The month-end performance estimate as of November 30, 2014 for Horse Cove Partners Absolute Return Strategy is +2.08%, net of fees1. For 2014 year to date, the strategy return is +10.12%, and since the inception of trading in December 2010, the strategy has achieved a total cumulative return of +153.77%.
Market Recap and Commentary
For the month, the S&P 500 Total Return Index rose 2.69%. What is more remarkable is the rally since October’s correction. Since the bottom of the decline on October 15, 2014, the S&P 500 Index has risen 13.56% to close at the end of November, near record highs.
Volatility was fairly stable during the month opening at 14.41% and closing at 13.33%. We did see a high of 15.93% and a low of 11.91% during the month. This range of volatility still remains historically low however, given an average of 20% over the last several decades.
Volume remained light as we headed into the Thanksgiving holiday with the market direction and movement being encouraged by strengthening labor data and declining oil prices. Black Friday sales data seems unusually weak given all the hype. We can’t help but wonder if the hype is meant to convince us how things should be versus how they really are.
Performance and Trading Update
November was a fairly calm month for trading, with little margin pressure. After the correction in October, we eased up on our collateral usage slightly to permit more breathing room with Interactive Brokers. That decision paid off, resulting in only needing to purchase a handful of options back because of margin pressure and only during one week.
For the balance of the month, the strategy played out as “normal.” We wrote puts and calls an average of 4.93% and 2.75% out of the money respectively. We bought them back for a $0.05 each week and repeated 4 times.
We did have a mark to market issue on the last trading day of the month. This was on the Friday following Thanksgiving. We sold the 1975—1875 put spread for $0.42 only to have it priced at the close of trading at 1:00 pm at $0.90. That was reversed on Monday and was most likely a function of light trading volume.
“Mark to market” is an accounting concept that requires reporting holdings at fair market value versus historical cost. This has the effect of treating open position as if they had been sold at the end of the month for the then market value, recognizing the gain or loss and then repurchasing them at the same price as the starting price for the next reporting period. The effect on our reported result was to show a loss on the open puts of ($0.48) for the month of November, and will result in a corresponding gain in December.
Here are the returns versus the S&P 500 total return index for the periods indicated:
IRA Update
We are adding a new section this month to report our results for our growing IRA clients. We have been engaged by a number of clients to provide advisory services to their IRA’s and Interactive Brokers act as a qualified custodian for those accounts.
Under existing securities and lending regulations, an IRA is not permitted to trade securities under portfolio margining. This is the style of margin that the Horse Cove strategy regularly uses. Instead IRA must use a style of margin known as Reg. T. The main difference is that under portfolio margining, the amount of collateral required by Interactive Brokers can vary from day to day and starts out at about $3,500 per option contract that is written.
Under Reg. T., the amount of collateral required does not change and is fixed at about $10,500 per option contract. As a result, the returns in an IRA account are approximately 55% to 65% of the returns that the Horse Cove strategy has achieved historically. However, there has also been less volatility in the returns because there are few margin calls requiring positions to be bought back.
Here are the returns for the consolidated IRA’s for the periods indicated:
Compared to What and When?
We frequently provide performance results for the Horse Cove Absolute Return strategy against the S&P 500 Total Return Index over multiple time periods. Is that the best comparisons for our strategy? We don’t really know because to us, the question needs to be qualified by each investor’s objectives and time frames. More important is how is the strategy doing compared to (blank) and over what period of time? There exists any number of indices one could compare performance against. We try to leave it up to the individual investor and their objectives.
We have investors coming to us with cash investments that have been earning 0.25% to 1.0% per year. Compared to the 2.08% return for the month, the Horse Cove strategy is achieving a years’ worth of their investment objectives in a matter of weeks. On the other hand, if one was to look at the returns year to date versus the S&P 500, the strategy is slightly behind as of November, yet ahead of the index for the first nine months of the year. The strategy returns are also significantly ahead of the S&P 500 index over the last three years.
We measure ourselves against an absolute benchmark, net of all fees—judged by a simple question: “Did we make money for our investors? If so, how much?” For the past four years, Horse Cove Partners has been a very good place to have money managed.
November represents the completion of four years of trading results. (The small caveat being that our results for December of 2010 only represent 1 week of trading.) An investment in the S&P 500 index over that period of time would have grown by 77%. A similar investment in the Horse Cove strategy would have grown by 153%.
Horse Cove Update
We welcomed two new clients this month. The total assets under management now exceed $12 million in the Horse Cove Absolute Return strategy. As a firm, including assets under management in our affiliated firm, we are currently responsible for just under $15 million of assets.
We value each of our clients and the assets they have entrusted to us in our strategy and will continue to pursue attractive returns to the benefit of each and every one.
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 non-IRA accounts as of 11.30.2014, 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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