Vulture Fund
What is a vulture fund?
A vulture fund is an investment fund that buys securities of severely distressed issuers—such as high-yield bonds in or near default, loans, or equity in companies facing bankruptcy—at deep discounts. Managers aim to profit by holding, restructuring, litigating, or otherwise extracting value from assets that the broader market has written down.
How vulture funds work
- Target assets: distressed corporate debt, sovereign debt, distressed real estate, and highly leveraged firms.
- Acquisition strategy: purchase obligations at significant discounts when prices reflect distress rather than underlying recovery value.
- Value extraction: pursue restructurings, negotiate settlements, enforce contractual claims through litigation, or wait for market recovery.
- Time horizon: often patient—managers may hold assets for years while negotiating payouts or participating in restructurings.
- Operators: typically hedge funds or specialized alternative managers using activist and legal strategies to secure returns.
Typical tactics
- Buying discounted bonds or loans of troubled issuers.
- Filing claims or lawsuits to enforce debt contracts or accelerate payment.
- Engaging in negotiations or lobbying during sovereign restructurings.
- Participating in formal debt restructuring processes to improve recovery terms.
Notable examples
- Argentina (2016): After extended litigation and negotiations, Argentina settled with several holdout funds—including units of major hedge funds—for approximately $6.5 billion on disputed sovereign bonds.
- Puerto Rico (2010s): Facing a severe fiscal crisis and roughly $100–$120 billion in obligations, Puerto Rico underwent one of the largest public-debt restructurings in U.S. history. Specialized funds and mutual funds participated in the claims process; Congress enacted PROMESA (2016) to provide an orderly restructuring framework.
Who runs them
Vulture strategies are commonly executed by hedge funds and specialist distressed-debt managers. Examples of well-known firms that have engaged in distressed and holdout strategies include Elliott Management and Aurelius Capital Management; other managers active in distressed investing include Autonomy Capital, Canyon Capital, and Monarch Alternative Capital.
Criticisms and risks
- Perceived predation: Critics argue vulture funds can be opportunistic—exerting pressure to extract outsized recoveries from already-struggling issuers, sometimes at social cost.
- Economic impact: Cost-cutting and asset seizures during restructurings can lead to layoffs and reduced public services in the case of sovereign debt.
- Investment risk: High probability of default and long, uncertain recovery timelines make these investments suitable only for investors willing to accept elevated risk and illiquidity.
Key takeaways
- Vulture funds specialize in buying deeply discounted, distressed assets with the goal of securing higher-than-average recoveries.
- They use negotiation, restructuring, and legal tactics to extract value, often over extended time horizons.
- The strategy is high-risk and controversial; it can produce large gains but also carries legal, political, and reputational challenges.
- Not suitable for risk-averse investors; typically managed by hedge funds and specialist distressed managers.