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The Hedgeweek Interview: Paul Mulvaney, Founder and Chief Investment Officer, Mulvaney Capital Management: Exploiting price adjustments

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Paul Mulvaney highlights the trading and investment characteristics that are driving performance at Mulvaney Capital Management.

Paul Mulvaney highlights the trading and investment characteristics that are driving performance at Mulvaney Capital Management.

HW: What is the background to Mulvaney Capital Management?

PM: I launched Mulvaney Capital Management Limited in March 1999, in order to manage client money in my systematic, trend-based program. The Mulvaney Capital Global Diversified Program is based on a trading philosophy which evolved during my early career embracing derivatives trading, and the research and development of statistical futures trading systems.

MCM first operated out of London-based GNI Fund Management, which seeded the program with USD 5 million via a managed account, opened in May 1999.

On concluding we wanted to be independent of GNI, MCM moved to new offices and in March 2002 launched the Bermuda-domiciled Mulvaney Global Markets Fund. As at end-March 2006, we have a total of almost $135 million under management.

HW: How and where do you distribute the funds? What is your current and targeted client base?

PM: Qualified private and institutional allocators worldwide can access our program, either via the fund or separately managed accounts. We have recently recruited full time business development and client relationship managers to address investor interests. They will meet with diverse investors globally to explain how our strategy can be more than just a good source of alpha.

It is also a good portfolio diversifier, as performance is generally uncorrelated with that of traditional and other alternative investment strategies. A managed futures strategy, such as ours can coexist with volatility arbitrage and macro strategies to form a block of defensive strategies that hedge relative value type strategies.

HW: What is the your investment process? How do you generate ideas for your fund?

PM: The Mulvaney Capital Global Diversified Program is designed to capitalise on the broadest psychological characteristics of markets. Because economic changes play out over very long periods, our system exploits price adjustments ensuing from markets gradually digesting new information. While a chart of, for example, two-year oil price changes will show many small changes, it will also show changes that are much greater than those occurring in a normal price distribution. The larger adjustments reveal themselves in the form of price distribution fat tails representing the kinds of long-term trends which Mulvaney’s program exploits.

The watershed events of September 2001, prompted changes that are still rippling through world politics, and will continue doing so for many years, in a similar way to the ripple effect of throwing a stone in water. I have modelled such ripple effects mathematically for the benefit of our trading system. As the phenomena that cause these ripples are wide-ranging and persistent, our trend-based strategy should always find opportunities to exploit.

Utilizing technical analysis of market prices to identify opportunities, our program is continually on the look-out for a market price break-out from a trading-range channel. Depending on the direction of a break-out either an initial buy or sell signal is generated.

By virtue of the program’s exploiting price changes that ripple out over long periods, unlike some other programs, it doesn’t have to rush to market. Rather, our program can wait for a bigger break-out from a wider channel before taking a position than do many other programs, thus avoiding being caught by false break-outs.

Unlike many programs which end a position when a target is reached, ours holds the position until a trend reverses.

HW: What is your approach to managing risk?

PM: For long positions, our trailing stops are initially placed at levels which the system estimates have certain probabilities of being penetrated over various periods of time into the future.

We add to an initial position as a trend develops. On reaching full position size, our stop losses continue to be repositioned daily in accordance with a volatility analysis. We find this works well for our very long-term approach, as it allows the program to ride out relatively high intra-trend volatility for long periods and so fully exploit trends, without getting stopped out too frequently on market price randomness.

To capture as many major opportunities as possible, we diversify across about fifty futures markets, many of which have no or low correlation with each other.

Our very long-term time frame allows for exploiting relatively uncrowded opportunities, while avoiding the capacity and liquidity issues that can affect shorter-term programs. The system eliminates insufficiently liquid instruments.

HW: Has your performance been as per budget and expectations? How/against what do you benchmark the performance of your fund?

PM: Our live performance has been right in line with our long term historical simulations. Because the strategy exploits long-term trends, the results should be looked at from a long-term perspective.

Apart from 2004, when performance was flat, the fund’s end-of-year returns have been consistently strong and over 76 months of trading our compound annual average rate of return is 21.02%, surpassing that of the S&P Managed Futures Index. Also Q1, 2006 returns of 22%, and 2005 returns of over 32% make our fund one of the top performers in the Barclay CTA Index of trading programs with over USD 50 million under management for these periods.

We find positive results are enhanced by our program’s being more cost efficient than many shorter-term programs. As a consequence of the program holding positions for 180 days on average, it clocks up only about 1,500 round turns per USD million per annum.

HW: Do you expect your performance or style to change going forward?

PM: The program has the capacity to continue trading all current instruments until assets reach about USD 500 million. As assets under management rise, the current weighting to less liquid instruments may have to be reduced but we will continue trading such instruments as heavily as is feasible.

(Paul Mulvaney was interviewed during April 2006)

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