The December 31, 2017, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is +1.94% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +342.17%.
Total assets under management as of December 31, 2017 - $141.66 million.
Market Recap and Commentary
S&P 500 Total Return for the month of December was up 1.11%. This marks the 14th consecutive positive month for the index, bolstered by investors’ confidence in the passing of the tax reform package.
It certainly was a banner year for the S&P 500!
- The index closed at new record highs 62 times last year.
- The streak of no 3% or 5% corrections has been extended--records not seen since the 1960’s.
- At 382 trading days, this has been the second longest period of time without a 5% correction in the market. (That is 2 weeks short of the record set in 1929!)
- The average absolute daily percentage change of the S&P 500 in 2017 was just 0.3%. That is the smallest since 1964.
December proved to be more of the same; more highs with no signs of retreat. Santa was good to our children but better to our 401k’s.
The average observed one-month volatility was lower than any other year since 1970. In fact, during 2017, there were only eight trading days where the VIX closed with a move of 1% or more in either direction.
VIX remained muted for December, spending most of the month under 10 and almost all of the month under 11. According to data from S&P Dow Jones Indices, of the 56 lowest closing levels in the history of the VIX, 47 of them occurred in 2017. Again, more of the same.
Performance and Trading Update
The Horse Cove Partners Absolute Return Strategy composite was up 1.94% net of fees in December.
Strong returns this month for HCP investors, in the face of low volatility and low Holiday trading volumes. All but one of our trades were without incident and expired or closed as intended. We faced pressure on one of the three expirations of calls in the second week of December and bought them back at a loss, preserving the gain for the week. For December, we sold options with the average VIX of 10.12%.
We continue to write at an 80-point spread to the Monday, Wednesday, and Friday expirations.
Due to extremely low volumes in the market, and very light premium, we decided not to trade over the New Year holiday.
Here are the composite net returns for the Portfolio Margin accounts for the periods indicated:
Reg. T Update
Here are the composite net 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
Here are the composite net returns for the HCP Income Strategy for the periods indicated:
Trumponomics, Bitcoin, and Santa... OH MY!!!
Apparently, we were all very good boys and girls this year as Santa delivered healthy gains in December to cap off a record year for all indexes. As mentioned earlier, the S&P 500 Index set multiple records in 2017; all while doing so in a calm steady march higher. This reduced volatility to unseen levels; avoiding and significant test of the downside for lengths of time not realized for many decades.
Despite all the records posted by the indexes this year, 2017 seemed to be the year of Bitcoin. I doubt you can find a 10-minute stretch of news coverage in all of December where the blockchain technology was not mentioned. Its meteoric rise and the introduction of futures by the CME have caused some market experts to express concern. The fear of a burst in the bubble trickling through to the broader markets and causing large-scale problems does not seem a likelihood to us. Just as one stock collapsing would not tank the market [even one as large as GE (which was down 48% in 2017)], we don’t think Bitcoin is large enough or deeply enough entwined into the financial system to cause major panic. It still appears to be traded by relatively few and small investors, and even though the futures market has made access easier for institutions, they have not appeared to jump on the bandwagon. Many CEOs of large financial institutions, as well as hedge fund managers, have dismissed the investment, and Merrill Lynch has banned its clients and advisors from investing in it.
Trading through the least exciting year for stocks on record is obviously a headwind for HCP. An average VIX of just a hair over 11 for the year, (10% lower than the next lowest year) and a strong bull market has removed a lot of fear in the market, and that has driven the premiums we collect lower. The market is riding the waves charged by tax cuts, regulation cuts, a business-friendly government, stronger earnings and improving economic data. All that said, HCP outpaced the S&P 500 in December by artfully applying our math and using our experience to make prudent decisions. For 2017, we were able to capture over 80% of the upside in the S&P, which is above our historical upside capture ratio of 69%.
However, where we really shine is when the market gets choppy and fear is strong. There is no one that can tell you with consistency what the market will do in the short or even medium term. We can say with a fair amount of certainty, that indexes, returns, and volatility have always, at some point, seen a reversion to the mean. That has historically translated into strong returns for HCP.
Happy New Year!
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 December 2017 were $141.66 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.
Sincerely,
Sam DeKinder, Kevin Ellis
Greg Brennan
Fiona Dyer
John Monahan
Michael Crissey
Don Trotter
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
gbrennan@horsecovepartners.com
fdyer@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 12.31.2017, 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.
