Ranking Process vs. Stop Loss in Portfolio Management

In this absolute cracker of an interview, Perry highlighted how increased market participation and technological advancements have influenced the efficacy of trend following strategies. He also provided insights into the shifting dynamics of the market, emphasizing the need for longer calculation periods and more sophisticated risk management practices as the markets mature and become more volatile.

Perry's view on trading many markets versus concentrating on only a few involves weighing the benefits of diversification against the potential for higher returns through focused trading. Rich and I tend to think that there are ways of having your cake and eating it too – whereby there are ways to expand your universe while increasing profits. However, there are significant differences to the approach whether trading futures or equities, and this became a key part of the discussion.

Futures offer market diversification and leverage that is very different to equities. Stocks, on the other hand, consist of an enormous universe, making a ‘relative’ selection (and ranking) more necessary.

Interestingly though, Perry essentially trades the same strategies on both futures and stocks. The absolutely critical part of Perry’s strategies, in both the futures and stocks, is the nature of his ranking process. He effectively rotates candidates in and out of the portfolio based on their recent system performance. Importantly, ranked by their absolute returns only, and not any risk-adjusted method. Tune in for a deep dive on all his models, his portfolio construction & risk management process!