The January 31, 2017 month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is +1.48% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +275.26%.
BarclayHedge.com ranked Horse Cove Partners Absolute Return Strategy “No.1” for 2016 in the Option category. This is our second year in a row for this ranking.
Market Recap and Commentary
The S&P 500 Total Return Index was up 1.90% for the month.
The opening month for 2017 proved mostly positive for markets around the globe, with the S&P 500 being no exception.
As expected, the Fed continues to expect gradual rate hikes through 2017.
Volatility, as measured by the (VIX), spent the entire month below 13%. The VIX has not been above 15% since November 8, 2016.
Performance and Trading Update
For the month, the Horse Cove Absolute Return Strategy composite return gained 1.48%, compared with the S&P 500 Total Return Index that was up 1.90%.
The VIX continues to remain at historically low levels, mostly hovering between 10% and 12% for the month of January. This is a surprisingly stable level of “calm” for the index while wading through a flurry of executive orders, cabinet confirmations, and economic reports. Both the S&P 500 and the DOW did reach all-time highs - the S&P reaching 2300 in intraday trading.
We have successfully implemented our risk management strategy of splitting the portfolio between the Wednesday and the Friday expiration. We continue to feel the value of this move in managing risk is worth what appears to be a minimal, if any, cost to return. We continually strive to achieve the “efficient frontier” between risk and return.
The science of our calculations proved itself yet again this month, encountering no significant pressure on any of our positions.
Here are the returns for the composite portfolio margin accounts:
Reg. T Update
Here are the composite returns for the Reg. T 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.
HC Income Update
Six months ago, several clients asked us if we could reduce the risk of the Horse Cove Absolute Return Strategy in exchange for lower returns. The clients wanted to significantly reduce the “what if” risk. That risk of something unquantifiable happening, the risk that - while it never has happened - could in theory happen.
To do so, we created the Horse Cove Income Strategy under which the maximum loss is attempted to be capped at 50% of the account. We can accomplish this by reducing the spread on the trade to 50 points and using only Reg. T margin.
Returns are reduced because the cost of the buying the protection (the long put and call) is significantly higher than buying the protection 100 points out, as is done in the HCP Absolute Return Strategy.
In a low volatility environment, we will employ all the collateral with our strikes at a 50-point spread (versus a 100-point spread used in the HC Absolute Return Strategy). The protection is cheaper to purchase in a low volatility environment, therefore writing twice the contracts (full collateral usage) will net greater premium. When the trade goes against us however, we will have more contracts to buy back potentially causing a larger drawdown. This will be partially offset by the larger amount of initial collected premium, as well as greater value for the closer protection we own.
When volatility is at elevated levels, and a closer (50 point) spread is too expensive, it can make sense to employ half of the collateral and write the full 100 point spread. Though we are writing half of the contracts, the collected premium would be greater. In this case, when we face a loss, there are also fewer contracts to be bought back.
Here are the composite returns for the HCP Income Strategy for the periods indicated:
Predictions
As 2017 opens with a strong month for equities across the board, we feel it is a good time to reflect on some of the major milestones and their history that have occurred. As mentioned earlier, both the DOW and the S&P reached all-time highs again this month. The DOW moved up by 1000 points in just 42 trading days, its second-fastest climb of that amount in its history. It took 103 years to reach 10,000 in 1999, doubling to 20,000 in just 17 years. Markets continue to move up propelled by President Trump’s appearance as a business-friendly administration, with moves to cut regulations, and efforts promote infrastructure projects.
Our strategy lends itself very well to a steadily rising or steadily declining market. Our math self-adjusts to move with both the market and volatility, allowing us on a weekly basis to write positions outside the S&P’s probable moves and collect strong premiums for our clients. We see no reason to expect this to change this year. As the wave of executive orders and their effects continue to settle in, and economic positions of the administration are being established, volatility remains at historically low levels and the markets are relatively stable.
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 January 2017 were $45.97 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 thank you for your continued support. Happy New Year.
Sincerely,
Sam DeKinder, Kevin Ellis
Greg Brennan
John Monahan
Michael Crissey
Don Trotter
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
gbrennan@horsecovepartners.com
jmonahan@horsecovepartners.com
mcrissey@horsecovepartners.com
dtrotter@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 1.31.2017, 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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Internet communications are not secure and subject to possible data corruption, either accidentally or on purpose, and may contain viruses. The content of this message should not be construed as an investment advice unless explicitly stated as such in the text of this message. Further, this message should not be construed as the solicitation of an offer to purchase or an offer to sell any securities or other financial instruments, including, without limitation, interest in any private investment managed by Horse Cove Partners LLC or any of its affiliated entities.
Past Performance is not a guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value. The returns are based on the Investment Manager's strategy and not actual client accounts. The Horse Cove Absolute Return and IRA Return strategies seek to extract absolute returns from the market by trading short volatility option spreads. The strategies reflect the deduction of advisory fees and any other expenses that a client would have paid or actually paid. Model results do not represent actual trading and they may not reflect the impact that material economic and market factors might have had on the Portfolio Manager’s decision-making if the advisor were actually managing the clients' money. The S&P 500 index is used for comparative purposes only. The volatility of an index is materially different from that of the model portfolio. The S&P 500 refers to the Standard and Poor's 500 Index which is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic stock market. The VIX (CBOE volatility index) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge." Option trading entails a high level of risk. The models do not include the reinvestment of dividends and capital gains because options don't pay dividends. Please read the Characteristics and Risks or Standardized Options available from the Options Clearing Corporation website: http://www.optionsclearing.com for further details.
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.
