The September 30, 2018, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is +2.06% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +326.69%.
Total assets under management as of September 30, 2018 - $149.91 million.
Market Recap and Commentary
S&P 500 Total Return for the month of September was up 0.57%.
September was a strong month for HCP as the markets continued to climb higher. In spite of recording new highs in the S&P 500 (as well as the Nasdaq and DJIA) and an absolute daily change of less than 0.24% for September and just 0.4% for the last 50 trading days, VIX has managed to stay away from the extremely low levels recorded in 2017. The S&P closed at a record high on September 20th, which did not retest for the remainder of the month. The VIX remains up 8% for 2018.
There is no denying that things have calmed down dramatically since February’s historic spike in VIX, with the second half of the year posting no 1% moves in the S&P compared with 36 such closes in the first half. Since 1990, there have only been three other years where the S&P has gone longer than the current 64 trading days without a 1% move: 1993, 1995 and 2017. The S&P 500 is trading at a forward P/E multiple of 16.9x. This is based on the recently raised consensus earnings estimates of $172.83 per share for the next 12-months (Source: Bespoke).
Investors remained focused on positive economic data and seemed to ignore the Feds’ September rate hike. GDP continues to climb, as well as wages and jobs, while inflation has remained steady and the FED appears committed to staying on track with its rate hikes. The next hike is expected in December. In addition, one of the two looming potential trade conflicts that had been weighing on the market appears to have been resolved as President Trump has announced a new and improved “NAFTA”. We would expect the good news from this administration to keep flowing through October as they try to create positive momentum for Republicans in the upcoming midterms.
There are a few things however that seem to oppose this rally. On-balance volume, a measure of stock-market momentum based around volume flow, was lower than its 21-day moving average for the end of September(Source: Bespoke). Typically, when markets are rallying and the news is all good, enthusiasm is increasing. We have already noted the divergence of VIX from the highs being set by the S&P, and that continues. Another divergence popped up in September; while the S&P 500 posted a 0.57% gain, the S&P SmallCap 600 lost 3.3%. This wide of a spread between the returns is very rare historically, and even more so when they are moving in different directions (one up/one down). Last, but definitely not least, are the massive inflows to short-term and ultra-short-term fixed income funds. Some of this can be attributed to bond investors’ fear of getting caught in the rising rate trap. The remainder appears to be equity investors looking to flee a potential drop from these all-time highs.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was up 2.06% net of fees in September.
September continued our streak of solid returns with little to no pressure on the fringes where we write. All positions proved profitable and were closed as planned. The higher average level of VIX has continued to work in our favor, and we have noticed a slow, steady climb in the average premium we are receiving. We continue to write the call spread selectively, resulting in and it proved to add value in September.
Enhanced Yield was up .75%, faced no pressure in September and continues to perform as expected, and outperform the Barclay’s US Aggregate Total Return Bond Index.
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 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.
HC Enhanced Yield Update
Here are the composite net returns for the Enhanced Yield Strategy for the periods indicated:
More Volatility Ahead?
The fall is a time of increased market volatility. Since 1929, September, October and November historically see more market movement and increased volatility than other months before everyone’s attention turns to the holidays and volatility wanes.
October has the distinction of being the most volatile month.
https://seekingalpha.com/article/4111224-volatile-month-year
However, if one considers the effect the years 1929,1987 and 2008 have on the average, the volatility of October falls in line with other months. In the first 5 trading days of October, we have seen more market movement after a relatively quiet summer.
In spite of the historical volatility, October has the highest average monthly returns over the last 20 years, up to an average of 2.5%. Source: Bespoke.
Options premiums are tied to volatility and fear. As the sellers of options, this may translate into a favorable environment for our strategy.
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 September 2018 were $149.91 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 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 9.30.2018, 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.
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.
THIS MESSAGE AND ANY FILES TRANSMITTED WITH IT ARE CONFIDENTIAL AND PRIVILEGED. IF YOU ARE NOT THE INTENDED RECIPIENT, PLEASE NOTIFY THE SENDER IMMEDIATELY AT 1 (678) 905-5723. IF YOU ARE NOT THE NAMED ADDRESSEE YOU SHOULD NOT COPY OR DISCLOSE THE CONTENT OF THIS MESSAGE AND OF ANY FILES TRANSMITTED WITH IT TO ANY OTHER PERSON.
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.
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.
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.
