Risk benchmark

In the beginning (2014-2017) we had to prove that there was a demand for a product like a DARWIN. We decided to offer it in various risk flavours and to check which risk investors chose the most. The goal, besides starting to attract AuM, was to get to know our investors' profile better.

In 2017 we switched to only one risk for DARWINs, that of 10% monthly VaR(95%). It was the most demanded by investors. It's like the risk of a mid-cap stock. This allowed us to compare DARWINs with stocks in our commercial messages.

If investors were rational beings, they would not care about the risk level of DARWINs. They would assign more or less capital to achieve their optimal target risk level.

Over time we've observed that from drawdowns above 10% a relevant number of investors starts to sell.

With drawdowns of 15-18%, more than 50% have sold their investment

. Moreover, this behaviour does not depend on the leverage used by the investor. This shows that investors think in percentage terms, rather than in monetary terms.

This behaviour is detrimental to the DARWIN managers. More so for the good ones, who after these drawdowns end up recovering. When investors sell at a loss, it's difficult for them to get back above the high-water mark (HWM) of their investment. So, even if they invest in the DARWIN again, they will not pay performance fees to the manager for a long time. But they will be spending the capacity of the DARWIN.

This type of behavior goes against our founding goal and we must combat it as a top priority.

In short, investors is not rational beings.

They're not capable of assimilating risk until they live it.

It's the euphoria of being able to win what conditions their decision to invest, but

what matters most for their investment to be successful in the end is their ability to endure a statistically probable drawdown without the temptation to sell at a low.

Besides,

They're not rational, because they think in percentage terms, instead of monetary terms.

So, the level of VaR shouldn't be determined by the VaR that investors select when they buy, but by what helps them keep their investment in a statistically probable adverse period of the DARWIN. We should not be guided by the euphoria at the time of purchase but by the fear at the time of sale. The two values are different. The condition of the fear means that VaR has to be lower.

In bad but statistically probable periods of the DARWIN, the drawdown will be 10%. This is a value we have seen is bearable for the investor who thinks irrationally in percentage terms rather than in monetary terms.

It's the average VaR of the SP500 index. From a marketing perspective, it makes more sense to compare the DARWIN to an investment product than to a stock. We will soon add to the interface the possibility of comparing the DARWIN's historical performance with that of the SP500 and other indices. From the manager's perspective, his alternative to a DARWIN is to create a fund, with risks normally similar to indices, not stocks.

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