The May 31, 2016 month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is 1.95% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +237.83%.
Market Recap and Commentary
The S&P 500 Total Return Index was up 1.80% for the month, and is up 3.57% for the year.
The “sell in May and go away” never materialized. In fact, the S&P 500 Index had one of the better 3 month returns in years. Rising 9.12% in 3 months ranks number 9 in best-performing three month periods going back to 2000. The average three month return from January 2000 to May 31, 2016 is +0.60%.
Volatility, as measured by the (VIX), slowly fell as the month progressed, trading in a range of between a low of 13.04% and a high of 17.65%. We started the month at 16.33% and ended the month down at 14.19%.
Performance and Trading Update
For the month, the Horse Cove Absolute Return Strategy composite return was up 1.95% compared to the S&P 500 Total Return Index that was up 1.80%. Year to date, the Strategy is up 7.32% compared to the S&P 500 up 3.57%.
This was a relatively calm month for trading the strategy. We were not forced to take any defensive action during the month. As we reported last month, premiums remained low, historically speaking.
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.
Market Waits on Janet's Every Word
It seemed like only a few years ago, the stock market was largely driven by fundamentals--things like earnings, sales, profit margins and dividends. However, it seems today, the one thing on everyone’s mind is “What will the Federal Reserve do?”
When the financial crisis unfolded in 2008, the Federal Reserve Board and the U.S. Government stepped in and bailed out the system. This meant that the people responsible for creating the situation that led to the “bubble” and the crisis itself, had no accountability for what was created and were allowed to retain the ill-gotten fruits. The system itself was not allowed to work. If you take on too much risk and the market moves against you, you are supposed to lose. Borrow more money, or make financial promises that you can’t possibly keep and you’re supposed to become insolvent. We have bankruptcy courts to deal with those kinds of situations.
But, when the “powers that be” prevented the system from functioning “normally” by not allowing those that were overextended to collapse, the Federal Reserve Board suddenly took on a whole new, critical role in the functioning and pricing of the market.
By infusing trillions into the system and allowing rates to drop to zero, the Federal Reserve Board has served its masters (the top banks in the U.S.) incredibly well, but also made every decision by the “Fed” all that more important to the outlook of the U.S. stock market.
Historically speaking, the market has performed well when the Fed has raised interest rates. However, the Fed has never before intervened in the functioning of the financial system to the level it has done in the past 8 years. We wonder what impact that will have on the market when it can no longer grow based on the status quo that has existed, with essentially “free money”, and no consequences for taking risk.
For now, the market waits on the next Fed meeting and a decision regarding another rate hike. Funny how a bad jobs number is now interpreted as good news, because it may mean the Fed won’t raise rates and cheap money will last a little longer.
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 May 2016 were $25.12 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 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
Michael Crissey
Greg Hyde
Don Trotter
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
jmonahan@horsecovepartners.com
mcrissey@horsecovepartners.com
ghyde@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 5.31.2016, 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.
