Vulture Fund: What it is, How it Works, Examples

What Is a Vulture Fund?

A vulture fund is an investment fund that buys distressed securities, such as high-yield bonds near default or equities near bankruptcy. The goal is to pick up underpriced shares that are perceived to have been oversold and make high-risk, high-reward bets.

Key Takeaways

• A vulture fund invests in assets with severely depressed prices.
• The goal is to identify assets irrationally oversold below fundamental value or with predicted turnarounds.
• This high-risk, high-reward strategy accumulates distressed assets that typical portfolio managers avoid.

Understanding Vulture Funds

Vulture funds take extreme bets on distressed debt and high-yield investing, also using legal actions in their management strategies to obtain contracted payouts. These funds are typically managed by hedge funds using various alternative strategies to obtain profits for their investors.

To achieve the strategy, portfolio managers seek deeply discounted investments with high potential rates of return due to the high default risks. Investments are focused on fixed income instruments such as high yield bonds and loans with fixed or variable interest rates. Oftentimes, investments will be in government debt of distressed countries, which requires greater lobbyist involvement in resolving unpaid debts.

A number of legacy cases involving hedge funds and sovereign debt highlight the processes and procedures that vulture funds undergo to receive payouts for invested assets.

Argentina’s Debt Crisis

After 15 years of negotiations ending in February 2016, Argentina agreed to repay six vulture funds that had invested in the country’s debt. Leading hedge funds involved included Elliott Management’s NML Capital unit and Aurelius Capital Management. The final payout on the debt to the bondholders was negotiated at $6.5 billion.

Puerto Rico’s Debt Crisis

A similar situation emerged in Puerto Rico, facing acute budgetary crises in 2006-2007 and from 2013-2016 when the U.S. territory 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. Leading fund managers seeking repayment included Oppenheimer, Franklin, and Aurelius Capital Management.

As a result, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), was enacted in 2016 to restructure the territory’s debts and adjust its budget. Most of Puerto Rico’s debts incurred in the 2010s are undergoing one of the largest restructurings of public debt in U.S. history, with vulture funds playing a prominent role.

Vulture Fund Investments

While Argentina and Puerto Rico are extreme cases, they highlight investments made by vulture funds resulting in substantial gains. In addition to government debt, real estate properties and highly leveraged firms are also top investments for vulture funds. These funds are often willing to patiently wait for payouts, resulting in substantial returns.

Vulture funds use alternative investing strategies, seeking bargain prices with substantial expected returns. Some people criticize investment companies that operate like vulture funds, as they prey on the cheap debt of struggling investments, forcing companies to make payouts plus interest.

Overall, vulture funds and vulture fund management are not typically for the risk-averse. Across the U.S., several investment managers engage in this type of investing. Some popular examples include Autonomy Capital, Canyon Capital, Monarch Alternative Capital, and Aurelius Capital Management.

Vulture Capitalists

A vulture capitalist is a type of venture capitalist who looks for opportunities to make money by buying poor or distressed firms. They are also known for taking control over someone else’s innovations and, as a result, the money that person would have acquired from those innovations.

The term is slang for an aggressive venture capitalist and is believed to be predatory in nature. Just like the bird they are named after, vulture capitalists wait until they see the right opportunity and swoop in at the last minute, taking advantage of a situation with the lowest possible price.

Vulture capitalists are often criticized for their aggressive behavior because they prey on the companies they buy to make a profit. They seek out the most distressed companies at really low prices and go to great lengths to keep costs down and maximize profit. This can lead to unemployment and cause a ripple effect in the economy.