The October 31, 2019, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is up 0.75% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +279.74% net of fees.
Market Recap and Commentary
S&P 500 Total Return for the month of October was up 2.17%.
October was a good month for the S&P 500, with many headlines pushing the index to fresh all-time highs. The Federal Reserve Bank cut interest rates for the third time in as many months to a range of 1.5% to 1.75%. This action was taken while US growth and jobs remained strong but against the backdrop of growing concerns of a global slowdown. The rate cut was followed by a very strong jobs report for October and upward revisions for September and August. This was a surprise to the market which was expecting a lower number due to the GM strike. Coupled with apparent progress on “phase 1” of the China trade deal and the $261 billion increase in the Fed balance sheet from “not QE,” the rate cut carried the S&P to an all-time closing high on October 28, the 14th record high this year.
Apparently, these headlines were enough fodder to allow investors to continue to ignore the chaos in the REPO market, massive negative-yielding debt, and collapse in manufacturing.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was up 0.75% net of fees in October.
October was obviously not one of our strongest months gathering premiums from trading, but as the market stampedes to all-time highs and VIX evaporates, the premiums on the short-term put options that we sell tend to move to the call side of the trade. The potential for a melt-up in the market before its eventual decline has kept us from going fully back into the call trade.
We continue to be cautious taking positions in the current environment.
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 than in 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:
Over Time, Not All the Time
As we look out towards the end of the year and the 10 months past, we pause to reflect on the impressive numbers the S&P 500 Index is putting up year-to-date and make some notes. The S&P 500 Total Return Index is up over 23% year-to-date (more than double its long-term average) versus the HCP Absolute Return Strategy which is up just over 11%. Is something broken?
As we have mentioned many times this year, we believe this is a transitional market. Growth is slowing all over the world and central banks are acting aggressively in hopes of pushing the can a little further down the road. This type of cycle usually ends with a melt-up, where fear of missing out, irrational exuberance, or just simple overconfidence in the Federal Reserve Bank’s ability to manipulate the economy can cause the market to rally in the face of logic.
There are plenty of data points on either side of where the market is headed. Typically, when everyone is on the same side of a trade the opposite happens. The current ratio of puts to calls has not been skewed to the call side since 1999. We cannot tell you where the market will be next month, but there are a few things to consider:
- Growth is slowing, most recently lowering to 1.9% versus 3% expected.
- The Federal Reserve Bank (and other central banks) are acting to lower rates to stimulate the economy and all the while reports are that the economy is strong.
- Global interest rates remain at historic lows.
- Consumers carry the US economy, and yet average incomes, adjusted for inflation, have not risen for decades.
- Trade wars and tariffs are like a stone thrown in a pond, and the ripples are generally wide-reaching, long-lasting, and disturbing.
- The ISM print under 50 is a clear warning sign of a contraction.
Most importantly, none of these things typically happen when the economy is in a good place.
We don’t know when the market will turn from this resilient bull, but all things return to the mean. That would presage a lower S&P, a higher VIX, and strong returns for HCP.
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 October 2019 were $100.70 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 10.31.2019, 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 20% incentive 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 for 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.
