The January 31, 2018, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is 2.59% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +330.70%.
Total assets under management as of January 31, 2018 - $137.3 million.
Market Recap and Commentary
S&P 500 Total Return for the month of January was up 5.73%. This marks the 15th consecutive positive month for the index, as tax cut momentum continues.
The start of 2018 seemed to be chock full of more of the same. New all-time highs as the S&P 500 sailed through 2800, continued strength from a business-friendly administration and positive forward-looking statements from many corporations due to the tax cut.
One interesting divergence from 2017 has been the steady rise of VIX over the month, starting in the low 9’s and moving to well over 14 by the end of the month. January saw more dramatic swings in the market than we have been accustomed to and not all of them were up!
Performance and Trading Update
The Horse Cove Partners Absolute Return Strategy composite was down (2.59%) net of fees in January.
January was a challenging month for the strategy. Due to market and economic conditions, we did not sell calls for the first few trades because the risk/reward was not there. During the second and third weeks, we returned to selling calls and puts. The rally accelerated and so faced pressure on the calls in all but one expiration. We made the decision to take intelligent losses on these positions to avoid the possibility of them running away from us. This led to our small loss for the month.
We continue to write at an 80-point spread to the Monday, Wednesday, and Friday expirations.
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 Income Update
Here are the composite net returns for the HCP Income Strategy for the periods indicated:
Recap
January 2018 saw the Strategy post the first significant loss since December of 2016. Realizing that our significant growth in assets over the past year now has us working for many new clients that have not seen the downside of this trade since they invested, we feel it is appropriate to review.
First off, let us once again be clear. We cannot predict what the market is going to do. Since we cannot predict with any accuracy what the market is going to do, we, therefore, cannot predict whether selling puts or calls in any given week will result 7 days later in a profitable or a losing trade.
Second, it is implied that selling options will sometimes result in losses. There would be no market for buyers of options if every time they bought them, they never paid off. That does not mean it’s a fifty-fifty proposition. The fear that something unusual will happen fuels, to a degree, the irrational pricing of options in a market where implied volatility is almost always higher than realized over time. It is the “almost” that allows us to profitably sell options expiring in 7 days that have only a very small likelihood of paying off to the buyer. But that is not guaranteed. There are simply times when the trade does not work and will result in a loss.
Third, we believe that taking measured, “intelligent losses” from time to time and preserving the portfolio to the greatest extent possible will result, over time, in a profitable trading strategy. We believe that by taking those losses we can to the greatest extent possible attempt to avoid a catastrophic loss.
Our trading strategy was built assuming the above. Rather than attempting to predict where the market is going, we take a consistent risk approach each week accepting what the market gives us in premium for that risk. Some weeks it is $0.35 and others it is $1.00. It benefits the strategy that pricing is not rational for the same assumed risk level.
We want to take as small a bite as we can at the market, knowing that if the market moves in a historically consistent way, most of the daily movement up and down will be activity “between the 40s” (in football language) and allow us to keep the premiums we collected. The last week of trading in January was a good example of that. For options expiring on Wednesday, January 31, 2018, we sold puts and calls with the S&P 500 index at 2842. On Friday the market rallied 33 points higher. On Monday it declined about 20 points and on Tuesday it declined 30 points. All told after 6 days (4 trading days) the market moved a total of 15 points lower. Each day taken of itself was impressive, but in perspective, not much really happened with a total cumulative decline of just 0.53% for the week.
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 January 2018 were $137.3 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 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 1.31.2018, 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.
