What is a vulture fund and how does it operate?

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AcadiFi · Accepted Answer

Vulture funds specialize in buying deeply distressed sovereign, corporate, or municipal debt, often at single-digit cents on the dollar, and pursue aggressive legal recovery strategies against reluctant debtors.

Classic playbook:

1. Source deeply distressed claims (e.g., defaulted sovereign bonds) from original holders who want to exit.
2. Refuse to participate in restructuring offers accepted by majority bondholders.
3. Litigate in multiple jurisdictions to seize assets or block payments to restructured creditors.
4. Negotiate a premium payout to drop the litigation.

A landmark example is the decade-long dispute between Argentina and holdout hedge funds over 2001 defaulted debt. Holdouts bought claims at 20-30 cents and ultimately received roughly 75 cents after years of litigation.

Legal mechanisms include:

- Pari passu litigation: arguing the debtor cannot pay restructured bondholders without also paying holdouts equally.
- Attachment orders on sovereign assets abroad (sovereign vessels, central bank accounts).
- Collective action clauses (CACs) in modern bonds have reduced holdout leverage.

Ethically controversial but generally legal if original debt contracts permit assignment. Some jurisdictions (e.g., Belgium's 2015 anti-vulture law) restrict vulture fund litigation on sovereign debt, but enforcement is uneven.

Returns can be 300-500% over 5-10 years but require specialized legal teams and patience. Most mainstream credit investors avoid this niche.

What is a vulture fund and how does it operate?

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