Why do people have different stands on the Vulture Fund Strategy?
Have you heard of the bird called culture? This animal will come with the others to prey and eat animals, or even people who are sick or about to die. This term can be used in different contexts. Sometimes, people are referred to as vultures when they take advantage of vulnerable or weak people. We can also apply this logic to other topics and areas such as investments.
Vultures and investments
There is an investment fund that is referred to as vulture. A vulture fund sees an opportunity when an investment is in distress. Examples of investments in distress include high-yield bonds near default and equities near bankruptcy. These are the type of investments that the vulture fund is searching for to buy. Why? These situations call for underpriced shares that other people think have been oversold to make a high risk and high reward bet at the same time. The vulture fund will enter the picture and buy.
Criticisms on vulture capitalists
Vulture capitalists search for distressed firms to buy them. People who buy another’s innovation and discovery are also coined as vultures. Later on, these innovations and discoveries generate massive returns, but the one who benefits is the vulture capitalist and not the creator. These vulture capitalists are nothing different from the birds that we mentioned earlier. They wait until an entity is so weak and needy —almost dead— before entering and taking advantage. They do this because they want to ensure that they swoop in at the lowest price possible.
Some people do not understand the strategies of these venture capitalists. Their aggression can be too much sometimes to make profits. Furthermore, they will do everything just to cut costs, even if it means terminating staff.
Tell me more about vulture funds.
Now that you know what vulture capitalists do, you already have an idea about how a vulture fund works. The bets on distressed debts or high-yield investments are so extreme. They devise and use different kinds of strategies like using legal action to get contracted payouts. Most of the time, the management is based on a hedge fund to earn profits.
The portfolio manager looks for investments with an extreme discount but high chances of rate or return because of high default risks. Investments are generally more on instruments with fixed income, such as high yield bonds or loans. You will find most of these investments in a distressed country’s government debt—all the more reasons for lobbyist involvement for unpaid debts issues.
Vulture funds go the extra mile to receive money from their investments. In fact, their processes and procedures are more of legacy cases relative to hedge funds or sovereign debts.
Successful vulture funds
Vulture funds often find success in real estate, government debts, highly leveraged firms, and more. They do not bother waiting if it means they would get high returns. There are extreme cases where vulture funds gained a massive amount, and they happened in Argentina and Puerto Rico.
To sum it up
Some see this strategy as an opportunity and get interested. Some people think that these people are predators. But in the end, if you are risk-averse, then this investment strategy is not for you.