Distressed Hedge Funds in Secondary Sovereign Debt Markets of Emerging Economies
Keywords:
Distressed Hedge Fund, Sovereign Debt, Secondary Market, Liquidity, Emerging EconomiesAbstract
The paper aims to interrogate the effects of distressed hedge funds (DHFs) investments on
the liquidity in the secondary market for sovereign debt of emerging economies. DHFs, or vulture
holdouts, as they are informally known, have gained significant prominence in recent national debt
crises. The primary complaint against them is that they exploit cooperative creditors and sovereign
debtors by purchasing distressed debt at reduced prices, choosing not to participate in debt restructuring
processes, and pursuing litigation to recoup the total debt amount. However, writers and industry
experts have argued that although the activities of the holdout creditors, especially the DHFs, could
disrupt the orderly sovereign debt restructuring in the debt market, much more beyond that, they
promote the deepening and liquidity of the market. Thus, in pursuit of profits, distressed asset investors
unintentionally contribute to the market’s good by fostering market liquidity and indirectly helping the
bondholders, sovereign borrowers defaulted sovereigns, and the societies of the debtor nations and the
nations where the sovereign debt market is situated. This study is essentially non-empirical; hence, the
literature review is used as the methodological tool. Specifically, an integrative review is used because
the literature serves as the data.
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