The June 30, 2019, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is down (6.65%) net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +260.38% net of fees.
Market Recap and Commentary
S&P 500 Total Return for the month of June was up 7.05%. This is now the longest US economic expansion in its entire history. The S&P hit a record high, posting its best June since 1955 and the Dow just had its best June since 1938. While the stock market hovers near record levels, investor sentiment for the future remains pessimistic. The fact is, with all the volatility, the S&P 500 is up only 2% over the last 17 months.
The bond market has flashed ALL of its recession signals. Despite a very strong jobs number for June, the market appears to be expecting a rate cut at the FED's next meeting in July.
“Actual corporate profits for all corporations peaked in the third quarter of 2018, according to the GDP report, at $2.321 trillion,” said Ned Davis of Ned Davis Research. “They fell to $2.311 trillion in the fourth quarter, and fell to $2.252 trillion in the first quarter of 2019.”
Yet the market continues to climb to all-time highs. It appears the massive amount of stock buybacks since the tax cut have helped buoy the market in spite of the earnings slowdown. U.S. companies bought back $4.7 trillion of their own shares from 2009 through 2018, according to S&P Dow Jones Indices.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was down 6.65% net of fees in June.
The rally in the first week of June in the S&P 500 was record-breaking. Our strategy, which is based on probability, counts on the market to not do something historically unusual. The trade suffered a loss in the call side this past month. Trading calls had added just over 4% of returns year to date before the June loss. Unfortunately, we gave that back. We continue to adjust our call writing in an effort to maximize the potential net return. We are implementing stop losses to cut short trades that work against us.
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 may be written versus the “regular” accounts that use Portfolio Margin. Over time, this may also 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:
Source: http://performance.morningstar.com/Performance/index-c/performance- return.action?t=XIUSA000MC
Bull Market...what's next?
It has been a quick march back to all-time highs on the back of a broken, cornered Federal Reserve Bank and the market’s love of “free money.” It looks like it's going to get “free-er.”
By most standard measures, we are officially in the longest expansion in history. Bull markets are typically defined as the period of time when the market is up over 20%, without a 20% or more decline from its high.
According to Yardeni Research Inc., since recovering from the Great Depression in 1932, we have seen 13 bull markets lasting, on average, for 62 months and resulting in an average increase for the S&P 500 of 178%. There were only two periods over 100 months - the roaring 90’s which lasted 113 months with a 417% gain and our current market which is at 123 months and a 336% gain.
There have been a few corrections (10%+ drops) since March of 2009 in the S&P 500, but no drop by more than 20%, though we have been very close more than once. March of 2009 is thus discussed by many as the start of the current bull run. With that perspective comes the idea that the bull is getting “long in the tooth” and the next bear market is just around the corner.
However, there are other schools of thought that offer an alternative perspective. In 2011, from its high on Oct. 4, the S&P 500 fell -21.6% intra-day. That is almost two years later than what many mark as the start of the bull market in 2009. In February 2016, there was a drop in the Russell 2000 of more than 25%. There is no reason why the S&P 500 is used as a benchmark to satisfy the definition of a “bull” or “bear” market - just one of many.
Ned Davis Research has developed its own definition that incorporates the DJIA and the Value Line Geometric Index. Using their version to measure, they conclude that the current bull market started in February 2016 and we are now currently at month 27. That is insignificant from the average of 25 months for the 37-bull markets since 1900.
If the bull market began in 2016 we are right in the middle of a bull market run, not at the end of a historically long one that may feel like it has to end any day.
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 2010. The firm is built on the strength of hedge fund trading expertise developed beginning in 2002.
Assets under management at the end of June 2019 were $100.63 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 a 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 6.30.2019, 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 assumes investors have been invested the entire time with no withdrawals. Individual account returns may vary depending on cash flows, the time period assets are invested, and restrictions placed on the account.
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 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.
