Vulture fund

A vulture fund is a private investment vehicle—often a hedge fund—that specializes in acquiring the debt of countries or companies in or near default, typically at a small fraction of face value, and then seeking repayment of the original nominal amount through litigation, asset seizure, or hold-out tactics during debt restructurings.

The label is pejorative, coined by critics who compare the practice to scavenging. Defenders argue these funds enforce contractual property rights and discipline sovereign borrowers. The term is most often applied to creditors who refuse to participate in negotiated restructurings accepted by the majority of bondholders, instead pursuing courts in jurisdictions like New York or London where the bonds were issued.

Key features of vulture-fund strategy:

• Deep-discount purchase of bonds, often after a default has already occurred or looks imminent.
• Hold-out behavior during exchanges, refusing haircuts agreed to by other creditors.
• Litigation in creditor-friendly courts, frequently invoking pari passu (equal treatment) clauses.
• Attachment of sovereign assets abroad, such as ships, aircraft, or central-bank reserves, though most central-bank assets enjoy immunity.

The most cited case is NML Capital, Ltd. v. Republic of Argentina, in which Elliott Management's subsidiary NML Capital bought Argentine bonds from the 2001 default and won U.S. court rulings—affirmed by the Second Circuit in 2012 and left standing by the Supreme Court in 2014—forcing Argentina either to pay holdouts in full or default on restructured bondholders. Argentina settled in 2016 after a change of government. An earlier landmark, Elliott Associates v. Peru (2000), used a Brussels court to block payments and recover roughly $58 million on bonds bought for about $11 million.

In response, the UN General Assembly adopted Resolution 69/319 in 2015 setting out principles for sovereign debt restructuring, and jurisdictions including Belgium (2015) and the United Kingdom (Debt Relief (Developing Countries) Act 2010) passed laws limiting vulture-fund recoveries against poor countries. Bond contracts now routinely include collective action clauses to bind holdouts.