The month-end performance estimate as of July 31, 2014 for Horse Cove Partners Absolute Return Strategy is +0.98%, net of fees1. For 2014 year to date, the strategy return is +8.72%, and since the inception of trading in December 2010, the strategy has achieved a total cumulative return of +154.47%.
Market Recap and Commentary
Something or things have changed in July, as we saw the market turn sharply lower at the end of the month. We don’t know if it was due to the Argentina bond default, or the war in Gaza, Ukraine, or Ebola, the change in the unemployment rate or whatever else…but volatility rose by over 65% during the month from a low of 10.32 to a high of 17.11, most of that occurring in the last week of the month.
Historically speaking, volatility as measured by the VIX, has spent less than 10% of its time down at these levels. So a change was predictable, but certainly not the timing. July was the largest monthly decline for the S&P 500 this year, with the S&P 500 price return declining by 1.51% for the month. Small caps are faring much worse, with the Russell 2000 now down 2.66% year to date.
It remains to be seen whether the orderly melt up driven by the Feds balance sheet expansion and “free” money will be restored as what one author described the market as a “low-volatility, low volume melt up of complacent buy the dips”. The market is more than overdue for a correction.
Performance and Trading Update
For three weeks of trading in July, things were once again relatively calm. We saw new lows reached in volatility with the VIX trading below 10.32% during the month. However, as we have noted in the past, history told us that the low volatility was not likely to persist and in the last 10 days of the month we finally moved off of the lows. This translated nicely into return premium and the ability to sell calls. During the month, we only wrote weekly call positions twice, as there was simply not enough premium to take on the market risk. The month provided us with 4 opportunities to write put contracts, with the last week ending on August 1. We had mark-to-market at month end on those open positions that will be realized in August.
During the month, we sold puts at an average of 4.5% out of the money and calls at 2.4%. We averaged $0.57 of gross premium each week for both the put and call contracts written.
Here are the returns versus the S&P 500 total return index for the periods indicated:
Here is the adjusted daily close of the VIX® for the month of July:
On "Risk"
Over dinner recently, a successful friend asked about how we were doing. When we commented that we continue to deliver returns to our clients north of 30% per year on a rolling basis, he commented that we must be taking a lot of risk. Not really we said, we are “selling options”.
In his stunned silence that ensued, we took a moment to give him an example. “You get an investment idea: going to buy 100 shares of XYZ, which has a great new product coming out” we said. “On the day you make that investment, we assume you know how much you’re going to invest. But what exactly is your investment period? What will be your return? And, given the history of this company and the market, what is the probability that you will be correct? He responded with “Well I don’t know exactly, but it’s a good company”.
“So on the day you make the investment, you don’t know how long it will take, you don’t know how much you’re likely to make, and you don’t know the odds of being successful. But when we sell an option on this Thursday we know it expires the following Friday. We know that when we make the trade we will get exactly $.75 per option contract deposited in our account, and we know that the statistical probability of being successful in the trade is 99.65% (that the options will expire out of the money). What we do is risky but what you’re doing is “safe”?
Needless to say, we felt bad and picked up the check.
If you would like to learn more about how we can produce these returns for your assets, please contact us at info@horsecovepartners.com.
News at Horse Cove
- Horse Cove became a registered investment advisor in Georgia during the month.
- Added two new clients.
- Assets under management in the absolute return strategy now close to $7.5 million and total firm assets managed directly and through affiliates is almost $14 million.
- Strategy returns are now listed at
- www.barclayhedge.com
- www.eurekahedge.com
- www.evestment.com
- www.greenwichai.com
- Engaged the Joseph DeCosimo CPA firm to review and certify historical returns.
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
kellis@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 as of 7.31.2014, 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.
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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.
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