The February 28, 2017 month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is +0.94% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +278.79%.
Market Recap and Commentary
The S&P 500 Total Return Index was up 3.97% for the month.
Markets continued their march upwards through February, with the S&P 500 posting its largest monthly gain in a year. The Dow has never had a longer streak of record closes…Ever.
We continue to expect gradual rate hikes from the Fed through 2017, and the market has placed an 80% probability of a hike in March.
Volatility, as measured by the (VIX), continues to remain at historically low levels breaking through 12% for only a few days at the end of the month. VIX has not been over 13% yet this year.
Performance and Trading Update
For the month, the Horse Cove Absolute Return Strategy composite return gained 0.94% compared with the S&P 500 Total Return Index that was up 3.97%.
“Up, up, and away” seems to be the only way to describe the almost euphoric upward march of the S&P 500, achieving several new all-time highs through February while the DOW ticked up 12 days in a row, a rare event to be sure. We faced pressure on our short calls in the third week, reaching our hardline probability on the Friday expiration to take action and unwind the trade. The drawdown was significantly reduced due to the split portfolio, and our ability to roll-out the short call 10 points. Wednesday expiration and Income portfolio were allowed to expire.
Interactive Brokers has continued with an elevated collateral requirement on our positions, seemingly in contrast with the low volatility environment we are in. They also expect to increase their stressing level on implied volatility in March.
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:
Predictions
As noted earlier, February continued the strong trend upwards, pushing most major averages to all-time highs and nearly launching the DOW to its all-time fastest 1000-point move. We are now selling our short call strikes higher than we were buying our protection just a few months, if not weeks, ago. Earlier in the month, we received strong total premium even with historically low VIX due to what seemed to be traders’ expectation of a sharp selloff. When the market drifted lower in small increments, this expectation evaporated along with the premiums.
Predictions are at best an effort to understand and interpret current market data and investor sentiment—never an exact science. At worst, predictions are a tool to support fear or greed and can lead to bad or no decisions. We continue to avoid attempting to “time the market” or outsmart it, and instead rely on the science of our system.
The Fed was more hawkish than expected in the notes released this month. The current overwhelming expectation is for the Fed to raise rates for the first time this year in March, leaving two more hikes in the remaining year. The expectation is for three rate hikes in 2018 as well, all signs the economy is doing well and getting stronger.
We do not see any “outlier” (Brexit, election, etc.) events scheduled in the near future that would cause us to modify the implementation of our strategy.
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 February 2017 were $48.2 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
John Monahan
Michael Crissey
Don Trotter
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
gbrennan@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 2.28.2017, 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.
