What Is a Vulture Fund?
A vulture fund is an investment fund specializing in purchasing securities in distressed investments, such as high-yield bonds in or near default, or equities teetering on the edge of bankruptcy. The strategy involves ‘swooping in’ to acquire underpriced shares believed to have been oversold, betting on high-risk but potentially incredibly rewarding outcomes.
Key Takeaways
- Vulture funds focus on severely depressed asset prices in the market.
- Their goal is to find assets irrationally sold below fundamental value or likely to experience a positive turnaround.
- This high-risk, high-reward approach involves accumulating distressed assets typically shunned by conventional portfolio managers.
Understanding Vulture Funds
Vulture funds make extreme bets on distressed debt and high-yield investments, often employing legal measures to enforce contractual payouts. Typically managed by hedge funds, these strategies leverage variations of alternative investing to generate profits.
These portfolio managers target deeply discounted investments with high potential returns despite significant default risks. The focus is often on fixed-income instruments like high-yield bonds and loans offering fixed or variable interest. Investments often extend to government debts of distressed nations, necessitating intense lobbying to resolve outstanding debts.
Prominent examples, including Argentina’s and Puerto Rico’s debt crises, illustrate the methods vulture funds use to finally secure payouts on their distressed assets. These cases highlight the intricate agendas these funds pursue to recover their investments.
Argentina’s Debt Crisis
After 15 prolonged years of negotiation, culminating in February 2016, Argentina consented to repay certain vulture funds that had purchased the country’s debt securities. Major involved hedge funds included Elliott Management’s NML Capital and Aurelius Capital Management, with a final settlement reaching $6.5 billion.
Puerto Rico’s Debt Crisis
A comparable situation developed in Puerto Rico, which faced intense budget crises between 2006-2007 and 2013-2016, culminating in the U.S. territory filing for bankruptcy. Laden with approximately $120 billion in bond and pension debt, creditors included U.S. mutual funds and hedge fund managers like Oppenheimer, Franklin, and Aurelius Capital Management.
The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) of 2016 was enacted to restructure the territory’s obligations. This restructuring, the largest U.S. public debt restructuring to date, prominently featured activities by vulture funds playing critical roles in adjusting the territory’s debts.
Vulture Fund Investments
While cases like Argentina and Puerto Rico’s debt crises are exceptional, they underscore potential gains from vulture fund ventures. Beyond government debt, top investments involve real estate and heavily leveraged firms, where these funds often patiently await substantial payouts.
Implementing alternative strategies to seek discounted investments poised for high returns, vulture funds are critiqued for preying on struggling investments, thereby enforcing substantial payouts plus interest. Consequently, vulture fund management is unsuitable for risk-averse investors.
Numerous U.S. investment and hedge fund firms, including Autonomy Capital, Canyon Capital, Monarch Alternative Capital, and Aurelius Capital Management, employ such opportunistic strategies.
Vulture Capitalists
A vulture capitalist refers to a venture capitalist focusing on acquiring poor or distressed firms, often taking control over innovations and resulting benefits that could have gone to the original creators. This term, seen as derogatory, paints them as aggressive capitalists exploiting optimal scenarios at minimal costs.
Vulture capitalists have gained notoriety for perceived predatory actions, acquiring distressed companies at very low prices then cutting staff and other costs to maximize profits, often inciting continued criticism for these harsh business tactics.
Related Terms: investment fund, hedge fund, distressed investments, sovereign debt, high-yield bonds.
References
- Seven Pillars Institute. “Argentina vs. the Hedge Funds: The 2014 Argentinian Bond Default”.
- Congressional Research Service. “Puerto Rico’s Public Debts: Accumulation and Restructuring”.
