What are Vulture Funds?
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 is to ‘swoop in’ and pick up underpriced shares that are perceived to have been oversold to make high-risk but potentially high-reward bets.
A vulture fund invests in assets whose prices have been severely depressed in the market.
The goal is to identify assets that have been irrationally oversold below fundamental value, or where a positive turnaround is predicted.
Strategies for Vulture Funds
It involves lots of strategies. Some of them are as under:
- Research about the companies on the edge of bankruptcy.
- Research about the essential assets of the company which can give them long term and high profits to the vulture fund.
- Analysis of whether the investment in the company on the edge of loss will give the profits.
- Obtain information about the loans and fixed income securities of the company on the edge of bankruptcy.
- Approach the bank for the purchase of debt or purchase the fixed income securities from the secondary market at the discounted price.
- Approach the company for settlement of dues or sell of the critical asset to recover the debt and earn the profit.
Are vulture funds legal?
While these types of funds are completely legal, there has been growing concern in recent decades about the propensity for vulture funds to target government debt. Critics believe that vulture funds cause distressed countries to fall even further into financial distress because of the legal actions taken against them.
Due to these concerns, many countries have attempted to pass legislation limiting or forbidding them.
The US was the first to take legal steps in 2009 with the Stop VULTURE Funds Act. The intention was to limit how much profit a creditor could make from secondary purchases. This legislation failed, however. Other countries have since succeeded with various limitations including Australia, Belgium, and the UK.
In 2014, the United Nations voted to exclude vulture funds from the bankruptcy restructuring process of sovereign nations.
Are vulture funds ethical?
Arguments about the ethics of buying debt in the secondary market abound. Many criticize funds for making profits on countries, companies, or individuals who are already struggling with massive financial burdens.
Critics are particularly vocal about the effect these debt collection actions have against poorer countries, claiming that the actions of the investors exacerbate the countries’ problems.
Investors and fund managers defend their actions and positions. They hold firm in the statement that they did not cause the financial problems to begin with. They are simply collecting on debt that is legally owed to them.
Some even point out that vulture funds help keep nations more honest, and make them potentially inclined to think more carefully about how much debt they take on.
In the case of sovereign nations, laws can potentially be passed that effectively excuse the nation from whatever level of debt it wants. For now, these types of funds are quite popular in some investment circles, because they have such a high potential of return.
Advantages of Vulture Funds
- It provides higher returns.
- It can earn a good profit with a lower investment.
- Vulture fund management can influence the market.
- The investment and actions for recovery are legally recognized.
- Solve the financial problems of banks or investors who invested in the loss company and purchase all debt at a time.
A vulture fund is the type of fund that invests the money into the securities of companies who are near to bankruptcy due to massive loss. It recognizes these companies through the research and invests in those companies with valuable assets at the discounted price. The fund first tries to settle with the companies if the company is unable to pay, then the fund will sell the asset or file the legal case for recovery.
Recently the two countries Argentina and the Demographic Republic of Congo faced a legal issue from a vulture fund due to the inability to pay for Governmental bonds. Vulture funds usually invest in high risk-based securities to earn higher profits. It is part of the hedge fund, but the scope of the hedge fund is broader. The most crucial point about the vulture fund is that all the processes are legal.