The June 30, 2020, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy lost (3.55%) net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +198.42% net of fees.
Market Recap and Commentary
S&P 500 Total Return Index gained 1.99% in the month of June and the Index had the best quarterly gains since 1989.
The market continues to be driven by massive global government stimulus and liquidity that seems to have no limit. The S&P 500 is now trading at 23 times last year’s earnings, which most would expect to be lower this year. The occasional sharp drops caused by headlines show how much the fear is still there and appears to us as the “FOMO” traders are in with a hair-trigger ready to dump whenever this irrational market turns.
Economic news remains dismal, and the “positive” jobs reports that have led to sharp rises are riddled with inconsistencies and potential large statistical errors. Despite staring into the face of some of the worst data ever posted, investors need a place to put all the cash the FED is handing them. “Don’t fight the FED” is the prevailing reason we are approaching all-time highs in the market while our economy, our businesses, and our society face unprecedented headwinds.
In the end, we cannot predict what the market will do or when it will do it. Relying on history and probabilities, as we do in our trade, our expectation continues to be that this rally will fade, and we will see new lows soon. All actions by the government or central banks, just like medicine, come with side effects…eventually when they are overused to prevent a normal healthy reaction to the current environment, the cure becomes the disease.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was down (3.55%) net of fees.
Volatility continues in the stock market with 11 of the 22 trading days in June experiencing daily moves of the S&P 500 Index up/down of more than 1%. The largest daily move occurred on June 11, 2020, when the market declined (5.89%). Source: Investing.com.
In spite of the three-day decline, the S&P 500 Index posted another positive month during the pandemic and the best quarter in over 20 years. Source: Bloomberg. Most of the attention is on the call side with call buying premium at significantly elevated levels compared to put premium. Adjusting to this reality, we are selling more premium on the call side.
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:
Source: http://performance.morningstar.com/Performance/index-c/performance-return.action?t=XIUSA000MC
Unprecedented
There is no question that we are all working our way through something unprecedented.
First: the job statistics being produced are an excellent example of this. In June the two measures of the labor market diverged dramatically with a 1.35 million increase in new jobless claimants occurring at the same time as the BLS reported an increase of 4.8 million jobs in the U.S. economy, lowering the unemployment rate to 11.1%. Source: https://www.bls.gov/news.release/empsit.nr0.htm
As Jesse Felder points out, rather shockingly, echoing the thoughts of most rational Americans:
"This might be the craziest thing I’ve ever seen in my stock market career.”
“It’s like nothing I’ve ever seen (or anyone else has ever seen, for that matter). Typically, when recession hits and unemployment rises dramatically it’s not good for the stock market as both revenues and earnings take a hit. In the past, the trends in continued jobless claims and stocks had a negative correlation, meaning that when the former rose the latter fell. Over the past few months, however, we have seen both rise strongly in tandem.”
Source: TheFelderReport.com
Next: a quick check over at https://www.usdebtclock.org/ estimates that the U.S. workforce is now 137.4 million. They estimate that the official unemployed is 21.47 million giving us an unemployment rate of 15.6%. They estimate the actual unemployed is 33.26 million, which would put the unemployment rate at around 24.2%--more than double the “official” rate.
Finally, if you wander over to the Department of Labor, https://www.dol.gov/ui/data.pdf they note that for the week ended June 13, 2020, the number of persons claiming Unemployment Insurance from all sources (unadjusted) was 31.49 million. Using their own base of 145.671 million as the total covered employment we are at 21.6% unemployment rate.
Against that backdrop, the S&P 500 had its best quarter in decades and is trading at 23 times over last year’s earnings in an economy with “actual” unemployment at levels greater than the Great Depression.
This is all quite extraordinary.
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 the 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 June 2020 were $23.72 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
Don Trotter
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
gbrennan@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 6.30.2020, 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.
