The March 31, 2019, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is up 2.78% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +264.44% net of fees.
Market Recap and Commentary
S&P 500 Total Return for the month of March was up 1.94%.
That caps its best quarter since 2009 - over 13%, or an annualized return of 66%. In 2009, history shows us that the worst of the crisis was over, but we are skeptical to make that same bet for 2019. For the last ten years, the markets have gathered strong gains while governments and consumers have racked up tremendous (unsustainable) debts. The middle class in the U.S. has shrunk noticeably, and the global political environment has been stirred up, to say the least. Eventually, confidence in this “raging bull” and global Fed intervention will fade. As we have seen in past bear markets, and as recently as February and December of last year, wealth is typically lost far quicker than it is gained.
The 10-yr U.S. Treasury rate fell from 2.76% to 2.39% in March, a possible signal from the market that a recession may be coming.
The U.S. China trade deal continues to be elusive. There is no progress to speak of in BREXIT. Most European economies are a mess (to put it kindly). U.S. corporate earnings have slowed, and the Fed has signaled they will be backing off planned tightening for at least the balance of 2019.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was up 2.78% net of fees in March.
The S&P 500 posted a stellar first quarter for 2019 by most measures. VIX remains relatively low, seemingly subdued by investors’ confidence in the Fed put. In the face of this, we were able to post a strong month.
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 Enhance Yield Update
Here are the composite net returns for the Enhanced Yield Strategy for the periods indicated:
IMPORTANT TAX INFORMATION
If you have 2018 net losses on Section 1256 contracts, see IRS Form 6781, the instructions to that form and consult your tax advisor as to the availability of any carryback of such losses to prior years.
We are not in the business of offering tax advice so please consult with your tax professional.
Interactive Brokers does not mail tax forms out. Tax forms are available by logging into your account at www.interactivebrokers.com.
When Doing Nothing is Something
As we mentioned in the performance update, the S&P 500 was up over 13% for the first quarter of 2019. That is an annualized return of over 66% should the market hold this strong march forward.
At Horse Cove, we do not predict the market. We are not Bulls or Bears, instead, we extract value from the market, relying on the probabilities of occurrences and our experience to weigh the risk vs. reward when applying those probabilities.
One of the hardest things for us to do as managers is to hold back, or not to use every ounce of available collateral for our trades. This is what Seth Klarman described in the Baupost Limited Partnership’ 2004 Year End letter as “The painful decision to hold cash.”
This, however, is a bit of a hedge for our trade. Whether or not a trade would have worked is irrelevant. We are making decisions based on risk/reward. When the option buyers aren’t willing to pay a reasonable premium for the risk we are insuring, we have to be able to walk away. The few small trades (at a low premium) that we miss leave us slightly overcapitalized in the event of a drop in the market or spike in VIX, lessening the potential for loss and leaving us with plenty of ammo to profit.
In the short run, this may shave a few basis points off the monthly return for the strategy. But in our opinion, it will pay off greatly when the market does eventually turn and VIX spikes. Charlie Munger, Warren Buffet’s long-time partner, has counseled investors: “It’s very basic. You have to understand the odds and have the discipline to bet only when the odds are in your favor.”
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 March 2019 were $106.37 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 3.31.2019, 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 by our firm name.
THIS MESSAGE AND ANY FILES TRANSMITTED WITH IT ARE CONFIDENTIAL AND PRIVILEGED. IF YOU ARE NOT THE INTENDED RECIPIENT, PLEASE NOTIFY THE SENDER IMMEDIATELY AT 1 (678) 905 5723. IF YOU ARE NOT THE NAMED ADDRESSEE YOU SHOULD NOT COPY OR DISCLOSE THE CONTENT OF THIS MESSAGE AND ANY FILES TRANSMITTED WITH IT TO ANY OTHER PERSON.
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.
