The August 31, 2018, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is +2.37% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +318.08%.
Total assets under management as of August 31, 2018 - $148.2 million.
Market Recap and Commentary
S&P 500 Total Return for the month of July was up 3.26%.
August has brought more of the same for the S&P 500, Horse Cove and most equity indexes as investors continue to focus on the few things going well and ignore the many things that can go wrong. While trade uncertainties account for most of the volatility we are seeing in the markets, problems in Turkey and Argentina have also weighed on Wall Street, though not enough to pull the markets down. All three major U.S. indexes ran through their highs from January to set new all-time highs. The S&P 500 set a new closing high of 2914.04 on August 29th booking three consecutive weekly gains and the best August return in four years. These high returns were driven by earnings growth in the first and second quarters, subsiding inflation concerns, low yields and a willingness to worry about trade later. By certain measures, equity markets achieved the ominous record of the lengthiest bull market in August - a month that is typically challenging for the index.
VIX has seemed to settle in the 12 to 14 range this month, an interesting divergence from the all-time highs posted by equity markets. VIX continues to trade at levels that are 40% to 50% higher than the levels we saw in 2017, even as the averages rally. The volatility index typically has a negative correlation to the S&P, so when we see stretches of them trading in the same direction, it is worth taking note. This tightening spread between the two indexes has historically been followed by a drop in the markets.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was up 2.37% net of fees in August.
Horse Cove Partners was able to successfully navigate through August with no stressful or negative events. All of our trades were profitable and were exited as planned. The higher average VIX has helped keep us further from the markets when we write, and the steady climb up has helped keep pressure off the positions. Even with the higher VIX, premiums are not outsized as there has not been any substantial or sustained pullback since February. As we have said many times in the past, there are multiple strong environments for our trade, and this is one of them. When the markets move steadily in either direction, we are able to collect and keep premium by writing on the wings and not face any pressure. We have continued to add profit to the trade by selectively writing calls.
The Enhanced Yield had no pressure on any positions in August and continues to prove itself as an excellent alternative for investors seeking yield. We created this strategy in response to investor requests. As bond markets and bond mutual funds continue to take losses and provide little to no yield, we thought there was a better way. The FED is on a solid course of raising interest rates to curb inflation (AKA the roaring economy and markets). This typically hurts income investors who have either moved out on duration or lower in the quality of their portfolio chasing yield. Our portfolio offers the highest-quality, shortest-duration US government T-bills, which have a very little reaction to rising interest rates as they are constantly reinvesting at current market rates. We then use a conservative application of our strategy (using NO leverage) as an overlay, in an effort to add 300-500 basis points to the yield of a two-year Treasury note.
Here are the composite net returns for the Portfolio Margin accounts for the periods indicated:
Reg. T Update
Here are the composite net 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 Enhanced Yield Update
Here are the composite net returns for the Enhanced Yield Strategy for the periods indicated:
Normal?
We have received a number of inquiries this month about the returns of late in spite of relatively low volatility. The basic assumption is that premiums are higher when volatility (think the VIX) is high, and premiums are low when the VIX is low. The conclusion, therefore, is that: in a low volatility environment, the monthly returns should not be as strong as they are. That sounds normal…but it doesn’t work out that way.
It turns out that the assumption that the markets are “normal” is just that…an assumption that is only generally true. It is the exceptions that provide the opportunity for traders like Horse Cove Partners to profit because we understand what’s not normal.
We just completed a review of the option premiums we have collected on a weekly basis over the past 5 ½ years. One would assume that if the markets are efficient, that expectations of higher volatility would translate directly into higher premiums. Described another way, all things being equal, at a given level of volatility and the same time to expiration, the premiums collected over time should be roughly equal.
Since we seek to sell options at a constant risk or probability target, and at roughly the same time to expiration, it would be normal to assume that with VIX at 14% the premium received this week, would be the same as the premium received a year or two ago selling with VIX at 14% and the same time to expiration. That is not the case.
With VIX between 14.00% and 14.99%, the range of premium we have received for selling puts one week to expiration has ranged from a low of $0.25 to a high of $1.70. With VIX in the 15% range, the spread has been from a low of $0.30 to a high of $1.40.
Options premiums include a component of fear and that translates into variation of pricing week to week. This is why Horse Cove Partners is rigorously focused on the risk and probability of the trade, rather than focusing primarily on return.
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 August 2018 were $148.2 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 the 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
Fiona Dyer
John Monahan
Michael Crissey
Don Trotter
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
gbrennan@horsecovepartners.com
fdyer@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 8.31.2018, 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.
This was prepared by Horse Cove Partners LLC a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Additional information about our firm is also available at www.adviserinfo.sec.gov. You can view the firm’s information on this website by searching by our firm name.
THIS MESSAGE AND ANY FILES TRANSMITTED WITH IT ARE CONFIDENTIAL AND PRIVILEGED. IF YOU ARE NOT THE INTENDED RECIPIENT, PLEASE NOTIFY THE SENDER IMMEDIATELY AT 1 (678) 905-5723. IF YOU ARE NOT THE NAMED ADDRESSEE YOU SHOULD NOT COPY OR DISCLOSE THE CONTENT OF THIS MESSAGE AND OF ANY FILES TRANSMITTED WITH IT TO ANY OTHER PERSON.
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.
This material has been prepared solely for informational purposes only. Strategies shown are speculative, involve a high degree of risk and are designed for sophisticated investors.
Past performance is not a guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value. The information herein was obtained from third-party sources. Horse Cove does not guarantee the accuracy or completeness of such information provided by third parties. All information is given as of the date indicated and believed to be reliable. Performance results are estimates pending a verification. The returns are based on the Investment Manager's strategy and the compilation of actual client account trades. The Horse Cove Absolute Return and IRA Return strategies seek to extract absolute returns from the market by trading short volatility option spreads. The Enhanced Yield strategy seeks to achieve a targeted return trading only puts with a high probability of success.
The strategies reflect the deduction of advisory fees and any other expenses that a client would have paid or actually paid. 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 the 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." Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Options 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 of 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.
