Summary:
- The episode discusses volatility-based allocation for copy trading as a way to avoid overexposure and painful drawdowns when volatility spikes.
- Core idea: allocate capital based on each trader’s historical volatility, using inverse-volatility weights so steadier traders get more exposure.
- Practical steps include: gather a universe of traders, obtain volatility data, and implement a risk-management framework with minimum/maximum exposure per trader and an overall portfolio risk target.
- How weights are calculated: compute each trader’s historical volatility, set weights as w_i = (1/σ_i) / sum(1/σ_j), and apply exposure caps (e.g., 5%–35% per trader). Rebalance regularly (e.g., monthly) to reflect changing volatility and correlations.
- Example given: three traders with volatilities 0.20, 0.35, 0.15 yield inverse-vol weights that allocate roughly 34%, 20%, and 46% respectively, illustrating that steadier traders receive more exposure without domination.
- Discussion prompts: assess whether your portfolio already uses diversification or relies on a single star trader; consider risks of concentrating on one operator, especially during volatile streaks.
- Additional insights: high macro volatility can raise asset correlations, reducing diversification; volatility filters and exposure limits tend to smooth maximum drawdowns.
- Practical considerations: decide between monthly or more frequent rebalances, set exposure stops (e.g., if a trader loses 8–10% of their allocated share), and automate rebalances if possible.
- Philosophical takeaway: volatility is a compass that helps navigate markets; the goal is to balance potential gains with stability, not copy the biggest winner.
- Practical enhancements: track each trader’s maximum drawdown and correlations; adjust weights if Drawdown spikes or correlations change; maintain discipline to avoid overconfidence during favorable periods.
- Closing: invites listeners to follow the speaker’s strategies via links in the podcast description and emphasizes disciplined risk management for sustainable growth.

Remeber you can contact me at
andresdiaz@bestmanagement.org