STA Blog

If you’ve been around trading circles, you’ve probably heard of Perry Kaufman. A major figure in the industry, Kaufman has authored numerous books, with his sixth edition being a crowd favourite. His deep experience in hedge funds and portfolio management makes his insights incredibly valuable. During the chat, Jeff explored Kaufman’s books, particularly his sixth edition and a smaller guide on algorithmic strategy. Perry personally recommends Kaufman Constructs, which is packed with practical trading advice.

Jeff, along with the audience, tackled the classic question: Is more diversification always better? The discussion revealed mixed opinions, exploring various perspectives on the trade-off between risk reduction and return potential. One of Perry’s biggest takeaways? Testing strategies properly is crucial. Over-optimizing can be a dangerous trap, and he shared ways to avoid it. Kaufman discussed whether traders should diversify extensively or focus on specific stocks or futures markets. His current stance? He prioritizes areas where he can achieve the highest returns rather than spreading investments too thin. He also broke down stock selection using performance metrics like the Sharpe ratio and recent returns. Having a structured system to rank stocks is essential. Algorithms play a significant role in modern trading, but Kaufman emphasized the importance of using unclean data to prevent overfitting. He highlighted Fortran and TradeStation as key tools.

Volatility can make or break a portfolio. Kaufman’s approach? Exit the market when historic volatility exceeds 32%, and re-enter when it stabilizes. Adjusting leverage based on market conditions is another key strategy. While he primarily trades stocks today, Kaufman noted that managing leverage in highly correlated markets remains a challenge. There’s no universal solution—it requires constant adaptation.

Perry’s main strategy is to follow long-term trends, with clear criteria for entering and exiting trades. However, he sets strict limits on highly volatile stocks to maintain stability in his portfolio. He also discussed the importance of equal investment across positions and compounding profits as core principles. Throughout the discussion, he shared numerous valuable insights, looking at many different areas, these really were the gems to take away from the discussion:

Index Markets & ETFs – ETFs and index markets can be noisy and overly diversified, making them difficult for trend-following strategies. Exploring Micro Futures – Micro futures can offer diversification, but the available options remain limited. Optimal Portfolio Size – A 10-stock portfolio offers the best balance between risk and return. A 20-stock portfolio lowers risk but also dampens performance. Diversifying Trading Systems – Using multiple strategies (short-term vs. long-term, mean reversion vs. trend-following) can help navigate different market conditions. Moving Averages as a Tool – Rather than relying on simple price crosses, moving averages provide a more reliable indicator of market direction. Historic Volatility vs. VIX – Many traders use the VIX, but Kaufman prefers historical volatility as a more effective measure. Trading Bonds & the S&P – Only trade long bonds when interest rates are declining. When it comes to the S&P, Kaufman sticks to long positions, avoiding the risks of shorting. Automation vs. Manual Trades – Automation is crucial, but some discretionary oversight when placing orders is beneficial. Adapting to Market Shifts – Strategies should evolve with the market. Post-2008, many traders introduced risk controls and adjusted volatility models for tech stocks.

The chat between Perry Kaufman and Jeff Boccaccio offered a fascinating glimpse into Kaufman’s current approach to trading, his key focus areas, and the systems he has in place to determine what to trade. It was an invaluable opportunity to hear from a true trading legend. The main lesson? Stay flexible, keep learning, and always let data drive your decisions.

If you weren’t able to be there, then the video is available in the the members section of the website.