The month-end performance estimate, as of August 31, 2015 for Horse Cove Partners Absolute Return Strategy is (-10.39%), net of fees1. Since the inception of trading in December 2010, the Strategy has achieved a total cumulative return of +183.75%.
Market Recap and Commentary
The market finally had a correction this month and it seemed to happen all at once, accompanied by a series of “firsts”. On Monday August 24, 2015, the DOW had its largest single day point decline ever, dropping 1,089 points. The VIX rose from 13% to a high of 53% in one week. The DOW dropped more than 500 points in two consecutive days and dropped over 300 points per day for 5 days.
The major market indices: the DOW, the S&P 500 and the NASDAQ all reached correction territories in August, declining more than 10% from their peaks. On August 17, the S&P 500 was at 2102. Six trading days later, it had lost 11.2% of its value. For the month, the S&P 500 Total Return Index was down (6.03%), and was down (2.88%) year to date. Horse Cove is up 8.54% year-to-date.
We noted last month that the market appeared to be topping. The repricing of the markets, given what appears to be a global slowdown, is not over yet and is likely to take some time to work itself out. We therefore expect more volatility and larger than normal price swings. This, and the questions of when and if the Fed will raise interest rates are still affecting the markets.
Performance and Trading Update
We had two bites at the volatility spike. On August 18 the S&P 500 index was at 2101.99. By Friday morning it had fallen 3.23%. When we wrote positions on August 21, volatility had already risen from 13% the week before to 22% on Friday morning. After we sold positions on Friday morning, the market fell all afternoon. By the close of trading on Friday, the market had fallen 3.1% from where we had written that morning. On Monday August 24, the market fell 5.23% from Friday’s close and VIX hit 53%.
Our risk protocol was triggered on Monday, when the probability of the puts going into the money hit 66%, so we took action to roll down, causing the loss for the month. (Rolling down is buying the open put and selling puts farther out of the money with the same expiration date). In hindsight, the 1850 strike puts that we had sold never went into the money and expired out of the money that Friday. Surprisingly, there was no margin pressure during that week. We have been told that the “Government” intervened and ordered a suspension of intra-day margin calls in an effort to try to calm the market.
IRA Update
Here are the returns for the consolidated IRA accounts for the periods indicated:
IRA accounts must use Reg. T Margin which, means that fewer option contracts can be written than in the “regular” accounts that use Portfolio Margin. Over time, this will result in lower returns when compared to the “regular” accounts.
Rules Based Trading vs. Systematic
At Horse Cove Partners, we operate a rules based trading system that is not completely formulaic. As mentioned above, the loss for the month was “self-inflicted”. We have risk management rules that have been developed over our trading history and with the benefit of the hindsight of predecessor firms. The goal of which is to manage losses when the trade is not working to be able trade again to make up losses.
No trading strategy can produce gains every week. The Horse Cove Absolute Return Strategy has, and will produce losses from time to time. We believe over time, that the weekly gains will outweigh the losses, resulting in compelling, absolute returns for our clients.
When we look back in hindsight, not taking the defensive action would have produced a positive result for the month--this time. A purely systematic approach would have produced a significant gain. By that I mean, put the trades on a 99½% on the put side and 90% or higher on the call side and see what happens at expiration. (Relying solely on historical statistical probability).
There are in fact, there are traders at Interactive Brokers who trade that way, for a while. They put positions on, go away and come back a week later to see how they did. No room for emotion. There is one major flaw in that approach. At some point, the trader will be wiped out.
Our goal is to produce absolute returns for our clients over the long term. As we have mentioned before, we hate to take losses, but by doing so in “smaller” amounts, we can preserve the majority of capital to trade the next week. This gives the strategy the historical advantage of making up drawdowns in three months or less.
Historically speaking, volatility spikes up and then drifts down. That produces a good environment to make up losses, as high volatility that is drifting lower produces high premiums and lower probabilities of losses.
About Horse Cove Partners LLC
Profiting from the art and science of taking risk.®
Horse Cove Partners was founded by Sam DeKinder and Kevin Ellis in January of 2013 with the commitment to help grow clients’ assets with a highly disciplined investment strategy, replicated weekly, to extract absolute returns from the market by trading short volatility option spreads. The firm was launched after more than two years of trading experience with personal assets that began in December of 2010. The firm is built on the strength of hedge fund trading expertise developed beginning in 2002.
“We do not believe we are smarter than the market, nor can we time the market in any given week or month. As a result, we take an investment approach similar to an insurance company in that our investment strategy focuses on probability of success and the management of risk. We believe that it is possible to realize positive returns through disciplined focus on the risk of each trade with a weekly investment horizon, and accepting intelligent losses when risk events occur.”
We would like to thank you for your continued support and look forward to being in touch with you in the near future.
Sincerely,
Sam DeKinder, Kevin Ellis
John Monahan and Michael Crissey
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
jmonahan@horsecovepartners.com
mcrissey@horsecovepartners.com
Horse Cove Partners LLC
1899 Powers Ferry RD SE
Suite 120
Atlanta, GA 30339
678-905-5723 main
1Net estimate on a consolidated basis of similar accounts as of 8.31.2015, which is preliminary and subject to revision. Performance estimate described herein as “YTD” are net of fees and expenses including a 2% per year management fee and 20% incentive fee and also assumes investors have been invested with no withdrawals.
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