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 refer to them as distressed debt or special situations funds.
Vulture funds have sometimes had success in bringing actions against sovereign debtor governments, usually settling with them before forced sales. 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 US is K-Mart, where the real estate held by the company was the anticipated payout for investors who bought stock during their bankruptcy proceedings.