Today, there exist a wide variety of funds within the world of finance, ranging from mutual funds to hedge funds, index funds and equity funds— the list is indeed quite long. Among these, however, exist a particularly interesting type of fund that may be relatively unfamiliar to the vast majority. This fund is known as the vulture fund, whose purpose can be insinuated by its namesake. Hence, in this week’s edition, we will take a look at what vulture funds are, and how they work!
V stands for Vulture Fund
What Is a Vulture Fund?
A vulture fund is an investment fund that seeks out and buys securities in distressed investments, usually being high-yield bonds or equities either in or near default. Usually, these investments belong to commercial companies or sovereign nations, with the namesake an homage to the fact that these funds profit from the debt of failings rather than successes. In fact, the goal of these funds is to "swoop in" and purchase vastly discounted shares that are thought to have been oversold, then use a variety of strategies to sell the debt for more money than the purchase price in order to place a high-risk, but possibly high-reward wager. With respect to this risk to reward ratio in accumulating distressed assets, the strategy employed by vulture funds is one typically avoided by the conventional portfolio manager.
Vulture funds have historically been successful in bringing recovery and attachment cases against sovereign debtor governments, frequently reaching agreements with them prior to actually realizing the attachments through forced sales. Due to the fact that vulture funds engage in assets with drastically reduced market valuations, any subsequent settlements are typically done so at a discount in hard or local currency or by issuing new debt.
How do Vulture Funds work?
Vulture funds make extremely hazardous bets when investing in high-yield and distressed debt, employing legal action as one of their management strategies to get paid as agreed. Typically, hedge funds are in charge of managing these funds, and they use a range of different strategies to maximize returns for their investors. Similarly, portfolio managers search for assets that have been significantly discounted and have high expected returns due to the huge default risk. In practice, there have been many examples in which it can be observed how vulture funds prey on poor nations riddled with debt. Argentina is one such nation, wherein a final payout of $6.5 billion USD was made to six vulture funds that had invested in its debt. Similarly, when Puerto Rico filed for bankruptcy, the country owed as much as $120 billion in bond and pension debt to its creditors, which included U.S. mutual funds and hedge fund managers. Due to the role that vulture funds played in the Puertorican debt crisis, they are now undergoing one of the largest restructurings of public debt in U.S. history through the Puerto Rico Oversight, Management, and Economic Stability Act.
That’s all for this week! Thanks for reading, and see you in the next one!