Definition of Vulture Fund

What is a "vulture fund"? What is the definition of the term "vulture fund"?

A "vulture fund" is a fund that chooses to invest in distressed companies and securities.

A "vulture fund" chooses to invest their money in "high-risk" situations in order to (hopefully) secure a big payoff.

Much like venture capitalists, the operators of vulture funds don't expect to make money on every single investment. Instead, they are looking for that rare home run that will pay for all of the fund's failed investments and then some.

Definition of Vulture Fund - IllustrationLet's look at an example of when a vulture fund might invest in a company.

A biotech firm has a couple of promising drugs in the pipeline but they have been rocked by allegations that company executives have been misappropriating funds.

The company executives have since stepped down, but the firm has been tarnished by the scandal and is in dire need of funds to continue operating. The stock has been hammered, and the company is finding it nearly impossible to raise additional funds.

The vulture fund might step in and take a large stake in the company or buy a large amount of newly-issued debt in return for much-needed operational funds. The vulture fund is taking a risk, but if the company can manage to right itself and get back on track, then the fund might be looking at a huge score down the road.

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