The month-end performance estimate as of January 31, 2013 for Horse Cove Partners High Yield Strategy is -3.77%, net of fees1. This is the 7th monthly loss we have reported since trading began over three years ago. Since the inception of trading in December 2010, the strategy has achieved a total cumulative return of +126.33%, compared with +50.22% for the S&P 500 over the same period.
We want to welcome our two newest clients to our firm in January. We are now trading our strategy on just over $4.7 million dollars of assets, and look forward to helping all of our clients have a prosperous 2014.
Market Recap and Commentary
The bloom appears to be off the rose as the US equity markets have begun a correction off of their recent highs. We saw the S&P 500 index peak on January 15, 2014 at a closing price of 1848.36. From there, the market pulled back ending the month down -5.76%--leading to one of the worst starts for the New Year in recent history.
The period of tapering has begun with further reductions in purchasing by the Federal Reserve having been announced in January. If one were to believe that the “easy money” fueled a bubble in the equities markets, then a pullback from that policy would logically lead to some retracement of the gains.
Performance and trading update
January presented one difficult week to trade; and that one week led to the reported loss this month. On January 22, 2014 the VIX closed at 12.84, and 5 days later peaked at 18.99. That’s a 47.2% increase in a week. When that happens, the pricing of puts shoot higher and margin calls need to be managed by reducing size limits. We are very cognizant of the fact that our trading strategy will not always work, and in keeping with our philosophy of intelligent losses, we took defensive action to get out of the way of the market. By doing so, we took what we believe was a manageable loss and moved over 110 points lower in the S&P 500 index dropping from the 1755 level to 1645. Yes, we could have waited and hoped, but we make no bones about the fact that we can’t predict which way the market is going to go.
Statistically, we would expect such a trading week to happen once every two or three years. But our risk management protocols dictate that we stay in the game rather than risk it all. We hope you see the value in that.
On the bright side, now that volatility has adjusted up, we closed out January 2014 selling puts over 7% out of the money at triple the price options sold at 99.5% probability of success fetched two weeks earlier. Historically, that has meant a favorable period to recoup losses.
How much loss is enough?
In his book Trading for a Living, Dr. Alexander Elder proposed that a trader that wants to survive and prosper must control their losses. We have described what we do as simple but not easy. January proved to be one of those “not easy” months. However, we have learned over time that the control of losses is critical to be successful over time.
Here is one way to look at it: 52 weeks to trade in a year, where the probability of losing on the upside (the calls) is 10% or 5 weeks a year. Losing on the downside (the puts) is 0.5%. But let’s call it 1 week a year for this illustration. That is a total of 6 losing weeks a year and 46 winning weeks. If a trader averaged 0.75% each week of positive returns in the winning weeks, then that is roughly 34.5% of return in a year. (No compounding here).
That means in order to have a positive year you need to limit losses to no more than 5.75% in the losing weeks. “Simple, but not easy.” But we have the strategy and experience to be your guide.
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, and is built on the strength of hedge fund trading expertise developed beginning in 2002.
“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 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 would like to thank you for your continued support and look forward to being in touch with you in the near future.
Sincerely,
Sam DeKinder and Kevin Ellis
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
Horse Cove Partners LLC
1899 Powers Ferry RD SE
Suite 120
Atlanta, GA 30339
678-905-5723 main
1Net estimate as of 1.31.2014, which is preliminary and subject to revision. Performance estimate described herein as “YTD” are net of fees and expenses and assume investor has been invested with no withdrawals.
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Finally, to the extent that performance information is contained in this message, you are hereby advised, and you acknowledge it, that past performance does not assure future results, which are not guaranteed by Horse Cove Partners LLC or any of its affiliated entities or by any insurance mechanism.
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.
