There’s plenty of small opportunities for every large one, and you’re competing in a much less congested space. Produce 3 such strategies (as the best DARWIN providers seem capable of), what’s better than getting paid 180.000 EUR a year (3 strategies * 2 MM / strategy * 20% return * 15% success fee) for trading from home?

Sure, 180 K a year is hardly the stuff Ferraris are made of,  but in a global village with 7 BN online brains, there’s plenty of smart ambitious engineers!

Further there’s compound, compound investor leverage. Returning 20% long enough, you eat investors out of your pie and 180.000 EUR become 1.200.000 EUR (3 strategies * 2 MM trader equity * 20% return), by which point it’s GS traders who wonder if non-scalable was really stupid after all!

The savvy investor perspective

Where are you more likely to make a consistent 20%, on an average year?

  1. With a share in a single fund with 5 BN AuM
  2. Co-investing with the managers of 500 consistent DARWINs returning on average 20% on 100 K each

This is where the law of big numbers kicks in. Plus the 500 DARWIN providers are competing for your attention every year, whereas the 5 BN star manager delegated in his management team long ago (how else would he sail the yacht your 2% management fee bought him?).

Who looks vulnerable now?

Small size is a structural advantage in the long tail economy: Wall Street economics can’t engineer profitable strategies at nano-scale.

Who's the better dancer?

Who’s the better dancer?

Any thoughts? Is this really so crazy?