Dynamic Option Strategy targets capital appreciation along with income generation by strategically selling options on the broad market index and large cap stocks. We seek to generate positive portfolio cash flow through careful risk management in all market environments.
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 approach similar to an insurance company in our investment strategy that focuses on probability of success and the management of risk.
All investments entail risk. Loss events do occur. However, there is an undeniable characteristic of investors (humans). We have an overwhelming fear of large loss and that translates into overpaying for “insurance”. Horse Cove makes money because at its core, that “insurance” is over-priced. There is a difference between implied volatility in the pricing of an option and the realized volatility at expiration. That difference cannot be arbitraged away. Horse Cove Partners profits by selling implied volatility and profits when realized volatility is less than implied as time decays.
As advisers, we understand that events will occur. “When” they will occur is the unknown. One of the keys to success is to take intelligent losses when those events occur and expect that the trading strategy will result in positive performance net of those losses over time.
We believe our success comes from focusing on the risk of each trade. By maintaining a weekly investment horizon and relying on over 60 years of history of market movement we believe it is possible to realize positive returns through option transactions, while maintaining acceptable risk limits.
We look to blend three primary factors:
1. Evaluation of the funds market price to net asset value (NAV) in the context of historical levels and current peer levels. We also try to answer the question. “Why is it different now?” are investors mad at the fund or some other short-term condition, or did the rules change in which we should evaluate the manager or sector?
2. How has the manager performed after cost or expenses? (NAV total return performance). How has he done vs. peer fund and similar indexes?
3. The third part of our analysis is looking at the funds sectors, CEF data and peer funds to see if they are delivering a distribution level that is more likely to be maintained or increased vs reduced.
We try to blend the asset allocation and manager research with the ability to seek CEF alpha, which is experiencing the narrowing of a CEF discount to NAV. Discounts can also help protect investors from expected market or fund news items. Discounts at a certain level draw in institutional and activist investors which can help support the stock price in many cases.
CEFA’s “Yield Animal” portfolio is a long-only focused and tactical portfolio of 6-12 liquid and publicly-traded business development companies (BDCs). There are over 50 BDCs from which to choose from for the portfolio. We believe BDCs are an attractive way to gain liquid exposure to private and small US companies. The sector typically has on average 74% 1st Lien and 2nd Lien Sr. Secured Loans and 72% Variable Loans (BDCUniverse.net 10/9/15). This makes them attractive to us for both a rising rate environments and historically for obtaining better protections than from an unsecured high yield portfolio. BDCs are closed-ended management companies created by congress in 1980 that are regulated by FINRA and The SEC. They report detailed data on all positions quarterly for investors. Daily BDC data available on our website: www.BDCuniverse.net.
Cable Car Capital invests globally in public companies. The firm screens public companies using an intensive, fundamental research process that seeks to identify mispriced securities using a value-oriented approach with a multi-year time horizon. Cable Car Capital capitalizes opportunistically on shorter-term or special situation (e.g. spinoffs, reorganizations, merger arbitrage) opportunities while maintaining a concentrated core portfolio of contrarian/out-of-favor but high-quality longs and over-hyped or mismanaged single-name shorts.
For non-U.S. public companies, Cable Car utilizes American Depository Receipts which are called ADRs. These are receipts of shares of foreign companies that trade on the U.S. stock market exchanges.
Sera Capital Management’s Financial Tales Portfolio is designed for investors, not speculators. This global tactical strategy invests in a mix of Exchange-Traded Products (ETPs), and seeks to potentially outperform inflation by 5% a year over multiple market cycles. We attempt to achieve that goal while taking on about half the risk of the S&P 500.