Claws out for vulture funds

Vulture funds... face having their wings clipped

Vulture funds... face having their wings clipped

Flush with their success in shepherding the global economy in recent years, the planet’s munificent politicians are anxious to spread their wings and treat yet more arenas of human endeavour to their undoubted magnificence.

Hedge funds and private equity are both set to benefit from “improved” regulation, courtesy of the searing insights of our political masters, and now it appears politicians in both the US and UK are anxious to clip the wings of vulture funds.

For the uninitiated, these vehicles specialise in buying up the sovereign debt of impoverished or recalcitrant developing nations that have defaulted, or are perceived to be likely to do so, at a chunky discount to face value.

These vultures then pursue the poor, harassed nation through the planet’s law courts (very often those of the US and UK, as it happens), in an effort to force payment and make a nice turn on the deal.

Some, including 110 UK MPs who signed an early day motion and a bevy of members of the US Congress, find the activities of these vulture funds distasteful. But any good environmentalist would advise against removing a lifeform from an ecosystem without careful consideration of the knock-on effects throughout the food chain.

Many find vultures themselves distasteful, but erase these important scavengers from their ecosystem and you’re left with one stinking, rotting mess. Ditto in the financial world.

Few institutional investors would be willing to invest in a long-term asset without the back-up of a secondary market to offload that position should circumstances dictate. Remove the vulture funds that provide a degree of secondary market liquidity and you are reducing the pool of primary purchasers.

As a result, the very nations politicians are endeavouring to protect would simply end up having to pay higher interest to borrow on the international markets in the first place.

The law of unintended consequences has a tendency to rise above human laws. The efforts of well-intentioned politicians could well backfire and make the lives of the developing world’s huddled masses even grimmer still.

About the blog

FTfm is no longer updated but it remains open as an archive.

FTfm's specialist writing team offer their insights into the global fund management industry.

About the authors

Pauline Skypala has been editor of FTfm for four years having previously been deputy personal finance editor. She joined the FT in 1999 and has been writing on savings and investment issues throughout her career.

Steve Johnson, FTfm deputy editor, has been a journalist for 17 years, 10 of which have been with the FT.

Sophia Grene, reporter on FTfm, has been a financial journalist in print and online for 12 years.

Ruth Sullivan has worked as a financial/business journalist and foreign correspondent and for the past 10 years has been at the FT.