The October 31, 2016 month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is +0.83% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +264.46%.
Market Recap and Commentary
The S&P 500 Total Return Index lost -1.82% for the month, and is up 5.87% for the year.
The S&P 500 index continues to give back gains from the high reached in July. It is now down over 2% from its peak, and has many investors continuing to search for return.
We expect an interest rate raise by the Fed at its December meeting, well after the election.
Volatility, as measured by the (VIX) was on a bit of a roller coaster during the month. We opened at 13.75%, saw a low of 12.80% shortly thereafter, then a 30% rise to 16.69% midmonth. After that rise, the VIX fell -22% only to rebound and end the month at 17.06%.
Performance and Trading Update
For the month, the Horse Cove Absolute Return Strategy composite return was up 0.83%, compared with the S&P 500 Total Return Index that was down -1.82%. Year to date, the Strategy is up 15.78% compared to the S&P 500, up 5.87%.
Despite rising VIX during the month, premiums were light. The SPX index options market has inefficiencies in it and higher VIX does not always mean higher premiums. We received historically low premiums for the sale of options during one week, but as the election has drawn closer we are seeing premiums rise quickly.
Here are the returns for the composite portfolio margin accounts:
Reg. T Update
Here are the composite 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.
The Election Ahead
At Horse Cove Partners, we know better than trying to predict what the market is going to do. The execution of our strategy is grounded in statistical probability and is replicated weekly. The math behind our trading system is based on the weekly movement of the S&P 500 Index since 1950.
There are however, a few rare occasions when the market faces the digestion of something that it has not seen before (i.e. Brexit). At those times we make trading decisions, within our rules based system, to maximize profit while minimizing our exposure to risk.
The pending presidential election seems to present us with one of these moments. Much like the Brexit vote, there is a possibility that the polls have missed something. There are only two viable candidates and two possible likely outcomes, Clinton or Trump. We acknowledge that over the past 66 years there have been a lot of presidential elections, however we don’t recall one that has been filled with such colorful characters as we have this year.
There is a third possibility, this time around. Given what we have learned from Wikileaks, the FBI investigation, and the parties involved, it is possible that on Wednesday morning there is still not a president elect and the lawsuits are flying.
Our strategy for trading around the election on November 8, is to sell options that expire Wednesday November 9 and collect the premiums that are available. Those premiums include pricing for the above described risk. Our plan is to buy back the options (not let them expire) before the election results, with the expectation of being in cash when the votes are counted.
While we believe the markets have priced all of this in, there is an “art” to our strategy of profiting from the “science of taking risk”.
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 October 2016 were $34.45 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
Greg Brennan
John Monahan
Michael Crissey
Don Trotter
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
gbrennan@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 10.31.2016, 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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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.
Past Performance is not a guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value. The returns are based on the Investment Manager's strategy and not actual client accounts. The Horse Cove Absolute Return and IRA Return strategies seek to extract absolute returns from the market by trading short volatility option spreads. The strategies reflect the deduction of advisory fees and any other expenses that a client would have paid or actually paid. Model results do not represent actual trading and they may not reflect the impact that material economic and market factors might have had on the Portfolio Manager’s decision-making if the advisor were actually managing the clients' money. 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 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." Option 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 or 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.
