Category Archives : About

2018 Letters

Cable Car published its Spring 2018 letter earlier this year. The Summer 2018 letter sent to clients today references a private securities offering and is available along with further details upon request.

Cable Car is no longer soliciting separate account clients and is in the process of converting to a hedge fund.

Please view important disclosures regarding performance reporting.


Is your high water mark net or gross of fees?

Cable Car does not deduct previously earned incentive fees from the high water mark. Most of the industry does.

A few recent conversations with current and prospective clients reminded me to clarify one area in which Cable Car’s standard fee structure is differentiated in favor of clients. Cable Car already offers qualified and non-US clients an unusually aligned fee model, with no management fee and a 30% incentive fee. This performance-based fee is typically crystallized quarterly, subject to a high water mark of previous performance.

The way in which the high water mark is calculated can have a material impact on the net returns received by clients. For example, suppose a $100,000 investment had gross returns of 20% during a period, for a gross account value of $120,000. After deducting a 30% incentive fee, the client’s net return would be 14%, for a balance of $114,000.

In this example, Cable Car’s high water mark for future periods would be $120,000, the gross amount before fees. By contrast, many hedge funds calculate the high water mark only after deducting the performance fee. The high water mark for these funds would be $114,000.

Cable Car Calculation Example

Period Starting Value Gross Return Fee Ending Value New HWM
1 100,000 20,000 6,000 114,000 120,000
2 114,000 2,000 - 116,000 120,000
3 116,000 (10,000) - 106,000 120,000
4 106,000 24,000 3,000 127,000 130,000

Industry Standard Example

Period Starting Value Gross Return Fee Ending Value New HWM
1 100,000 20,000 6,000 114,000 114,000
2 114,000 2,000 600 115,400 115,400
3  115,400  (10,000) - 105,400 115,400
4 105,400 24,000 4,200 125,200 125,200

With the same $36,000 in gross returns over 4 periods, Cable Car’s total incentive compensation would be only $9,000, versus the headline figure of $10,800 under a fee structure with net compounding.

For a concentrated and relatively volatile strategy, Cable Car’s approach limits the risk to clients that performance fees are crystallized at inopportune times. Cable Car is not compensated until it has “earned back” the prior incentive fee. In practice, this means that for positive gross returns, the total incentive fee over a long period of time may be significantly less than the headline fee as a proportion of the gross returns earned in the account. Depending on the actual pattern of returns and timing of fees, a 0/30 model may offer a significant long-run discount when compared to the traditional 2/20 fee model. Due to the effect of compounding as an investment grows, the absence of management fees under this structure results in the potential for significantly better net returns for clients over time.

For example calculations, questions, or comments, please don’t hesitate to contact Cable Car for more details. Depending on client needs, management fees may be more appropriate in the future to support investments in additional infrastructure as the firm grows. Cable Car’s fee structure is negotiable for large, long-term capital commitments.

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What fees does Cable Car charge?

For US investors who are not qualified clients, Cable Car charges a flat annual management fee equal to 3% of the account value, billed daily in arrears by the custodian.

For non-US investors and qualified clients, Cable Car waives the management fee and charges a 30% incentive fee, computed quarterly by the custodian on the net profit and loss in the account and subject to a high water mark of previous performance.

Please see Item 5 in the firm’s brochure on Form ADV for more information.

Management fee Incentive fee
Non-Qualified 3% None
Qualified None 30%