The month-end performance estimate, as of May 31, 2015 for Horse Cove Partners Absolute Return Strategy is +1.76%, net of fees1. Since the inception of trading in December 2010, the Strategy has achieved a total cumulative return of +194.65%.
Market Recap and Commentary
The S&P 500 Total Return Index had a positive month in May, up 1.29% but continues to lag last year’s performance and the Horse Cove Partners Absolute Return Strategy. For the year-to-date, the S&P 500 Total Return Index is up 3.23%. Horse Cove is up 12.72%.
Volatility moved within a range on the historically low end for the entire month, only getting over 15% briefly. The VIX opened at 13.98% and closed at 13.84%, with only a brief rise to 15.12 over the course of two days in mid-May.
With the revision of the GDP report for the first quarter to a loss, the U.S. economy is now on the clock. Two consecutive quarters are labeled a recession by economist. Any thought of a rate hike seems to have been put off for now.
What kind of returns expectations should we have for the stock market in the coming years? Dr. Robert Shiller, Nobel Prize Laureate Economist, has looked at the average annual inflation-adjusted returns for ten-year periods, based on the starting P/E ratios (price/earnings ratios). Based on the research of someone ranked among the top 100 most influential economist in the world, when the starting P/E ratio is in the range we are now--the next 10 years may only deliver annual returns of 0.5% per year after inflation.
Performance and Trading Update
With volatility below 15% during the month, premiums for selling options were low, but there was no need to take any defensive actions. So we kept most everything we collected. There was little margin pressure during the month.
We wrote puts and calls on average 5.075% and 2.6% out of the money respectively. The strategy continues to out-perform the S&P 500 Total Return Index in all of the periods indicated:
IRA Update
Here are the returns for the consolidated IRA 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.
Why Isn't Horse Cove Partners Bigger?
The question posed above is one of the more vexing that we get asked. It is usually asked by someone who has not invested with us. Obviously if the person asking allowed us to work for them, we would be bigger. But why is that an impediment to doing so?
The main stream investment business tends to be one of herd mentality. There is perceived safety in numbers. By joining the herd, we satisfy our innate instinct to belong to a group. “Safety in numbers.” All these things are implicit messages that the investor considers, most of the time without being conscious of it.
Safety in numbers also provides the basis for mediocrity to be passed off as “normal”. The concept of relative performance is at the heart of this idea. “Well, Mr. Client, I realize your account has less money than it did a year ago, but the market is down and your account is only down 10% more than the market, and that is still better than 60% of the other money managers…so we are doing a great job for you!” That kind of comparison reminds me of something my Mom said (I’m sure everyone’s mom said), “Well, if your friend Billy jumped off a bridge I suppose you would too?” Just because all the other Billy's out there have less money doesn’t help the fact that Mr. Client’s account is less and he is now farther away from his goals.
Moms know something. We don’t get ahead by doing what everyone else is doing. Following others, who are not getting ahead, doesn’t make sense if your goals are different. We excel by standing out, by choosing different. Paradigms shift, most of the time, from people outside, people who see a different way of doing things versus all those committed to maintaining the existing system.
So why doesn’t Horse Cove Partners have more clients, given our performance? Breaking from the herd is hard. Look again at the performance compared to the S&P 500 for the last 3 months, one year and three year periods. Which looks better, what Billy is getting from his group think choice, or the Horse Cove clients who listened to their mothers and followed their own ideas?
If you would like to learn more, please contact us. We would welcome the opportunity to work for you.
Horse Cove Update
Horse Cove Partners added two new clients this month and has two more working on their new accounts in June.
Total assets under management now exceed $16.34 million in the Horse Cove Absolute Return Strategy.
We value each of our clients and the assets each has entrusted to us in our Strategy. We will continue to pursue attractive returns to the benefit of all.
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.
“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, Kevin Ellis
John Monahan and Michael Crissey
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
jmonahan@horsecovepartners.com
mcrissey@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 5.31.2015, 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.
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.
