What Does Vulture Fund Mean?
A vulture fund is a type of hedge fund or private equity group that invests in risky debt instruments, where the chances for default is high. These debt instruments that are nearing default are called distressed securities, and since the fund invests in these distressed securities, it is also known as a distressed securities fund. The idea behind such a fund is to buy the instrument at heavily discounted prices on the secondary market, then make huge profits by suing the debtor.
Divestopedia Explains Vulture Fund
Vulture funds are mainly used against sovereign debt and troubled public sector companies. They are a popular form of investment because of the immense success that these funds have enjoyed in bringing recovery actions against such defaulters. Sometimes, vulture funds are not repaid in cash, but through the issuance of new debt in local currency. This option is also beneficial for vulture funds because they get more value than their purchase price.
Vulture funds are calculated risks taken by hedge fund managers to make windfall profits. The name is a metaphor, as it compares itself to the preying pattern of vulture birds. Since vultures prey on dead or near-death creatures, the term has been used for distressed funds because they deal specifically in near-bankrupt securities. It is also a strategic way to make money from struggling debtors to make a large monetary gain.