The October 31, 2018, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is down (8.05%) net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +292.47%.
Total assets under management as of October 31, 2018 - $138.8 million.
Market Recap and Commentary
S&P 500 Total Return for the month of October was down (6.84%).
October was a tough month for HCP as the markets finally moved into correction territory before rallying at month end. For the S&P 500, October was its biggest monthly decline since September 2011. The Dow dropped 5.1% in its biggest monthly percentage fall since January 2016, and the Nasdaq was the worst-performing major benchmark, dropping 9.2% in October for the biggest decline since November of 2008. The S&P closed below its 200-day moving average in October for the first time since April 2nd, after seeing 134 days above that line.
Fears over consistent earnings growth for the FAANG stocks, along with continued talks of trade wars, possible missteps by the FED and a slowing growth trend in China (the world’s second-largest economy) have caused the recent market leaders to fall dramatically taking the indexes with them. The downturn in October seems to be a more “normal” correction than we saw in the liquidity event from February where VIX spiked dramatically in a two-day period due to short covering and then quickly reverted to historically low levels once the dust settled. In the first two weeks of October, VIX rose from just over 12 to over 20 and for the most part stayed above twenty for the remainder of the month.
As you know, Horse Cove Partners is not in the business of calling a top or a bottom. We can note, however, that the market action through October seems more consistent with a market finding a top and possibly transitioning from bull to bear. Reactions to news are fast, and the intra-day swings have been dramatic. With many of the S&P 500 stocks already in a correction, some down more than 20%, October was proof that any perceived weakness in the market leaders can lead to significant selling pressure. The FED is holding true to its path to higher rates, and the Treasury continues efforts to normalize its balance sheets--both adding to the headwinds the market is facing.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was down (8.02%) net of fees in October.
Early October’s market fall and rise in VIX triggered our risk protocols, forcing us to close some positions and causing losses in the strategy. We have already begun to recoup the drawdown seeing stronger premiums than we have in a while for the second half of the month, all while writing significantly further away from the current levels. Splitting the trade by time and expiration again helped to mitigate the losses.
Obviously, a tough month for HCP and the S&P 500, this pullback (as mentioned earlier) feels more “normal” to us as the selling had credible fears to reference and volatility has remained at higher levels through the remainder of the month. We spent the balance of October writing almost twice as far “out of the money” while collecting premium anywhere from two to five times the averages we were seeing coming into October. As we have mentioned many times over the years, a consistently higher volatility environment is ideal for our trade. From our use of collateral to our timing of trades we are doing everything we can to maximize our collection of premiums through this higher VIX environment.
We continue to write calls on a very selective basis, taking defensive action only once during the month.
Enhanced Yield was up .99% and again, faced no pressure in October as it continues to outperform the Barclay’s US Aggregate Total Return Bond Index.
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 Enhanced Yield Update
Here are the composite net returns for the Enhanced Yield Strategy for the periods indicated:
October in Perspective
In last month’s update, we discussed how October is historically the most volatile month of the year. We had no idea it would live up to its reputation as such in 2018.
The decline in the S&P 500 was enough to erase the gains for the year. That happened by way of a brutal month for the index, which affected our performance results.
The two-day decline during the week of October 8th was the 46th largest two-day move down in 50 years. To put that into perceptive, there have been 67 two-day declines larger than 5% since 1950. Out of 17,312 observations that is equal to an event that happens only 0.39% of the time.
With 18 negative trading days in the month, October 2018 equaled the worst number of declining days in October since 2008. Had it achieved one more negative day, you would have to go back to 1970 to find a worse October on record for the S&P 500.
Since we began trading in December 2010, Horse Cove Partners Absolute Return strategy has had positive returns 82.98% of the time versus the S&P 500 with 72.34%. Source: eVestment.com. More importantly, during that same period of time, the S&P 500 has spent 57 out of 95 of those months either losing money or making up the loss. This is in contrast to HCP which has only spent 41 months losing money or making up for the losses. The average monthly returns of HCP over that time period is 1.55% versus the S&P 500 of 0.97%.
One of the keys to this profitability is the fact that after a loss event, like that which occurred this October, fear enters the market and premiums for selling options increase. The increase is generally in the range of 2-3 times that of the premiums received for selling options at the same risk level as before the loss. At one point in the last couple of weeks, we collected 5 times the normal premium for one trade.
Options premiums are tied to volatility and fear. With elevated volatility, we have a favorable environment to let the “math” of the trade work and return to positive territory.
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 October 2018 were $138.8 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 the 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 10.31.2018, 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.
This was prepared by Horse Cove Partners LLC a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Additional information about our firm is also available at www.adviserinfo.sec.gov. You can view the firm’s information on this website by searching by our firm name.
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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.
This material has been prepared solely for informational purposes only. Strategies shown are speculative, involve a high degree of risk and are designed for sophisticated investors.
Past performance is not a guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value. The information herein was obtained from third-party sources. Horse Cove does not guarantee the accuracy or completeness of such information provided by third parties. All information is given as of the date indicated and believed to be reliable. Performance results are estimates pending a verification. The returns are based on the Investment Manager's strategy and the compilation of actual client account trades. The Horse Cove Absolute Return and IRA Return strategies seek to extract absolute returns from the market by trading short volatility option spreads. The Enhanced Yield strategy seeks to achieve a targeted return trading only puts with a high probability of success.
The strategies reflect the deduction of advisory fees and any other expenses that a client would have paid or actually paid. 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 the 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." Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Options 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 of 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.
