The January 31, 2020, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is up 1.13% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +291.98% net of fees.
Market Recap and Commentary
S&P 500 Total Return Index was a loss of (0.04%) in the month of January.
The practice of “buy the dip” remains the key influence in the market in spite of potential headwinds. The growing threat of the spread of coronavirus knocked the wind out of the S&P’s strong start to the year at the end of January, leaving the index just barely negative for the month. The market quickly shrugged it off and marched on to new highs. It looks like China is continuing to struggle to get the disease under control, with many doubting the “official” numbers. The true cost of this outbreak remains uncertain. It was once said that if the U.S. sneezed, the world caught a cold. We will see what happens to the global supply chain as China battles the flu. Regardless of whether or not the coronavirus gets worse, the damage has already been inflicted and will have to be digested by the markets.
In the U.S., politics continued to grab most of the headlines as the impeachment of President Trump ended with his acquittal.
Depending on which economics numbers you are following, the U.S. economy is either contracting or expanding. On the surface economic numbers are strong, accompanied by some better than expected corporate earnings (on lowered expectations). However, small cracks are evident with lower estimates of the GDP, business spending, manufacturing, and private payrolls. In our opinion, the major U.S. stock indexes are growing at a rate that is not supported by the lack of year over year corporate revenue growth.
Money is consolidating into fewer and fewer companies and indexes are rising on the growth of fewer stocks. This consolidation, or lack of breadth in a rally, is typically not a sign of a long-term healthy market.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was up 1.13% net of fees in January.
We continue to remain cautious with our trades as the market marches on to new all-time highs. There have been times when the greed (or confidence) factor has been so high that no one appears to be interested in buying options, resulting in some very low premiums.
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:
What are the odds?
After closing a decade with no technical correction - and for the first time ever, no recession - one has to ask themselves “Can this go on for another 10 years, or is it somehow different this time?”
Record expansion of the FED’s balance sheet over the last decade has fueled a tremendous run for stocks. The Federal Reserve Bank loans short-term cash to financial institutions who then invest that money in long-term government issues that they use for collateral to leverage their bets on the market. This is happening all over the world and all that money has to go somewhere. With interest rates at generational lows, there is only one place left…stocks. This has allowed markets to essentially ignore the flashing red lights we have discussed in this and past newsletters. The S&P 500 Index continues to climb in the face of Brexit, trade wars, impeachment, stagnant corporate revenue growth, and over-levered consumers, to name a few. At some point, the music stops. Any one of these issues could easily escalate and start an avalanche of selling, or the free money stops and there is no one with anything left to buy the dip.
Horse Cove Partners trades a strategy that is based on short-term probabilities, and from our perspective, the odds don’t look good for back-to-back record-breaking decades. John Hussman of Hussman Strategic Advisors, in his Hussman Market Comment for February, noted:
“At the market open on Friday, January 24, our estimate of likely 12-year nominal total returns for a conventional passive investment portfolio (60% S&P 500, 30% Treasury bonds, 10% Treasury bills) fell to just 0.04% annually, below even the previous record of 0.34% set in August 1929. This extreme reflects the combination of record equity market valuations and depressed interest rates. That’s not an “equilibrium” situation. It’s a combination that joins insult with injury, creating weak prospects for the future returns of passive, diversified buy-and-hold strategies, across the board.”
Source: https://www.hussmanfunds.com/comment/mc200130/
We hope his forecast is wrong for a number of reasons but understand why he would suggest that. Since bull markets tend to end in euphoria and fear of missing out, what are the odds?
A passive approach to the next decade may certainly not be the best approach.
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 the 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 January 2020 were $81.66 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 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 1.31.2020, 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.
