What is Vulture Fund?
276 reads · Last updated: December 5, 2024
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.
Definition
A vulture fund is an investment fund that seeks to purchase distressed securities, such as bonds in default or near-default, or stocks of companies nearing bankruptcy. The goal is to 'swoop in' and buy these undervalued assets at low prices, making high-risk but potentially high-reward bets.
Origin
The concept of vulture funds originated in the 1980s when some investors began focusing on buying the debt and equity of distressed companies. This strategy became particularly prominent during the U.S. debt crisis of the 1980s, where investors profited by purchasing low-priced assets and selling them after corporate restructuring.
Categories and Features
Vulture funds are mainly categorized into two types: those focusing on debt and those focusing on equity. Debt-focused vulture funds typically purchase bonds of distressed companies, hoping their value will increase post-restructuring. Equity-focused vulture funds buy stocks of near-bankrupt companies, expecting a price rise upon recovery. Both types are characterized by high risk and high return, suitable for investors with a high risk tolerance.
Case Studies
A typical example is during the 2008 financial crisis when many vulture funds purchased debt and equity of distressed banks and financial institutions. For instance, Apollo Global Management acquired parts of Lehman Brothers' assets during the crisis, eventually reaping significant returns as the market recovered. Another case is Oaktree Capital Management's purchase of distressed Greek government bonds in 2012, which saw substantial value appreciation as Greece's economy gradually recovered.
Common Issues
Common issues investors face when using vulture fund strategies include overly optimistic expectations of successful corporate restructuring and underestimating market risks. Additionally, the high-risk nature of vulture funds means investors may face the risk of total investment loss. Therefore, investors need to carefully assess their risk tolerance and market conditions.
