The August 31, 2019, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy is up 1.16% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +269.52% net of fees.
Market Recap and Commentary
S&P 500 Total Return for the month of August was down (1.58%).
The Dow Jones Industrial Average suffered its worst day of the year on Aug. 14 when the yield on the benchmark 10-year Treasury note broke below the 2-year rate--an odd bond market phenomenon that has historically preceded recessions. The “yield curve” has since repeatedly inverted, as the longer-term yields continue to fall on trade war fears.
Stocks also took a big hit on Friday, Aug. 23, 2019, after China struck back by slapping retaliatory tariffs on U.S. goods. https://www.cnbc.com/2019/08/26/lehman-like-drop-nomuras-masanari-takada-warns-it-could-happen-in-a-week.html
The first three trading sessions for August were negative. Over the month of August, we saw the three largest single-day declines of the year so far, and at one point the S&P 500 was down over 5% for the month. Easing trade fears and some relatively positive economic numbers combined with low summer volume pushed the market up to recover over half of that loss by month-end. Trading in a range between 2825 and 2940, and attempting to break those limits multiple times, August was a much more volatile month than its final month-end return suggests.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was up 1.16% net of fees in August.
The month of August is historically one of the most volatile of the year, and this month was no exception to that. There were 11 days where the S&P 500 Index changed +/- 1.0% in August. That was half of all the trading days. Contrast that with the 7 months from January through July, when there was a total of 19 days of similar movements or only 13% of the trading days. Included in these daily moves were three declines of at least (2.6%).
In August, 73% of the intra-day moves, as measured by the difference between the low and the high of each trading day, were 1% or more, versus the prior 7 months, where only 30% of the days had intra-day moves over 1%.
Volatility, as measured by the VIX, averaged 19.01% for the month, with an intra-day high on Aug. 5, 2019, hitting 24.81%.
This all led to a challenging environment for selling puts and calls.
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:
The Summer is Over
Will this rally end with it?
The longest market expansion on record continues. As we mentioned earlier, August was a highly volatile month with big swings in both directions. This is fairly common for August as the low “summer volumes” can be as little as 50-60% of normal. Low trading volume in an uneasy market with no shortage of breaking headlines can lead to these outsized swings. September is the only month, on average, that has worse returns compared with August, averaging down about 1% since 1937.
We still face the same headwinds that we have discussed for much of this year. Depending on the day, the China trade talks are going swimmingly and the deal is all but signed; or they are escalating and destroying the economy. Most European economies are struggling. If they’re not already in a full-blown recession. Money is still accumulating in negative-yielding debt (now $17 trillion), as investors are trading “safety” for “return.” A “hard exit” for the UK now appears inevitable. China’s economy also seems to be struggling as it digests the effects of the trade war. To top it all off, conflicts continue in the Middle East and Hong Kong.
The bond markets continue to point to a recession. Historically, the U.S. economy has begun to contract about 14 months after an inversion of the yield curve. We have had multiple inversions of short-term versus long-term yield so arguably the countdown may have begun.
The market is trading “all or nothing” on almost every headline. After the large decline on Friday the 14th, due to Trump and China’s comments on new tariffs, the S&P rallied the next three consecutive trading sessions due to what we now know was at least an exaggerated statement by the President that talks were resuming.
On the bright side….
According to a Friday analysis by LPL Financial, the past 15 times in which the S&P 500 lost ground in August were followed by positive returns for the rest of the year in every instance. https://lplresearch.com/2019/08/30/here-comes-the-worst-month-of-the-year/
We are, after all, heading into an election year, and no incumbent wants to run for re-election in the middle of a recession/bad market that could easily be laid at their feet. Despite the forecasts of a pending recession as predicted by the inverted yield curve and a growing global economic slowdown, the equity market and the corporate bond markets remain strong. The strength of the U.S. consumer has been very resilient, and so far, has outweighed the slowdown in U.S. manufacturing.
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 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 August 2019 were $89.36 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
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 8.31.2019, 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.
