The month-end performance estimate, as of January 31, 2016 for the Horse Cove Partners Absolute Return Strategy is 4.35%, net of fees1. Since the inception of trading in December 2010, the Strategy has achieved a total cumulative return of +228.47%.
Market Recap and Commentary
The S&P 500 Total Return Index declined (-4.96%) for the month.
The first five trading days of January were the worst start in January for the market in modern history (since 1927). At its worst, the S&P 500 index lost 11.08% before rallying at the end of the month. Since its peak at 2,134.28 in May of last year, the S&P 500 closed January down just over -9.0%.
It is interesting to note the range of daily moves in the market during this past month. Of the 19 trading days in the month, 12 of them had moves from open to close of +/- 1% or more. 18 of 19 days had moves from inter-day high to inter-day low of more than +/- 1% with an average of 2.20%. This translated directly into more volatility with the VIX spending almost the entire month above its historical average of 20%. The peak of volatility was 32.09% in January.
January is typically considered a barometer for the market for the upcoming year. As we noted last month, “as goes January so goes the year”. According to the Stock Trader’s Almanac “every down January in the S&P 500 since 1950, without exception, has preceded a new or extended bear market, a flat market or a 10% correction”. Given January’s start and history, 2016 may prove challenging for the buy and hold investor.
Performance and Trading Update
For the month, the Horse Cove Absolute Return Strategy composite returns were up 4.35 % compared to the S&P 500 Total Return Index, that was down (4.96%).
The first week of the month saw significant pressure on the put side of the trade. We were able to close out our positions at essentially breakeven. The balance of the month was relatively calm for the strategy as higher volatility translated into writing farther out of the money than we would have done with the VIX below 20%, and receiving fairly nice premiums.
IRA Update
Here are the returns for the consolidated IRA accounts for the periods indicated:
Because of the differences in margin requirements, we trade our IRA group of accounts first, before trading our regular accounts listed above. (We must, for example, buy back all short positions each week in the IRA group to clear collateral to write for the next week. We don’t have to do that in the regular group). Timing differences, whether a day or a few minutes, can make a difference in the performance of the two groups. Over time, we expect that the returns of the IRA group will be roughly 70% of the regular group. In 2015, that was not the case, as timing differences helped the IRA group significantly over the course of the year--especially in August of 2015. For 2015, the IRA group earned approximately 90% of the returns of the regular accounts. In the start of 2016 however, those timing differences went the other way accounting for the difference in the returns between the two groups.
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.
The Search for Returns in a Zero Interest Rate World
We are now at an interesting time in the world of investing with many governments now offering negative interest rates on “safe” investments. The Bank of Japan was one of the latest, cutting its key rate to -0.1%. You lend $100,000 and get $99,000 back. The Eurozone’s key rate is -0.3%...in Switzerland it’s -1.1%. Governments are attempting to stimulate their economies by forcing investors into markets or to deploy their savings versus losing money by depositing it. So far, the strategy does not appear to be working.
As we discussed above and in previous newsletters, the prospects for the coming year(s) are not looking too good for real returns. Since the bottom of the last bear market in April of 2009, being invested in the stock market produced positive returns until last year. Despite the fact that higher returns could be produced elsewhere, getting something was “ok” on a relative basis and most conventional investment managers did satisfy that requirement.
We met with one such manager a few months back. Their investment decisions have lost money for the last couple of years, and the start of 2016 has likely been no kinder to their clients. They are selling relative performance which is fine when the markets are up. But a firm with a room full of Chartered Financial Analysts could not offer a plan on how to outperform the market once the inevitable correction occurred.
As alternative investment managers we believe you need to have:
- A workable plan set out in advance.
- A plan that can be replicated with as little emotion as possible; and
- A trading strategy that is replicated with discipline.
Our strategy fulfills those three requirements and has produced positive absolute returns for the past five years. We also offer clients the possibility of performing in a bear market, something conventional equity managers cannot do. Our strategy has virtually no correlation to the equity markets. The buy and hold investor could be in for a painful number of years before their portfolios recover losses and produce positive gains again.
In the search for returns in a negative interest rate world, it is time to look at the unconventional. History has shown us time and again what conventional results are achieved by “relative performers” when bear markets occur. And they do and will occur. Our disciplined option strategy, grounded in statistical probability that is replicated weekly is unconventional. But it has a good chance of delivering absolute returns as the markets weaken and conventional managers are left trying to explain how negative performance was relatively “ok” given what the markets did.
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 2016 were $20.224 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 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
Michael Crissey
Greg Hyde
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
jmonahan@horsecovepartners.com
mcrissey@horsecovepartners.com
ghyde@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 1.31.2016, 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.
