The month-end performance estimate as of August 31, 2014 for Horse Cove Partners Absolute Return Strategy is +4.36%, net of fees1. For 2014 year to date, the strategy return is +13.46%, and since the inception of trading in December 2010, the strategy has achieved a total cumulative return of +161.44%.
Market Recap and Commentary
We began August with some increased volatility and a small pullback in the S&P 500 as the market awaited the next decision by the Federal Reserve. The news from Jackson Hole and the FOMC was dovish again. Market expectations that the Federal Reserve would start tightening proved to be misguided. This immediately led to a strengthening of the market rising to new highs and a lowering of volatility.
On one level, the “experts” seem to be saying that the Fed is fueling a bubble, implying that when the Fed starts tightening, the market will correct down. On the other hand, there are just as many “experts” that point to a strengthening economy. They argue this will lead to a stock market that will continue to rise to new highs.
There is enough ammunition on both sides. Depending on what you are looking for, you can find it supported with charts and statistics in the financial blogs. Fortunately, we are agnostic when it comes to predicting the direction of the market. While it all makes for interesting reading, we are not smart enough to predict who is right and go about our process while Russia is or is not invading Ukraine, ISIL is running rampant, and Ebola cases are turning parabolic.
Things are business as usual.
Performance and Trading Update
We started the month of August trading with the VIX at what turned out to be the highs for the month. This translated nicely into captured premium the first two weeks of the month. The VIX declined through the month from a peak of 17.57, to close the month at 12.25. That is a 30% decline in indicated volatility over the course of the month. The low for the month was on August 25, 2014 at 11.24.
The month provided us with 4 opportunities to write put and call contracts, with a little mark to market at the end of the month and some carry over from July. During August, we sold puts at an average of 5.715% out of the money and calls at 2.8%; both of which are farther out than last month.
Here are the returns versus the S&P 500 total return index for the periods indicated:
The Horse Cove Absolute Return Strategy continues to deliver long term returns that beat the S&P 500.
Net of fees. S&P 500 Net Total returns. www.spdji.com
Mathematical Expectancy
What is the mathematical expectancy of this investment? It is a question we never thought to ask. In over 30 years of investing, I have never heard a broker tell me the probability prior to making an investment. But--it is a legitimate question that should be considered.
In the category of quantitative evaluation measurements, the financial industry sometimes uses “expected return” which is the estimate of the probable returns an investment may yield. To determine the expected return of an investment, you assign a probability to each return that the investment is likely to earn, then multiply the return by the probability of it occurring.
For example, if an investment has a 30% probability of returning 15% and a 70% chance of returning 10%, the total expected return would be (.30 x 15%) = 4.5% + (.70 x 10%) = 7.0% or 4.5% + 7.0% = 11.5%
As you can imagine, when evaluating an investment this way, the key is correctly assigning the probability of the returns, and those assumptions would have a greater margin for error, the longer in time you looked. For those reasons, this methodology is rarely used.
At its core, the beauty of the Horse Cove strategy is an investment process focused on risk, defined as the probability of an option position being exercised or going “in-the-money” in one week’s time. Probability can be directly assigned by looking at the historical movement of the S&P 500 market over decades of time, then calculating it for one week. Our options positions are determined by the probability and time, not price or return. In our case, return is an output or residual. It is not considered in the equation.
This is a subtle, but huge difference in investment methodology. In an industry focused on returns, making decisions based on risk is foreign. But when mastered, is a powerful return generating strategy.
Horse Cove Update
We feel very fortunate that during this quarter, four new clients have selected Horse Cove Partners to manage their assets. Two existing clients also added significant assets to their accounts. The total assets under management now exceed $8 million in the Horse Cove Absolute Return strategy. As a firm, including assets under management in our affiliated firm, we are currently responsible for $14.5 million of assets.
We value each of our clients and the assets they have entrusted to us in our strategy and will continue to pursue attractive returns on their behalf.
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 client’s 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
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
jmonahan@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 as of 8.31.2014, 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.
