The June 30, 2016 month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is 4.62% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +253.44%.
Market Recap and Commentary
The S&P 500 Total Return Index was up 0.26% for the month, and is up 3.84% for the year.
The S&P 500 Index went on a wild ride at the end of the month during the “Brexit” drama. The Brexit vote took place on June 23, and results announced very early in the morning on June 24. The week prior to the announcement of the result, the S&P 500 Index rose 1.69%. After the announcement, the market fell 80.75 points or (-3.82%) on Friday, and another 40.85 points to the low on Monday. Then the realization must have hit that Britain was still in the EU and would be for some period of time as negotiations took place. By the end of the month, the market had risen 107.18 points from the low or 5.38% to finish within 20 points of where the whole round-trip started.
Volatility, as measured by the (VIX), was below 14% as the month started then spiked to a high of 26.24% on June 24, closing the month out at 15.63%.
Performance and Trading Update
For the month, the Horse Cove Absolute Return Strategy composite return was up 4.62%, compared with the S&P 500 Total Return Index that was up 0.26%. Year to date, the Strategy is up 12.28% compared to the S&P 500 up 3.84%.
The Brexit vote created an interesting couple of weeks for the Strategy, because it reaffirmed a couple of things. First: we believe that we cannot predict what the market is going to do day to day, and we stood by our system. Second, is that by taking “intelligent losses” (or, in this case, capturing the majority of the profit in a trade and being out of the market) we can best maximize the total returns for our clients.
On June 16, we wrote options that expired on Friday, June 24. Because of the uncertainly around the Brexit vote, we received healthy premiums. We exited the put side, or downside of the trade, on Wednesday, June 22, at a nice profit. That left our clients with no downside exposure when the vote to leave the EU was announced, and the market fell on Friday.
This not only captured gains, but positioned us to write for the following week. We know from experience that the spreads on the options can get very wide when there is significant movement in the underlying index, even if there is very little time remaining in them. For that reason, we did not want to be squeezed on Friday, June 24, trying to clear collateral for options that expired that day, so we could write for the following week.
On Friday, June 24, we wrote options expiring on June 30 after the S&P 500 had already fallen about 50 points. We again received outsized premiums to do so. Because we sold options expiring on Thursday, June 30, versus Friday, July 1, we were able to let the options expire, savings an additional $0.10 to not have to clear the collateral.
Since the strategy is replicated weekly, and with a time horizon of a week, the strategy had multiple opportunities to digest moves in the market that occurred around the Brexit vote.
IRA Update
Here are the returns for the consolidated IRA 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.
Independence
Independence is in the air as we write our update for June. The British have voted for their independence by deciding to leave the European Union, and we just had a nice long weekend to celebrate the independence of the United States of America from Great Britain more than 200 years ago.
The Horse Cove Partners Absolute Return Strategy operates independent of most traditional investments. The strategy offers:
- A limited time horizon of a week with each trade
- Focus on probability where return is an output/result not a target
- Almost no correlation to traditional assets classes
- Outperformance of the broader stock indexes for the last 5 1/2 years
- Our clients absolute returns versus relative returns.
- An investment strategy that is rules-based and systematically executed
Traditional asset advisors and consultants have yet to whole heartedly endorse our strategy. It has been the independent investors who have seen the potential benefits of our strategy and granted us the opportunity to work for them.
We expect more volatility in the coming months, and believe that more investors will "declare their independence" from the returns and performance of traditional investments in stocks and bonds for alternatives more like Horse Cove Partners for a portion of their portfolios.
Please let us know how we can help you in attaining your financial "independence".
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 June 2016 were $25.96 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
John Monahan
Michael Crissey
Greg Hyde
Don Trotter
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
jmonahan@horsecovepartners.com
mcrissey@horsecovepartners.com
ghyde@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 6.30.2016, 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.
