The May 31, 2020, month-end performance estimate for the Horse Cove Partners Absolute Return Strategy gained 1.27% net of fees1. Since the December 2010 inception of trading, the Strategy has achieved a total cumulative return of +205.53% net of fees.
Market Recap and Commentary
S&P 500 Total Return Index gained 4.76% in the month of May, as global markets continue to ignore the accumulating “ever” numbers stacking up against the economy. “Ever” is a long time.
Bulls rationalize the massive disconnect between markets and economies by siding with the ever-increasing global FED intervention and seemingly limitless liquidity. In the past, this has been a recipe for disaster, see “A History of the United States in Five Crashes” by Scott Nations.
The Business Cycle Dating Committee of the National Bureau of Economic Research, which maintains a chronology of the peaks and troughs in economic activity in the United States, has determined that a peak in monthly economic activity occurred in the U.S. economy in February 2020. The peak marks the end of the expansion that began in June 2009 and the beginning of a recession. The expansion lasted 128 months.
While the job gains in the latest report were a huge surprise to the upside (with admitted errors), it is still a fraction of the jobs that were lost and the economic activity that cannot be replaced. Over 43 million people filed for unemployment in the last 10 weeks, and even if the most recent number is not revised, there is a long way to go.
The rally from the bottom in March has been manic, with the S&P 500 posting its best 50-day period ever. When small investors are crashing major discount brokers websites, scrambling to buy whatever they can, companies openly in bankruptcy--like Hertz--can shoot up over 100% in a day, and small-lot call purchases are at all-time highs…everything looks “easy.” In our opinion, that’s the time to be cautious. It's frustrating to watch, as reckless traders are rewarded by a FED with an unlimited budget and cautious investors look stupid for holding back. History has proven that someone always gets left holding the bag and that bear markets like to inflict the most pain unto the most people.
In summary, market performance continues to dramatically diverge from economic and market data. Economies that were showing signs of weakness before anyone even heard of Covdid-19 have not gotten any better, and in the U.S., the major indexes continue to be driven by a small number of companies.
Performance and Trading Update
Horse Cove Partners Absolute Return Strategy composite was up 1.27% net of fees.
The rally off the lows continues as the bottom of the FED’s wallet has not been revealed. We continue to trade cautiously and look forward to the CBOE opening the floor on Monday, June 15.
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
"This is easy!"
Barstool's Dave "I am the world's greatest day trader" Portnoy offers some insights from his experience "trading" stocks in recent weeks:
- "Buffett is an idiot."
- "All I do is make money… Literally the easiest game I've ever played. All I do is print money."
- “I should be up a billion dollars.”
Source: Zerohedge.com
Mania and loose monetary policy can drive markets for only so long. So far, it has done so longer than we expected.
We have all been watching the news, seen the images from our major cities, heard the stories of people hurting from losing their jobs, losing their businesses, and seen our own activities and consumption take a major decline for a few months.
The World Bank is calling this a deep global recession. It is the worst U.S. economic downturn since the 1930s and the most civil unrest since 1968. Estimates are that the U.S. GDP will decline by 50% in the second quarter of 2020. 43 million unemployment claims have been filed in less than 3 months. It is estimated that there is at least a 45% default/nonpayment rate in commercial real estate and over 5 million mortgages in the U.S. are in forbearance.
Yet the S&P 500 is almost positive year to date.
We are all witness to something extraordinary and frustrating.
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 May 2020 were $26.14 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
Michael Crissey
Don Trotter
sdekinder@horsecovepartners.com
kellis@horsecovepartners.com
gbrennan@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 5.31.2020, 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.
