The month-end performance estimate as of April 30, 2014 for Horse Cove Partners Absolute Return Strategy is +0.74%, net of fees1. For 2014 year to date, the strategy return is +2.83% and since the inception of trading in December 2010, the strategy has achieved a total cumulative return of +141.83%.
Market Recap and Commentary
April was a roller coaster month that ended up pretty much where it started: the S&P 500 eventually rising 0.53% from open to close during the month. However, on April 10, we saw the first real correction start to take shape with the S&P 500 dropping from 1,872.28 to 1,815.69 the close of trading the next day. That was just over a 3% decline and was accompanied by the VIX rising to 17.85. Things settled down over the following weekend, when we saw volatility steadily decline back down to 13%.
Geopolitical concerns in Ukraine weighed heavily on the market as rumors fed the roller coaster movements. From a 50,000 foot level, this is the kind of action typical of a topping market. Psychologically, traders want to ride the momentum up but no-one wants to be left holding when the inevitable correction happens. So we see the lack of consistent trend taking place.
Performance and trading update
While we never had any positions in the money during the month, margin pressures did force some repositioning and repurchase of puts that impacted returns for this month. Unlike the previous month, we caught the lows in volatility as we put positions on, then watched as margin requirements increased with the falling markets.
Year to date, the Horse Cove Absolute Return strategy is up 2.83% compared to the S&P 500, up 2.06% for the same period of time.
During the month, we sold puts at an average of 5.3% out of the money and calls at 2.8%. That is closer in than in March, when we wrote at 5.6% and 3.04% respectively and consistent with an overall decline in volatility. As volatility declines, our models call for trades closer in the money to the strike price. When volatility is rising, trades are made farther out of the money. Our strategy in effect, solves for a strike price while keeping risk constant.
Index Option Investing and High Frequency Trading
The investment process used by Horse Cove Partners to trade S&P 500 Index Options offers numerous advantages to our clients over most traditional investments. Among these are:
- Attractive returns per unit of risk
- Complete transparency
- Weekly liquidity for contributions or withdrawals
- No lock up period
- Tax advantaged returns under IRS Section 1256.
We have now discovered another advantage, index options are virtually impossible to be “front-run” by High Frequency Traders (HFT).
There has been a great deal of discussion on whether the markets are “rigged” with the recent release of Flash Boy, by Michael Lewis. We all want to believe we have a chance at “the game”, even if we realize that the odds are stacked against us. With the Horse Cove Absolute Return Strategy, we operate with the odds stacked well in our favor and constantly reexamine how we can improve on taking and managing the risk of our trades.
Having that in mind, we made inquiries of our floor brokers and industry veterans at Interactive Brokers to inquire if our trades could be skimmed, or front-run by the High Frequency (HF) players. They report that it would be virtually impossible to front-run options trades the way the HF boys do it, as they do not want to hold the risk. In a typical HF trade, they use the advantage of electronic spreads to determine one side of an order, in order to purchase it up and resell it, adding a cent or two in the process. As index options trading is one of the few remaining “open-cry” markets (where real people are in “the pit” at the Chicago Board of Options Exchange bargaining for an acceptable price at which to buy/sell) there is no practical way to front-run.
With an option contract, there is not a confirmed order to front run, which would leave the HFT exposed to risk. Given that there are easier ways for them to make a buck in the equities markets, options appear to be safe for now.
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
Horse Cove Partners LLC
1899 Powers Ferry RD SE
Suite 120
Atlanta, GA30339
678-905-5723 main
1Net estimate on a consolidated basis as of 4.30.2014, 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.
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. 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.
