The activities of �vulture funds" have been under scrutiny in recent weeks. An investigation by the* Guardian* and Newsnight has drawn attention to the way in which these entities aim to make significant profits at the expense of some of the world's poorest countries through buying up their sovereign debt. The World Bank estimates that hundreds of millions of pounds have passed in this way from developing nations to vulture funds to date. Aid charities Jubilee Debt Campaign, Oxfam and Christian Aid have all added their voices to ongoing campaigns against the activities of these funds.

Stressed out

Vulture funds, sometimes more diplomatically referred to in the finance world as distressed debt funds or special situation funds, are part of the wider hedge fund/private equity community and as such seek to make a profit through investment. The bread-and-butter activity of most vulture funds is investing in distressed corporate debt, that is, obtaining the debt of companies on the verge of bankruptcy, hoping that if these companies recover, or when their assets are sold, they will see a return. Some investors follow a vulture strategy in equity investing also, buying up shares in a troubled company when their price is very low, hoping that they will rise in value if the company is successfully reorganised. However, the vulture funds currently causing particular controversy obtain the debt not of corporates but of developing economies, acquiring it at knockdown prices and then claiming the full amount owed, often through the courts. It is hard for nations to protect themselves against this type of strategy because, unlike companies, they cannot declare themselves bankrupt and thereby have their outstanding debts cancelled.

Buying corporate or sovereign debt at a discount and then claiming repayment of the full sum owed is legal, and an established method of legitimate profit making in the secondary debt markets (the trading of debt among parties not involved in the original deal). Borrowers are sometimes even able to benefit from secondary debt market trading themselves by buying back their own debt when it's trading at a price below its face value.

However, many countries, including the UK, have introduced legislation to ban vulture funds from using their courts to pursue claims held against developing economies, because it can mean that public money given as debt relief ends up with private investors and that international agreements regarding how developing economies repay their debts might be breached. In addition, permitting such activities is felt to not be consistent with their commitment to the economic growth and stability of these nations.

Claim game

Some jurisdictions (areas in which a particular legal system applies), often offshore ones such as the Cayman Islands and the Virgin Islands, have not introduced such a ban. Nearest to the UK is Jersey which, although a British Crown Dependency, has its own laws. Vulture fund FG Hemisphere is currently taking advantage of Jersey's lack of prohibition of sovereign debt claims against developing nations to demand $100 million (�63 million) from the Democratic Republic of Congo (DRC) through its courts, having obtained the rights to a debt that was originally owed to the government of the former Yugoslavia for the construction of power supply infrastructure in the DRC. FG Hemisphere's efforts to date to claim this sum have even included an attempted seizure of the DRC's embassy in Washington DC. The DRC has been particularly popular with vulture funds because its significant quantities of natural resources give it potential access to capital, while its recent civil war and consequential turmoil have made its debt cheap to acquire as creditors seek to cut their losses.

Zambia has also faced high-profile claims, having been successfully sued by Donegal International as the holder of debt originally owed to the Romanian government for farming equipment purchased by the African nation. Other countries to face similar claims include Cameroon, Ethiopia, Sudan, and Uganda, and the World Bank estimates that over a quarter of the counties to which it has given debt relief have been subsequently pursued by vulture funds.

The majority of the countries currently subject to such claims are African ones, but vulture funds are not just a concern for nations on this continent. Claims have also been made in the past against the government of Argentina, whose debt could be purchased very cheaply in the early 2000s when the Argentinian economy was in crisis. And closer to home, there have been reports that these investment vehicles are showing an interest in sovereign debt of troubled eurozone economies, particularly Greece.