The July 31, 2019, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is up 1.36% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +265.28% net of fees.
Market Recap and Commentary
S&P 500 Total Return for the month of July was up 1.44%.
July started with a big jump and ended with a sharp decline, and in between, the S&P managed to set new record highs. The stock markets calmly climbed into the FED’s meeting at the end of the month. Going into the meeting, almost everyone expected a rate cut of at least 25 basis points, possibly 50 bp, and further commitment from the FED to support the markets. The S&P 500 traded in a 50-point range for most of the month.
The FED did deliver a 25 bp rate cut on the 31st, however, when “Chairman Powell” spoke to the media, the markets reacted sharply to what seemed a less dovish FED than was expected. Powell had to walk a fine line, as the US economy is showing many signs of strength, but the global economy clearly needed the US to cut rates. In our opinion, it was a near-impossible situation and odds were that no matter what they did, it was going to disappoint the market.
US trade talks with China continue, with very little progress. The stock markets are holding up, but seem very nervous. It is also interesting to note that gold is hitting recent highs and has now outperformed the S&P 500 year to date.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was up 1.36% net of fees in July.
In expectation of a disappointing FED announcement, we did not write any positions over the meeting and began to write after the market started its descent. This caused a small mark-to-market decline at the end of the day (month) on July 31, 2019, which was completely reversed on the first day of August.
We continue to believe that we are in a transitional market, moving from bull to bear, which is mainly characterized by larger/faster than normal swings in the market. As such, we continue to trade more selectively than typical and take defensive action more aggressively than we have historically. We are, however, selling insurance against outsized moves in the market, so it would be reasonable to expect some swings in the mark-to-market values in your account when the market moves quickly one way or the other. These “paper” losses most often correct themselves as the options move closer to expiration, or the market slows or reverses its move.
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:
Where's the Yield?
What to make of interest rates falling all over the world? The end of July saw the total of global debt yielding negative interest rates top $15 trillion dollars. Savers are getting crushed.
To put that in context, we noted a piece by Charlie Biello (@Charlie Biello) the other day listing the negative bond yields by maturity by country. We were surprised by what we saw.
In Switzerland, all bonds with a maturity out to 50 years have negative interest rates. Here is a list by country:
50 years: Switzerland
30 years: Germany, Netherlands
20 years: Denmark
15 years: Japan, Austria, Finland, Sweden, France, Belgium
10 years: Slovakia, Ireland, Slovenia
8 years: Spain
7 years: Portugal
5 years: Malta
3 years: Cyprus
2 years: Italy
1 year: Bulgaria
The United States currently has no bonds with negative rates. The lowest yielding bond instrument sold by the United States of America is around +1.56% for a three-year maturity. But we don’t expect that to last.
With interest rate returns equated to risk, how is it that borrowers are willing to accept a negative yield for a bond issued by any of the countries listed above, like Malta or Slovenia compared, with the USA? Something is out of balance, and it is only a matter of time before things return to equilibrium. Given the course the markets are taking globally, it is likely that US rates will come down versus those of other countries going up.
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 July 2019 were $97.92 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 7.31.2019, 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 for 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.
