The April 30, 2019, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is up 1.71% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +270.67% net of fees.
Market Recap and Commentary
S&P 500 Total Return for the month of April was up 4.05%.
The S&P 500 started the second quarter with continued strength, driving the average up and the VIX down. The term “irrational exuberance” comes to mind, and a rally such as the one we are experiencing is not without precedent in previous transitions to a bear market. While there are many reasons for investors to be positive (i.e. tax cuts, deregulation, corporate stock buybacks, resolution of the “Russia” investigation, and an accommodative FED), there is plenty out there to keep us nervous.
A late-cycle tax cut could be considered premature as it can be a major fiscal tool used in an economic downturn. Corporations have spent much of their windfall on stock buybacks and the government would now be looking at even greater deficits should they need to start increasing spending. The FED has halted their rate increases for the time being. Another powerful monetary tool, leaving U.S. rates lower than any other time in history at the onset of a bear market - if one were to take hold. That combined with the tremendous amount of debt already on the balance sheet is not a strong place to be considering some projections. Expect that sometime around mid-2024 all U.S. debt issuance will be used just to pay the interest on existing debt.
European economies continue to struggle, with many of their government’s debt at negative interest rates and their growth slowing dramatically. The UK has managed to delay BREXIT again but still has no feasible deal in the works. The U.S. has yet to finalize any trade deals - most importantly with China - even though the U.S. market’s rally seems to have priced in that deal being completed soon.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was up 1.71% net of fees in April.
The S&P 500 has continued its rally, driving VIX down to near lows. Volatility managed to hold above 12 for most of the month, which in the face of this rally from last December’s lows to all-time record highs suggest a potential lack of faith from investors in all the optimism.
We faced no pressure on any of our put trades this month, and the call trade continues to add value.
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 may be written than in the “regular” accounts that use Portfolio Margin. Over time, this may also 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:
Everything is Awesome
As we mentioned above, the market has regained its all-time highs and we are barely into the second quarter. You would think everything has been fixed, and we all have nothing to worry about.
"Be fearful when others are greedy,” Warren Buffet famously said in Berkshire Hathaway’s 2004 shareholder letter. Today, greed and complacency are rampant. While there are many things to be happy about, in our opinion they are outweighed by troubling signs on the fringes:
- Stock valuations are at the highest levels since 1929.
- The amount of “junk” debt is estimated to be over $1.6 trillion with most of that set to be refinanced in the next five years.
- Should the market move towards a recession, the Federal Reserve has little room to cut and help stimulate the economy.
- Political division is as high as we can recall, leaving little ability to actually make any progress on legislation. (That may go in the “happy about” list…not sure.)
- In spite of record collections, budget deficits are running over a trillion per year.
We try to keep both the “good” and the “bad” at top of mind when we make a decision to trade or not to trade, and as we mentioned last month sometimes deciding not to write is the harder of the two decisions. Our trade is obviously one of both risk and reward and sometimes we defer to our experience in determining if the reward is worth the 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 client’s 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 2010. The firm is built on the strength of hedge fund trading expertise developed beginning in 2002.
Assets under management at the end of April 2019 were $104.162 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 a 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 4.30.2019, 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 assumes investors have been invested the entire time with no withdrawals. Individual account returns may vary depending on cash flows, the time period assets are invested, and restrictions placed on the account.
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 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.
