I recently reopened the vault on some of my old investor letters from my days as a hedge fund manager, and it reminded me that I’ve talked about the importance of Capital Structure and Fulcrum Securities for years without ever putting pen to paper and demystifying the concept.
I’ve teased this post many times. In my Mental Model on the Lasagna Layers of the Risk Edifice, I wrote that it was “beyond the scope of this post to talk much more about Fulcrum Securities… perhaps that is fodder for a future post.” Well, this is that post.
As a former Capital Structure Arbitrageur, hunting Fulcrum Securities was not one thing I did. It was the thing I did. My old firm, Akanthos Capital, was built around a single obsession: mapping a company’s entire capital structure (loans, bonds, converts, preferreds, equity) and then finding the one security in that stack with the best bang for the buck. The biggest winners of my career all came from the same move. So let me finally show you how it works.
If you bear with me, learning how to identify the Fulcrum Security might prove to be one of the most powerful tools available to an investor willing to roam across the capital structure.
