The November 30, 2018, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is down (3.75%) net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +277.75%.
Market Recap and Commentary
S&P 500 Total Return for the month of November was up 2.04%.
November proved to be tough for HCP as we were forced to take defensive action by the rally in the last week of the month. As we mentioned in the last newsletter, it appears the market is in a transition from a bull to a bear. “Buy the dip” has become “sell the rally.” Historically when that transition is underway, there would be more down days and fewer up days. The S&P 500 headed into the end of the month down for the year when Fed chairman Powell’s slightly dovish speech, accompanied by a short-term trade truce between the US and China, led the market to have its best one-week rally since 2011. Every sector of the S&P, as well as all of the major equity indexes, were up for the week in what (in hindsight) appears to be an irrational overreaction to these events. Although Powell shifted from “a long way from neutral” to “just below neutral,” the Fed is still expected to raise rates in December and is only “just below” the low end of estimates for the neutral rate. And despite the reaction and all of the headlines, not much really happened at the G20 summit other than a short-term delay in the tariffs for China, giving the leaders a little more time to strike a deal.
In the end, investors are still faced with “no deal” with China, no deal with Europe, a tightening FED, slowing earnings growth, and a chaotic Brexit. Many analysts have been toning down their estimates for 2019 and as opposed to 2017, when market drops could not hold any steam despite the news, it now seems that the rallies cannot hold on, and the bears are gaining control.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was down (3.75%) net of fees in November.
November was looking solid for HCP, until the end of the month when the rally triggered our risk protocols on the call side of the trade. Closing out the trades caused us to take a loss for the month.
It never feels good to lose money, and it hurts a little more to lose when the market is up. As we have said before, if the market never went against this trade, there would be no money in it. 2018 appears to be the year that had three 100-year floods; it happens though not very often. While we remain committed to never trying to predict or time the market, the data and outlooks now support the idea that this 10-year bull market is now transitioning to a bear. In an attempt to recognize that possibility, we have adjusted our strategy to help us navigate through it. We have decided to restrict writing the call side of our trade even more severely for the foreseeable future.
We also don’t believe that VIX is properly reflecting the large and frequent swings the market has been handing us each day, and to that end, we will be artificially inflating the volatility index value to reflect what we sense is more indicative of what the market is doing. This will have the effect of moving our trades further out.
VIX had a volatile month as well, trading between 16 and 27 for the month. We wrote at a low of 16.32 and a high of 26.13; that’s almost a 40% difference.
Enhanced Yield was able to successfully navigate November. With no calls in the portfolio, there was no pressure on any of the positions.
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:
November
This month seemed to confirm the idea that we are finally transitioning to a bear market, and history will likely show that it began in February.
Our strategy works really well most of the time. As with anything, it doesn’t work all of the time. In a year that has seen multiple events that statistically shouldn’t happen so close together, it brings to mind the idea of multiple 100-year floods happening in the same year. It’s rare, but it happens.
As mentioned earlier, we have taken steps to recognize the current market environment, in effect “raising” our sea level elevation and trenching the rivers. By all but eliminating the call trade for the foreseeable future, we can avoid the whipsaw market rallies on little to no news as the bulls desperately cling to a trading way of life that has persisted for the past 10 years. By artificially inflating VIX, we will be writing further away than typical with significantly stronger probabilities. We strongly believe that these steps will carry our strategy through the current complex environment and on to the next. If we do end up in a bear market, we expect VIX and market premium to remain high, presenting a prime environment for our trade.
That being said, we would like to wish you all a very happy Holiday season. As always, we hope that 2019 will be a happy, healthy and prosperous year for you!
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 November 2018 were $135.9 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 11.30.2018, 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.
