The Cable Car Capital’s Hedged Value portfolio returned 0.1% net of fees in May during a relatively quiet month. At month-end, Hedged Value was conservatively positioned in my opinion.

Approximately 11.5% of the strategy’s gross long exposure relates to two short-term special situations that arose through corporate tender offers. The portfolio’s current low net exposure and significant cash allocation reflect both a deliberate effort to maintain flexibility for future such opportunities, as well as the scarcity of attractively valued long candidates in the current market environment.

Here is an excerpt from a recent quarterly report to clients that explains my current approach to investing:

“I frequently describe my investment style as concentrated, hedged value investing. In keeping with the theme of using these three bullet points to summarize the approach, there are important performance considerations for each of concentration, hedging, and value investing:

Concentrated: one important consequence of a relatively concentrated portfolio is that it does not have the aim of minimizing variance.

Although long/short portfolios in general may have lower volatility than a comparable long-only index, investors should not expect Cable Car’s returns to necessarily be of lower absolute value than those of a long-only index in any given period, as the impact of mark-to-market changes in a single large position can exceed movements in the broader market.

My goal is to generate absolute returns over the long-run, not to avoid ever having a down month. Qualitatively, I think about the volatility of the portfolio as being generally lower than overall equity markets in the very short term (e.g. on any given day without significant position news), while it should be higher over time as data and events cause positions to move toward their fair value.

If my stock selections prove successful, I do not want to diversify away too much of the positive variance. That being said, protecting capital is equally important. I seek situations with favorably skewed risk/reward dynamics and have established position limits so that mistakes are survivable. I fully expect that even after careful analysis, I will make mistakes. I pledge to be transparent and learn from every investment, successful or not.

Hedged: Cable Car’s short exposure is designed both to benefit from individually mispriced securities and so that clients will have incremental capital available to invest in quality businesses when market prices decrease indiscriminately. The portfolio maintains a net long bias, which means that aside from the impact of concentration just described, the portfolio should be expected to rise less than the overall market in periods of generally rising equity values and decline less during periods of declining equity values.

Value: While I make an effort to hedge identifiable risk factors, certain thematic shifts are likely to have a predictable impact on the portfolio. Although I do not typically think of companies in such terms, Cable Car may tend to be long ‘value’ (defined as low multiple stocks) and short ‘growth’ (defined as high multiple stocks).

Given my general skepticism of hype and preference for long investments that are in some way out of favor, Cable Car may underperform during periods of strong positive momentum in the broader market.”

DISCLAIMER: Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.