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Thursday, November 24, 2011

What is Vulture funds...?


Vulture Funds

A vulture fund is a private equity or hedge fund that invests in debt issued by an entity that is considered to be very weak or dying, or whose debt is in imminent default. The name is a metaphor comparing these investors to vultures patiently circling, waiting to pick over the remains of a rapidly weakening company or, in the case of sovereign debt, debtor country. Market practitioners prefer to refer to them as distressed debt or special situations funds.

How do vulture funds make their money?

They buy up the debts of countries in chaos and war, speculating on the fact that when investors finally come back into the country – often encouraged by generous debt writedown schemes and International Monetary Fund programmes – the vultures will get their money back with huge interest on top, benefiting from the fledgling trade and new liquidity.

What's wrong with that?

These desperately poor countries like the Democratic Republic of the Congo, for example, where 100 women a week are dying in childbirth, have better things to do with their money than pay off the vultures. Investors and companies who want to put money into rebuilding the countries, by investing in natural resources – mining, gold, diamonds and cobalt for example – simply stay away. They worry that they will also be targeted by the vultures by getting involved in joint projects with the government. One vulture fund, FG Hemisphere, tried to seize the embassy of the DRC in Washington as payment for the debt.

How big is the problem with these vulture funds?

The World Bank estimates that more than one-third of the countries that have qualified for its debt relief programmes have been targeted with lawsuits by at least 26 vultures. The funds have so far received payouts totalling $1bn.

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