Definition
A Vulture Fund is a type of limited partnership or investment fund that specializes in purchasing distressed assets, particularly real estate or securities, at significantly reduced prices. These assets can include properties facing foreclosures, bankrupt companies, or sovereign debt from financially unstable countries. The primary goal of a vulture fund is to turn a profit when the value of these assets increases after economic recovery or restructuring.
The term “vulture fund” derives from vultures, which are scavengers that feed on the remains of dead animals. Similarly, vulture funds “scavenge” for undervalued assets in the financial markets that others have abandoned, with the expectation that these assets can be rehabilitated or that their value will rebound over time.
Examples
- Distressed Real Estate: A vulture fund purchases a portfolio of foreclosed homes from banks at a fraction of their original values. Once the real estate market recovers, the fund sells these properties for a profit.
- Bankrupt Companies: A vulture fund buys debt from a failing company at a discounted price. After the company’s restructuring, the value of the debt increases, leading to a significant return on investment.
- Sovereign Debt: A vulture fund acquires sovereign debt from countries that are experiencing financial difficulties. When the country stabilizes, the fund can either sell the bonds at a higher price or negotiate better repayment terms for a profit.
Frequently Asked Questions
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Why are they called “vulture funds”?
- The term “vulture funds” is used because these funds target distressed assets that are undervalued or abandoned, similar to how vultures feed on dead or dying animals.
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Are vulture funds risky investments?
- Yes, vulture funds are considered high-risk investments as they deal with assets that are significantly distressed. However, they also offer the potential for high returns.
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What types of assets do vulture funds invest in?
- Vulture funds typically invest in distressed real estate, bankrupt companies, non-performing loans, and sovereign debt from financially unstable countries.
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How do vulture funds make a profit?
- Vulture funds profit by buying undervalued assets and selling them when their value increases, often after economic recovery, restructuring, or asset improvement.
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Are vulture funds considered unethical?
- Opinions are divided; some perceive vulture funds as taking advantage of distressed situations, while others see them as providing necessary liquidity and contributing to the recovery of failing enterprises.
Related Terms
- Limited Partnership: A partnership consisting of at least one general partner with unlimited liability and one or more limited partners whose liability is limited to their investment.
- Distressed Assets: Financial assets that are trading significantly below their intrinsic or book value typically due to financial trouble of the issuer.
- Sovereign Debt: Debt issued by a national government in a foreign currency in order to finance the issuing country’s growth and development.
- Non-Performing Loans (NPLs): Loans in which the borrower is in default and hasn’t made any scheduled payments of principal or interest for some time.
Online References
Suggested Books for Further Studies
- “The Vulture Investors” by Hilary Rosenberg
- “Distressed Debt Analysis: Strategies for Speculative Investors” by Stephen G. Moyer
- “When Genius Failed: The Rise and Fall of Long-Term Capital Management” by Roger Lowenstein
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