The month-end performance estimate as of March 31, 2015 for Horse Cove Partners Absolute Return Strategy is +2.43%, net of fees1. Since the inception of trading in December 2010, the strategy has achieved a total cumulative return of +188.98%.
Market Recap and Commentary
The S&P 500 had its second down month of the new year declining -1.58% of the month. This month’s decline coupled with the down January and up February has left the S&P 500 Total Return Index up less than 1% for the year.
Volatility took a mild roller coaster ride during the month. We began trading with the VIX at 13.90%, and it closed the month at 14.49%. In between, we saw two spikes up to highs of 17.19% on March 11 and March 26. The markets appear to be getting choppy, which could be a topping sign, and that is great for volatility.
We are still officially in a bull market. However, the early looks at the first quarter GDP and recent employment numbers miss have more investment commentators speculating that the bull is getting tired.
Performance and Trading Update
With the weekly bites at the volatility apple that the strategy provides, we had a solid month of trading. When we went to sell options for the end of the month, volatility was at its lowest point during the month. We made the decision to move out a couple of days and trade the quarter end option, expiring on March 31, 2015 rather than March 27, 2015. By doing so, we were able to let the options expire saving the cost to purchase them back to clear collateral. We were also able to pick up enough premium to take on the risk on the call side. Had we not, and only written the weekly expiration for the week ending March 27, we would have not sold calls. There was very minimal margin pressure during the month.
The Horse Cove Partners Absolute Return Strategy was listed as the #1 top performer in the Option category from BarclayHedge for the month of February.
We wrote puts and calls an average of 5.45% and 3.43% out of the money respectively. The non-correlation of the Horse Cove Absolute Return Strategy to the S&P 500 has been further magnified this month with the strategy now up over 10.5% for the year.
Here are the returns versus the S&P 500 total return index for 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.
Implied versus Realized Volatility
As humans, we all share a characteristic that we see play out in our everyday lives--that being the fear of a big loss. Amos Tversky and his collaborator Daniel Kahneman did some of the early work in behavioral economics trying to explain irrational human economic choices. Their work can be summarized by the saying, “the fear of loss is a greater motivator than the expectation for gain.” It is something that drives investor behavior.
In the options market, risk of loss or gain translates directly into volatility and in turn premium. When the expectation of risk is low, volatility is low, and option premiums are low. When the fear is high, volatility rises and so do option premiums.
However, the concept of fear of loss is a very important factor that affects the pricing of the options. The volatility that is perceived by the buyer of the option insurance is actually greater than the realized volatility. It is this spread or difference that is why the sellers of options have an “unfair advantage” in the transaction.
Historically, there is a persistent spread between implied volatility and realized volatility that is explained by the fear of loss. It is one of the reasons why buyers of options will pay premiums for options that have a 99.5% statistical probability of expiring worthless in a week. It is the selling of this difference that is one of the cornerstones that the Horse Cove Absolute Return Strategy is built upon.
As in the insurance business, the cost of the insurance is usually greater than the actual loss that is insured—which contributes to weekly returns most of the time for the Horse Cove Partners Absolute Return Strategy. When coupled with well-developed rules-based risk management, the seller of options can “take a market risk” and receive better than market returns.
Horse Cove Update
Barclay Hedge named Horse Cove Partners as the No. #1 performer in the Option category for the month of February. This makes four consecutive months that we have been recognized by Barclay Hedge as a top performer.
Total assets under management now exceed $15.7 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, and 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 3.31.2015, 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.
