The July 31, 2017 month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is 0.09% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +305.05%.
Market Recap and Commentary
S&P 500 Total Return for the month of July was up 2.06%. This marks the 7th consecutive positive month for the index, with only one negative month in the last 16. This is the sixth time in history it has gone a year without a 5% correction. (The longest streak since 1995.)
The major indexes continued their strong performance into the second half of the year. All three U.S. indexes achieved new all-time highs multiple times in July. Strong earnings reports, solid housing starts, and a Fed statement very much in line with expectations all contributed to what feels like a melt-up so far this year.
The VIX closed below 10% for 10 consecutive trading days between July 13th and July 26th, which is a new record. On five of those days, the S&P 500 Index closed at a new all-time high. And on seven days, the benchmark index traded at a new intraday record. At the same time, medium-term VIX futures have quietly fallen to 10-year lows, breaking the previous record set in the summer of 2014.
It seems unlikely that volatility will remain at these extreme lows throughout the remainder of the year. As we enter the last month of summer, it is interesting to note that the VIX has “settled” below 12% in only two of the past 27 Octobers. That, incidentally, coincides with the deadline for raising the debt ceiling--a fight that is expected when Congress returns from their August break.
Performance and Trading Update
For the month, the Horse Cove Absolute Return Strategy composite return gained 0.09% compared with the S&P 500 Total Return Index which was up 2.06%.
Horse Cove Partners continues to navigate these historic lows in the VIX, while a slow and steady “melt-up” in the S&P 500 continues. We are seeing an increased appetite for selling puts in this environment, and this has put pressure on the premium we are receiving. Given that the historical average of VIX is 19.98%, we believe that this is a temporary condition.
All options expired in July or were bought back as planned, except for the call options expiring on Friday, the third week of the month. We followed our self-imposed risk rules and bought back calls before settlement. This led to a small reduction in profits for that one week.
We continue to trade an 80-point spread to Wednesdays and Friday's expiration. In expectation of continued strong growth in AUM, we are also currently tracking the Monday expiration.
Lastly, the returns for the month were impacted by the deduction of performance fees from our strong 2nd quarter. In effect, we started the month down (1.1%) after fees and mark to market carry over from the previous month.
Here are the returns for the composite portfolio margin accounts:
Reg. T Update
Here are the composite returns for the Reg. T accounts for the periods indicated:
IRA accounts must use Reg. T Margin which, means that fewer option contracts can be written than in the “regular” accounts that use Portfolio Margin. Over time, this will result in lower returns when compared to the “regular” accounts.
HC Income Update
Here are the composite returns for the HCP Income Strategy for the periods indicated:
The Great "Melt-Up"
As Horse Cove Partners approaches the important institutional milestone of $100 million in total AUM, we have been reflecting on how we got here. Over the last few years, we have strived to deliver strong returns for our investors, all the while researching and implementing methods to reduce risk. Our goal is to achieve above market returns with exposure to the least amount of risk possible. We feel the actions such as reducing our collateral usage and splitting the portfolio to multiple expirations, have helped us continue to meet our goal.
Milestones:
- Dec 2012 Horse Cove Partners LLC is formed by Samuel DeKinder and Kevin Ellis
- Jan 2013 accepts first outside client separately managed account (SMA) $1 million
- Jul 2013 cumulative returns from trading the strategy double for the first time
- Nov 2013 second outside client account is funded
- Dec 2013 strategy AUM is $4.3 million
- Mar 2014 John Monahan joins company
- Jun 2014 Mike Crissey joins company
- Nov 2014 strategy AUM tops $10 million
- Jun 2015 first Fund of Funds opens an SMA
- Jan 2016 strategy AUM tops $20 million
- Mar 2016 Don Trotter joins the company
- Apr 2016 Horse Cove Partners becomes an SEC Registered Investment Advisor
- Aug 2016 Greg Brennan joins the team as Assistant Portfolio Manager
- Nov 2016 Horse Cove Partners becomes sub advisor to a public mutual fund
- Mar 2017 strategy AUM tops $50 million
May 2017
- Cumulative returns quadruple for first time
- Fiona Dyer joins Horse Cove as Manager of Operations and Customer Support
It seems like our growth this year is the only thing outpacing the S&P 500. As mentioned earlier, a steadily rising market with no significant pull backs has resulted in more investors selling puts on the S&P 500, which has lowered premiums. These new players move in for the “easy money” with strategies not tested by fire. We do not expect them to be around long after the next pullback.
Unlike many other managers in our field, we remain at a near constant risk level when placing our trades and do not move closer to the market to manipulate returns. I am sure you have heard Sam DeKinder say “We take what the market will give us.” When volatility returns to the market and we see what appears to be a long overdue correction, we plan to be around to take advantage of the higher premiums and take a strong lead over the market. In the meantime, as the market marches up, we are out-pacing our long term historical upside capture and remaining lockstep YTD with the S&P 500.
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 clients’ 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 of 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 2017 were $93.27 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 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 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 7.31.2017, 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.
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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 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.
Past Performance is not a guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value. The returns are based on the Investment Manager's strategy and not actual client accounts. The Horse Cove Absolute Return and IRA Return strategies seek to extract absolute returns from the market by trading short volatility option spreads. The strategies reflect the deduction of advisory fees and any other expenses that a client would have paid or actually paid. Model results do not represent actual trading and they may not reflect the impact that material economic and market factors might have had on the Portfolio Manager’s decision-making if the advisor were actually managing the clients' money. 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 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." Option 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 or Standardized Options available from the Options Clearing Corporation website: http://www.optionsclearing.com for further details.
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.
