Vulture Fund

Vulture Fund

Vulture funds deal with distressed securities, which have a high level of default and are in or near bankruptcy. A vulture fund is a hedge fund, private equity fund, that invests in debt considered to be very weak or in default, known as distressed securities. It is a fund that invests in companies or properties which are performing poorly and may, therefore, be undervalued. It invests in assets whose prices have been severely depressed in the market. Investors in the fund profit by buying debt at a discounted price on a secondary market and then using numerous methods to gain a larger amount than the purchasing price. Debtors include companies, countries, and individuals. The funds purchase securities from struggling debtors with the aim of making substantial monetary gains by bringing recovery actions against the owners.

Vulture funds are a subset of hedge funds that invest in distressed securities that have a high chance of default. It is a fund that buys the distressed debt of commercial companies or sovereign nations at a cheap price and then often sues them for the entire value of the debt. The fund buys risky debt instruments at highly discounted prices in the secondary market and benefits by taking legal action against the issuers for debt recovery. It is a pool of investor money that makes investments in securities from distressed issuers (usually bonds). Vulture funds are often the last chance companies have to come back to life, and the funds’ offers to provide cash may be the last attempt these companies can make to resuscitate themselves.

A vulture fund is an investment fund that seeks out and buys securities in distressed investments, such as high-yield bonds in or near default, or equities that are in or near bankruptcy. The goal of vulture funds is to get the maximum possible gain on their investment, rather than act in the best interests of the debtor. Vulture funds have had success in bringing attachment and recovery actions against sovereign debtor governments, usually settling with them before realizing the attachments in forced sales. The goal is to identify assets that have been irrationally oversold below fundamental value, or where a positive turnaround is predicted. Settlements typically are made at a discount in hard or local currency or in the form of new debt issuance.

Vulture funds are mainly used against sovereign debt and troubled public sector companies. They are a popular form of investment because of the immense success that these funds have enjoyed in bringing recovery actions against such defaulters. The idea behind such a fund is to buy the instrument at heavily discounted prices on the secondary market, then make huge profits by using the debtor. These mainly target fixed income instruments such as high yield bonds, or equities that are in or nearing bankruptcy. In one instance involving Peru, such a seizure threatened payments to other creditors of the sovereign obliger.