Instead of a bear market, the developing investment environment could be characterized as a vulture market. Aggressive investors hit by market turmoil and starved for returns, it seems, should be tempted to swoop down on ailing companies. "Given the market dislocations, there are vulture opportunities in a number of asset classes that we may never see again," says Brad McMillan, director of investment research at Commonwealth Financial Network in Waltham, Mass.

Some gauges put the value of distressed mortgage assets alone at more than $2 trillion. Add to this amount the problems plaguing municipal bonds, and you start to get an idea of the scale of potential pickings—a veritable vulture's buffet. Yet many would-be investors are holding back. "Though we are carefully evaluating distressed opportunities, we aren't pulling the trigger yet," McMillan says.

The reason many vultures are circling without swooping, experts say, is that this downturn is so different than those of the past. These differences apply to opportunities for distressed investing just as they do to other types of investing. Investors who made billions in distressed assets during previous downturns, such as Sam "Grave Digger" Zell, are still sitting this one out. Sovereign wealth funds, with their deep investment pools, are also staying on the sidelines right now. A key factor underlying the lack of investment activity, according to Tomasz Piskorski, a professor at Columbia Business School, isn't just uncertainty about the direction of the market, but uncertainty about future federal action as well.

Buoying Value

"The original Paulson plan [buying $700 billion in distressed mortgages] was a vulture fund," says Piskorski. "If you are a vulture investor and you have raised funds, you are essentially competing with Paulson, and that's hard to do," he argues. So, goes the logic, the federal rescue has kept or delayed the distressed-asset market from hitting bottom.

Moreover, Piskorski holds that the government could continue to intervene to ensure that these assets don't fall further. Also, banks have been recapitalized by government intervention and thus haven't been forced to sell assets—at least, not to the degree that they otherwise would have to. As a result, "the distressed market is largely frozen," he notes. These factors have compelled many investors to take a wait-and-see stance.

Nevertheless, these funds are raising money to seize opportunities when the time is right. There are no widely accepted estimates because there are no official figures or pertinent trade organizations. Piskorksi's sense is that the amounts raised has been "substantial." As vulture funds carefully position themselves to pursue distressed opportunities, advisors may do the same—even if they aren't yet ready to enter the market.

Vulture investing is sometimes politely referred to as distressed investing, though the two are often classified separately. The distinction is that investors in distressed assets are hopeful for turnaround, whereas vulture investors are banking on failure and hence, breakup value.

Part of the challenge for advisors interested in vulture/distressed investing is to identify and access the best money managers in this specialty. Most of these funds are, of course, private. They may be nothing more than hedge funds or private equity funds that can change tactics any time and buy anything they choose.

There are plenty of publicly held companies with mutual funds operating in this arena as well, though these funds don't always classify themselves as distressed. To identify vulture mutual funds, Lori Heinel, head of investment solutions for Citi Private Bank, advises investors to "look for funds that have the ability to buy illiquid securities as part of their mandate, say, up to 10%." Even if they don't label themselves as vulture, she says, these may be the easiest vulture plays for individual investors. (Citi typically uses private vehicles for its ultrahigh-net-worth investors.)

Heinel thinks terrific opportunities currently abound because many assets classified as "distressed" should more realistically be termed "stressed." "Distressed usually means companies that have filed for bankruptcy," she says. "What you are seeing is high-quality assets that are still performing but are falling into this category." The financial system, she adds, is forcing the deleveraging of all sorts of assets—some of them in reasonably good shape. Sellers are, in turn, unloading them in illiquid markets, driving prices to extreme lows.

Heinel finds secured mortgages or other structured products that are not in default—but are priced as though they nearly were—to be attractive buys. Additionally, she says, investors may be scared off by the words "mortgage-backed securities." For this reason alone, she says, these products are excellent buying opportunities.