The November 30, 2017, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is (0.23%) net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +333.75%.
Total assets under management as of November 30, 2017 - $134.5 million.
Market Recap and Commentary
S&P 500 Total Return for the month of November was up 3.07%. This marks the 13th consecutive positive month for the index, bolstered by investors’ confidence in the passing of the tax reform package.
The S&P 500 Index hit another all-time high in November. The bull market has now run for 108 months and 270 days without a 5% correction. During that period of time, the S&P 500 Price Index has gone up 357.16% through November 30, 2017.
There was a little more volatility in November with the VIX hitting an intra-day high of 14.51% on November 15, 2017. The average closing VIX was 10.54% for the month.
Performance and Trading Update
The Horse Cove Partners Absolute Return Strategy composite lost (0.23%) net of fees in November, all of which occurred on the last trading day of the month.
During the first three weeks of the month, trading was routine. Holidays such as Thanksgiving always present some challenges for trading. There is extended time with no trading because the market is closed and travel around the holidays makes for very light trading volume. As we have done in the past, we traded over Thanksgiving by selling options that expired the following week.
Enthusiasm around the tax reform bill started in earnest on Tuesday, November 28 with the S&P 500 rising 21.10 points as investors translated lower corporate taxes to increased earnings per share. On Thursday, as the S&P 500 rose 31.67 points, our risk rules went into effect: we bought to close the options expiring that day at a loss and rolled up the options expiring the following Monday, December 4, as well as those expiring on December 6.
The Horse Cove Partners Absolute Return Strategy will not make money every trade. We wish we never took a loss, but we are convinced that letting trades run where the statistical probability is very high and taking losses when the trade does not appear to be working, will over time, result in compelling positive returns. November 30 was one of those days where taking a defensive loss occurred by closing out our positions mid-day on the day of expiration. Intra-day, the 2655 calls we had sold a week earlier went in the money by almost 3 points when the market hit 2657.74. The market closed that day at 2647.58.
We had no way of knowing at noon on Thursday whether the rally that started a few days before was going to end there. We fashioned our “loss” rules long before they were needed to keep our strategy from turning to “hope” versus relying on the statistics of history.
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 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 net returns for the HCP Income Strategy for the periods indicated:
Buy the Rumor - Sell the News
The news of a couple of “yes” votes from previously undecided or “no” vote Senators fueled a big rally at the end of November. Friday, we saw a 40 point drop in the S&P 500 on the news that General Flynn was going to plead guilty to the process crime of lying to the FBI and had agreed to cooperate with the Special Counsel investigation. Uncertainty. Unknowns. They translate every day into premiums in the options market. The rapid decline of the Flynn news suggests to us that investors are nervous about the market’s record highs.
Both were items in the news that had been speculated on and “priced” into the level of the S&P 500. But as you saw, news of both of those items fueled greed and/or fear that might be easy to get caught up in.
A strategy that is rules-based and rigorously replicated gives Horse Cove Partners the opportunity to trade on those emotions. We don’t believe that execution of an options strategy based on predicting the direction of the market or trying to second-guess the market itself can be successful over time.
We have now completed 7 full years of trading the Absolute Return Strategy relying on rules. The strategy doesn’t always work, but if it did not work occasionally, no one would be willing to pay $0.50 for an option one week out that has a historical probability of expiring out of the money at greater than 90%. We have to accept our lumps on occasion in order to reap the benefits in the overwhelming number of weeks where it works well.
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 November 2017 were $134.54 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 11.30.2017, 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.
