A vulture fund is a financial organization that specializes in buying securities in distressed environments, such as high-yield bonds in or near default, or equities that are in or near bankruptcy.
As the name suggests, these funds are metaphorically like circling vultures patiently waiting to pick over the remains of a rapidly weakening company or, in the case of sovereign debt, debtor. Market practitioners prefer to refer to them as distressed debt or special situations funds.
Vulture funds focused on debt target not only corporate obligors, but also sovereign debtor states. In the recent case of Argentina, for example, vulture funds bought up a significant portion of the country's external public debt at very low prices (sometimes only 20% of their nominal value), and then attempted to cash them when the Argentine economic crisis exploded in 2002. A single vulture fund run by Kenneth B. Dart, heir to the Dart Container fortune, claimed 700 million USD in a lawsuit against the government of Argentina. It should be noted, however, that Argentina itself was behind many of the secondary market purchases. Some estimate that in the debt exchange of 2005, Argentina controlled over half of the debt tendered. It is likely that officials in the Argentine government benefited financially from these transactions.
Recently, public attention has focused on the efforts of Donegal International, a company registered in the British Virgin Islands to recover a debt through the British courts that is owed by Zambia. The high court ruled that a claim against Zambia by the BVI company was due and owing. Donegal bought the Zambian debt, with a face value of $29.8 million from Romania in 1999, for less than $4m. Zambia had run up the debt, mainly for agricultural machinery, during the Cold War. Donegal has defended itself on the basis that it did not purchase the debt for litigation purposes. It indicated in court submissions and the court accepted that it had bought the debt to convert into equity in a voluntary debt for equity swap with the government and only sued after three years of failed negotiations.
Vulture funds have sometimes had success in bringing attachment and recovery actions against sovereign debtor governments, usually settling with them before actually realizing the attachments in forced sales. In one instance involving Peru, such a seizure threatened payments to other creditors of the sovereign obligor. Settlements typically are made at a discount in hard or local currency or in the form of new debt issuance.
A related term is "vulture investing", where certain stocks in near bankrupt companies are purchased upon anticipation of asset divestiture or successful reorganization. A prime example in the U.S. is K-Mart, where the real estate held by the company was the anticipated payout for investors who bought stock during their bankruptcy proceedings.