The July 31, 2018, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is +2.29% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +308.40%.
Total assets under management as of July 31, 2018 - $143.4 million.
Market Recap and Commentary
S&P 500 Total Return for the month of July was up 3.72%.
July was a good month for the markets and for Horse Cove Partners. Investors have remained focused on positive earnings and jobs reports and continue to shrug off concerns of inflation, tariffs, and global political conflict. Technology was a drag this month for the first time in a long time, as it appears the leaders (FAANG) are simply running out of people to maintain their astronomical growth rates--Apple being the exception--making history as the first company to achieve 1 trillion-dollar valuation. As we steadily climb back to the all-time highs from January of this year, it is worth noting that we are approaching the 10-year anniversary of the Lehman Brothers collapse and subsequent market turmoil. We are also within a few weeks of being the longest bull market in history (so long as the S&P fails to decline at least 20 percent from a high following at least a 20 percent gain, a bull market is considered ongoing). This does, however, ignore the 15%+ declines in 2010 and 2011 and the downturn in 2015-2016.
All that being said, the S&P has posted five straight weeks of gains, indicating that the U.S. stock market’s momentum remained largely unhindered in spite of recent volatility.
Volatility continued to remain somewhat muted in July, spending all but the first week under 15 and posting an average close of 13.15.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was up 2.29% net of fees in July.
July was a solid month for Horse Cove Partners and the strategy continues to demonstrate its effectiveness. As expected, the VIX has drifted down from the spike in February but continues to post higher averages than we were seeing prior to the spike. We are still writing further OTM than we did most of 2017, on average over 5% on the put side of the trade. We maintain trading in the three expirations each week and continue to split the daily trade only when reasonable.
We wrote calls more often this month, taking defensive action once in an “artful” decision to take the risk off for a small loss. The call trade overall was profitable for the month and we expect to continue to use it strategically.
The Enhanced Yield had no pressure on any positions in July.
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:
Headwinds
The stock market continues to run higher. How long can it go? We don’t have any idea. We are in the second longest bull market run in history. But that doesn’t mean it is going to be over soon. The fact that it is the second longest run still leaves room for a run higher, before the inevitable “reversion to the mean.”
As we have noted in recent months, there are signs to be watchful of headwinds. First: the yield curve may be offering some clues. When the interest rate on long-term US Treasuries is lower than the yield on short-term instruments, the yield curve is said to have “inverted.”
At the start of 2018, the yield on a 2-year US Treasury was 1.92% compared with the 30-year yield at 2.81% - a spread of 0.89%. On July 31, the 2-year yield was 2.67% compared with the 30-year yield at 3.08% - a spread of 0.41%. Source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2018
Why is that important? Because all nine of the last recessions since 1955, were preceded by a yield curve inversion. History shows that a recession has followed, on average, 16 months after an inversion.
Second: debt and interest rates. Total US Debt to GDP has risen to nearly 350% with total US debt standing at $70.86 trillion, compared with GDP of $20.45 trillion. The US official debt is $21.31 trillion, http://www.usdebtclock.org/ not counting unfunded benefits promised to be paid in the future. As interest rates rise, all of this debt is going to need to be refinanced, and at higher rates.
The Federal Reserve is committed to 2 more rate hikes this year.
Third: inflation. The Federal Reserve has announced that they have an inflation target of 2% per year. The Fed needs inflation to pay for all that debt and future spending with cheaper dollars. Inflation is the tool to achieve that.
Unfortunately, over time, the loss of purchasing power from inflation is one of the greatest wealth stealers. Just look to Venezuela, where 8 years ago, 10 bolivars could buy $1 USD. Today, it is estimated to take 3 million bolivars to buy $1 USD.
There will be a reversion to the mean and the market is going to correct. (Unless you believe this time it is different.) We believe our absolute return strategy, which can profit in rising or declining markets, is going to be a place to be invested as headwinds lead to the inevitable drag on the economy and the markets.
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 July 2018 were $143.40 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 7.31.2018, 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.
