I wouldn't go past 0dB on the M-DAC, I know it can be pushed past it, but it's a bit like an overdrive mode, only if there is no other choice.
Obviously hiss in the source will be amplified as well if you really push it. And as far as Zenpunk's comment goes, it is quite possible to go that high if the source volume/gain is very low. And that seems to be at the heart of Daniel's issue... thus it makes sense that using any external amp as a second stage amplification will alleviate the problem, but again, not really so much an issue with the headphone section per se.
(I've had to turn up my Woo amps pretty far in an earlier chain until I put in a new DAC that outputs a strong clean signal on both balanced and RCA, and the volume setting on the amps is noticeably lower for the same perceived loudness...)