The month-end performance estimate, as of September 30, 2015 for Horse Cove Partners Absolute Return Strategy is 5.04%, net of fees1. Since the inception of trading in December 2010, the Strategy has achieved a total cumulative return of +198.05%.
Market Recap and Commentary
While some “experts” are calling the end of the bull market, the S&P 500 remains in a rising channel that goes back decades. Wherever the market is, bull or bear, the fact remains that returns from equities are slipping. The S&P 500 Total Return index is now negative -0.61% for the last 12 months. (Horse Cove is up 10.88% for the last 12 months). Goldman Sachs has declared that “flat is the new up.”
The market continued the declines that began in August with the S&P 500 -2.47% for the month and now down -10.04% from its all-time high on May 21, 2015. The Federal Reserve passed on the opportunity to raise interest rates for the first time in 9 years in September, pushing the decision off until later in the Fall or fourth quarter. Questions concerning whether or not the Federal Reserve will raise rates and the impact on the markets and broader economy have led to some wild swings in trading on a daily basis.
Performance and Trading Update
We have seen over time in trading our strategy, that volatility tends to spike up and drift down. This has allowed the Horse Cove Absolute Return Strategy to recover losses fairly quickly from a historical perspective. This was the case in September, allowing for multiple weeks of collecting good options premium without any margin pressure. The net effect of which was a very good month—plus a recovery of a substantial part of the drawdown in August.
We began the month with the VIX at a high of 33.82% and saw a low of 20.05 during the month. As you can see from the above chart, the VIX has been drifting lower since August 24, 2015. The VIX averaged 24.62% over the course of the four weeks that we sold options this month.
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.
The Past is All We Have
Look at almost any financial disclosure and you will see the words, “Past performance is no guarantee of future results.” True: there are no guarantees. But when evaluating an investment alternative, the past is all we have.
To that end, Horse Cove Partners LLC has been trading its Absolute Returns Strategy for just about 5 years now. Over the course of those five years, please consider the following:
- Year to date Horse Cove is up 14% versus the S&P 500 being down -5.29%
- Over the last 58 months, our average return for any 12 month period is +29%
- Our "worst ever" 12 months was a positive 8.54%
- If you had invested $100,000 with us on January 1, 2011, today you would have $298,050 versus the same investment in the S&P 500 that grew to $149,000.
- Even with August, we have out-performed every hedge fund index tracked by Greenwich in the last 12 months and for the last 3 years.
The gap of our past performance over the S&P 500 is not likely to be closed by an investor remaining in the equity markets, if the past has anything to do with the future. Current estimates by John Hussman suggest that the 10 year nominal return for the S&P 500 will be close to zero.
Our friend Tim Price, CFA writing for Op 8 Analytics, took a look at the last 100 years of market performance, based on the starting price earnings ratio. Let us share what Tim concluded in his own words:
"What should one think about this last statement regarding 10 year returns? I decided to investigate a bit this morning, looking at Robert Shiller’s CAPE P/E ratio. This is a valuation metric applied to the S&P 500 that is not only adjusted for inflation, but more importantly adjusted to smooth earnings. Maybe the best part is the length of the time series, with data going back 135 years.
My first step, adjust the S&P 500 for dividend distribution and reinvestment. Next, look at the last 100 years (on a monthly basis, so 1,200 data points) and calculate the annualized rate of return for the future 10 year period for each of those 1,200 points. Then a simple sorting from lowest valuation to highest, breaking them down into quintiles (1-5 with 1 having the lowest valuations and 5 the highest).
Each quintile has 240 data points. You can see a definite trend here...valuations matter, at least in regard to future performance. Right now, with a CAPE P/E of 24.34, we sit smack dab in the middle of quintile 5 (median P/E there is 24.7). Factoring in low level inflation, Hussman’s real return expectation of close to 0% seems to make a lot of sense. I thought taking it one step further might be of interest, to see the probability of different levels of 10 year returns based upon quintile...
Based upon past history while in quintile 5, it would seem there is a slightly higher probability of losing money than having returns in excess of 5% (31.25% vs. 29.17%). It would also seem the chance of returns exceeding 10% to be nonexistent (NEVER SAY NEVER, JUST DON’T BET ON IT). For each of these 10 year periods in quintile 5, there was ALWAYS one really bad 12 month window. The best of these “bad years” was losing 27%, the worst lost 68%. The average was a loss of 39%.”
Mr. Price and Mr. Hussman are not alone in their view of the next 10 years. With the S&P 500 now down for the last 12 months, there is one year of the 10 already “in-the-bank.” The Horse Cove Strategy is not correlated to the stock market. We make returns regardless of whether the stock market is going up or down. Given the past, we believe our clients are well positioned to “Profit from the Art and Science of Taking Risk.”®
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.
Assets under management at the end of September 2015 were $17.275 million.
“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, Michael Crissey and Greg Hyde
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
jmonahan@horsecovepartners.com
mcrissey@horsecovepartners.com
ghyde@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 9.30.2015, 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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Finally, to the extent that performance information is contained in this message, you are hereby advised, and you acknowledge it, that past performance does not assure future results, which are not guaranteed by Horse Cove Partners LLC or any of its affiliated entities or by any insurance mechanism.
IRS CIRCULAR 230 NOTICE. Any advice expressed above as to tax matters was neither written nor intended by the sender or any Horse Cove Partners LLC affiliated entities to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed under U.S. tax law.
