The April 30, 2018, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is +3.59% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +284.17%.
Total assets under management as of April 30, 2018 - $124.8 million.
Market Recap and Commentary
S&P 500 Total Return for the month of April was up 0.38%.
Markets have remained choppy throughout April; and as you can see by our returns for the month, it continues to be a solid environment for our trade. The S&P 500 remains uncommitted to a direction, posting 1%+ moves in both directions from day to day - often on the same day. 2018 is proving to be the polar opposite of the quiet enjoyed by many investors in 2017. It appears that the strong earnings reported this month, along with the administration’s fiscal stimulus (tax cuts, reduced regulations) have been offset by geopolitical tensions, rising commodity prices, tariff talk, and whipsaw corrections. Inflation or rising interest rates typically weigh heavy on investor sentiment. As rates rise, the trillions of dollars of debt tied to those rates become more expensive, tying up a great deal more capital to the service of that debt.
Volatility, as measured by the VIX, fell 24% in April and appears to be trading in the 15-18% range. Even though the S&P 500 continues to have violent swings in both directions, those swings have remained between the goalposts, thereby calming investors fears of the rare outlier move.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was up 3.59% net of fees in April.
April was a good month for the strategy, as we were able to collect relatively larger premiums while writing further away from the market. We continue to be extremely selective about when we put on the call side of the trade, writing them only twice out of 25 opportunities in April. One of those times, we were forced to cover the position at a loss, although the week remained positive.
The Enhanced Yield strategy had a flawless April, with no pressure on any of the positions. The lower targeted return typically allows us to be further away from the market than the regular strategy, with no calls written and no weekend risk.
VIX started the month in the 20’s and finished just over 15. We wrote at an average VIX of 18.34%. Although this is lower than both February and March, it is still double what we were facing in 2017 and continues to be a ripe environment for our trade.
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:
Volatility
Higher volatility appears to have returned to the market, which is good for our strategy. The CBOE Volatility Index (VIX) is an index that attempts to show the market’s expectation of volatility over the next 30 days. It is often referred to as “the investor fear gauge.”
In 2017 we saw a period of unusually low volatility. The average daily move in the S&P 500 Index in 2017 was 0.40%. In 2017, the average closing VIX was 11.09%. In 2018, through April 30 the average closing VIX was 17.58%. That is a significant change in volatility that we expect will continue for an extended period of time.
The average “bull” market in the U.S. lasts 61 months. The current bull market is the second longest in history, running for 106 months. As markets top, we would expect volatility to increase as sentiment shifts from “buy the dip” to the exits. As tension grows between market participants expecting more gains and those seeking to hold their gains and avoid losses, those emotions and perceptions add to the dynamic nature of gains and losses. This, in turn, increases volatility as the “fear” of the end grows.
Emotion drives a big portion of option pricing. Higher volatility generally results in higher premiums for the same risk. The Horse Cove Absolute Return strategies are built to systematically take advantage of those market dynamics without the need to accurately predict whether the market will continue to march higher or to begin the transition to a full-on bear market.
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 April 2018 were $124.8 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 4.30.2018, 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.
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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.
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.
