Kevin Neville
Hedge Fund Manager
Man Group plc

Kevin Neville started his trading career as a prop derivatives trader for Natwest Markets, implementing various arbitrage strategies. He joined the Man Group (www.mangroupplc.com) to start a joint venture, Man Corpus hedge fund. The strategy he uses is a common one among institutional investors - pair trading. A pair trade is one in which a long position of one stock is taken at the same time a short position of a similar stock is taken. The key is to time the trades to take advantage of their price movement relative to each other (i.e., the prices of the two stocks either converge or diverge). The main advantage to this approach is the reduction of risk - if the overall market or a particular sector move in one direction or another there is minimal exposure since the pair portfolio is half long and half short across all sectors.

The track record of the model for the fund has been consistent and impressive. In 2001 the fund returned 36% and in 2002 it returned 35%. As of 8/15/03, the year-to-date return is a little behind the pace at 12.5%, but this is still a very respectable gain given the relative low-risk of the strategy. The Sharpe ratios of his models have ranged between 4.3 and 5.0. Another impressive feat is the 75% win ratio he achieved for this year. Although pair trading is common, the models Mr. Neville uses to time those trades are quite unique. Fortunately, Mr. Neville was willing to share his approach with us.

Within TradingSolutions, he creates two fields for each pair of stocks, by simply taking the, Open and Close from one half of the pair (we will call it Stock #1) and dividing it by the, Open and Close of the other half of the pair (we will call it Stock #2) to come up with two ratios to use as the prices for his indicators. He mostly uses common indicators included with TradingSolutions, such as MACD, RSI, Linear Regression, Bollinger Bands and percent change in Close. He then uses those indicators as inputs into a neural network model of the Optimal Signal to tell him when to go long or short on the ratio. If this signal is long, then he would take a long position in Stock #1 and a short position in Stock #2. If the signal is short, then he would take a short position in Stock #1 and a long position in Stock #2.

Mr. Neville has a pool of about 150 of these neural network models -- all developed exclusively with TradingSolutions. He was easily able to create such a large group of models because of what he called a "fabulously written and intuitive user interface". He was able to specify the set of indicators, optimal signal and neural network parameters that worked for one pair of stocks, then apply it to the data for a large number of pairs, analyzing the results to see which ones performed well. He kept the pairs that performed well and for the pairs that did not, he either tweaked the parameters and re-trained the nets or threw them out and tried other pairs. In general, when choosing the successful models, he looks for ones that have a high directional accuracy and a high Sharpe ratio.

He trades from a group of about 280 very liquid stocks, mostly from the European exchanges. He averages about 15 trades per day, and usually has about 100 positions open, with a total value of about $50 million and target of $100 million. He does interject his expertise of the markets into the overall system. He analyzes each signal produced by the TradingSolutions model to make sure he agrees with the signal before making the pair of trades.

We would like to thank Mr. Neville for being so open with the details of his pair trading models. The open discussion of his approach will likely spur research and new ideas by other TradingSolutions users.

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Testimonials disclosure: Unique experiences and past performances do not guarantee future results! Testimonials herein are unsolicited and are non-representative of all clients; certain accounts may have worse performance than that indicated. Trading spot currencies involves substantial risk and there is always the potential for loss. Your trading results may vary. Because the risk factor is high in the foreign exchange market trading, only genuine "risk" funds should be used in such trading. If you do not have the extra capital that you can afford to lose, you should not trade in the foreign exchange market. No "safe" trading system has ever been devised, and no one can guarantee profits or freedom from loss.