Mulvaney Capital Management is a London-based commodity trading
advisor, regulated by the FSA in the UK and the CFTC in the
US. The program is a long horizon systematic trend-capturing
program allocating capital in all major sectors of the financial
and commodity markets.
- How do you define your approach?
Systematic trend-following with an extremely long-term
investment horizon.
- What are the essential elements of your system?
The system essentially buys into uptrends and sells into
downtrends across a broad portfolio of financial and commodity
markets. Its edge lies in its ability to capture more
of those trends by being extremely well diversified, and
to distinguish between noise and the significant price
action that might justify a position reduction. In simple
terms, we tend to stay in trends longer than other traders.
I started to develop the 'bones' of the system back in
1995 while I was trading options at Merrill Lynch in New
York. I experimented with a wide range of technical trading
rules and came to the conclusion I still adhere to: simple
works best. That's an empirical observation on my part,
but it's a contention I have encountered repeatedly in
the enlightened literature. (There are, of course, snake-oil
salesmen who write overly complex books on technical trading
methods!)
Over time, I improved the system by applying conventional
mathematical solutions to trading problems -- for example,
how to weight instruments to take into account correlations.
By 1998, it had crystallised and become largely similar
to the current form. It is still driven more by econometric
considerations than by technical analysis.
-
What are the key characteristics of your trading
approach, and how do you differentiate yourself from your
peer group?
Trend-following is a well-populated style group, but
by no means homogeneous, so it's difficult to categorically
define my peer group.
We are quantitative and systematic, very broadly diversified,
and have the longest time horizon of which we are aware.
On average we have held positions for six months.
Econometric price distributions are the key motivation
of our trading approach, especially fat tails. From studying
price return distributions we can gain all sorts of insights
into what is or is not likely to work - insights that
are not apparent in conventional price charts. There is
a huge battery of quantitative techniques (generically
'options theory') which can be applied to trading futures.
The use of options theory is integral to the system:
the return stream generated by the system is just a manufactured
or synthetic derivative of price action. It can be evaluated
and hedged like any other derivative. Bear in mind that
the Black & Scholes framework is much more than a
call or put option formula: it describes a system of dynamic
relationships. Applying options hedging techniques to
trading futures led me to develop a probabilistic trailing
stop mechanism.
I am very committed to systematic as opposed to discretionary
trading. Being systematic enforces discipline and the
need to develop a framework. Fortunately - since I have
run the system and executed the trades for over 1,200
consecutive trading days so far - I still relish the trip
to work to run the system. It's the highlight of my job.
I run the signal generator every morning, analysing data
when most of my markets are closed. The process takes
about 30 minutes. I could automate it further, but the
balance is perfect as it is; the current procedure allows
me the minimum interaction with the market that I consider
necessary.
Typically, we do four trades per day, and we do not react
to intraday price action. On average we hold 40 positions,
but this can vary between 34 (lowest since inception)
and 45 (due to the relatively small size of our asset
base, the full instrument set).
- Which markets do you trade and do you have a core market?
There is no such thing as a core market for us, since
by nature we are diversified to capture any trends which
may emerge.
We trade all market groups, and are active in 45 different
markets at present. These allow us to pick up all the
major independent sources of alpha. We plan to trade a
few more markets for market access reasons when our AUM
grows. We trade all markets with equal portfolio emphasis.
For example, we don't regard interest rates as more or
less important than livestock. The optimal mix of markets
is determined by the system's asset allocation algorithm.
- What are your ideal market conditions?
The ideal conditions are when major trends play out over
long periods of time. Take the US dollar, for example:
we've been net short against G7 currencies since second
quarter 2002. Along the way we reduced our position at
junctures when the market started to reverse and then
re-established it when the trend resumed.
However, the system is very patient: it sits with a position
over the long term to milk profits to the full.
-
Describe your stop-loss process.
Our goal is to deliver an average net return of 20% per
annum, while not exceeding a 25% drawdown. This constraint
drives the stop-loss degearing rules.
More fundamentally, though, we only ever exit positions
after adverse price action to ensure we don't suppress
the profit potential in the few really big trades that
come along. Thus, we don't exit positions at target prices
or try to lock-in profits. My research has shown, within
my paradigm, that would be detrimental to performance.
The stop-loss mechanism is based on probability theory
and is applied automatically across all trades in all
markets. In layman's terms, the more probable it is that
a trend has ended, the more of the position the system
exits. In options terms, the system regards stop-loss
orders as short options positions and chooses strike prices
that ought to be relatively easy to manage. Stop losses
are never manually overridden. That would be an absurd
notion, given the amount of research time I have devoted
to designing a labour-saving computerised solution.
I would argue that the most important thing is not entry
price, which gains so much attention, but the method used
to exit. Exiting losing trades is trivial; exiting profitable
trades takes a little more thought. Typically, only 20-25%
of our trades are profitable in the long term, but these
tend to be very big winners.
- What's your background?
At school I was among the first generation of mathematicians
who programmed computers. I remember literally punching
cards in the late 1970s. The cards got sent away to be
run on a mainframe computer and we got the results a few
days later!
I studied computer science and mathematics at Manchester
and then completed an MSc in management science at Imperial
College, London. Unsurprisingly, the course at Imperial
had a very quantitative bent. When I graduated in 1986
there was a big push by the banks for quant graduates,
so I found myself beginning a career in finance.
I've always focused on trading derivatives. I began trading
with Midland Montagu in London for four years, then moved
to Bankers Trust in London and Tokyo for two years, then
to NatWest for a year and then to Merrill Lynch in London
and New York for six years.
- What makes a good trader in your opinion?
Discipline and objectivity, without a shadow of doubt,
would come first on my list. They are characteristics
an individual is born with, but they must be developed.
It takes discipline to repeat the same, often mundane,
tasks day after day, and my trading approach is about
dogged consistency, rather than flashes of inspiration.
Also, an immense degree of objectivity and lack of emotion
is needed to systematically develop a methodology and
adhere to it. In the early stages of system design I had
to battle to believe what the numbers told me, rather
than what my prejudices told me. Trading is about what
'is' happening rather than about what 'should be' happening.
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What is the maximum capacity of your strategy?
The MCM system trades extremely infrequently. Without any
adjustments to the technical trading strategy, but accepting
a slightly lower weighting to tangible commodities, we could
absorb $500 million. However, in the long run, I plan to
introduce a number of modifications which would allow us
to trade significantly more than that. Firms operating similar
strategies manage billions of dollars.
-
Do you have a typical investor?
No. Our investor base
is very diverse. We have several pension funds, several
funds of funds, a private bank and a growing number of
high net worth individuals. We have investors on three
continents - this is a global business.
-
What are your plans for 2004?
I'm pleased to say we had an excellent 2003, nearly doubling
our AUM and delivering 29.28% net of fees. Since the program's
inception, we've returned an average of 19.54%. None of
our marketing people were in the saddle on 1 January 2003
and we're only just beginning to see the fruits of their
efforts. So in 2004 we expect to at least double assets
again.
We plan to make a number of strategic hires in the coming
year, including a senior professional on the business
side and a trader on the investment side.
We're also in the process of obtaining a Dublin listing
for the MGM Fund. This should be completed in the first
quarter.
Mulvaney Capital's Global Markets Fund is domiciled in
Bermuda, with Refco as clearing broker and Argonaut (Bermuda)
as administrator.
