Litigation finance, as an emerging alternative investment, is gaining popularity among investors looking for high returns outside of traditional markets. By providing funding for legal claims and lawsuits, litigation finance helps level the playing field for plaintiffs lacking deep pockets. With the right strategies, litigation finance can generate stable uncorrelated returns and diversify investment portfolios. This article will explore the best practices of investing in litigation finance based on market trends, risk management, and expected returns.
Market size of litigation funding is expanding rapidly
The litigation funding market has grown substantially in recent years. According to Westfleet Advisors, the global litigation funding market reached $11.3 billion in 2021, more than doubled from $5.7 billion in 2017. North America accounts for over 70% of the global market. As litigation funding gains mainstream acceptance and investors seek higher yields, the market is projected to reach $22 billion by 2026.
Litigation funding provides high returns with low correlation to markets
Unlike traditional investments tied to broader financial markets, returns of litigation funding are largely uncorrelated, making it an effective portfolio diversifier. According to a study by Burford Capital, the annualized return for litigation funding was 14.23% from 2009 to 2018, outperforming stocks. Moreover, the returns had near-zero correlation with equity and bond markets, providing true diversification benefits.
Proper risk management is key to successful litigation funding
While litigation funding offers high returns, it also comes with risks like other alternative investments. Thorough due diligence and risk assessment are critical before investing in a case. Key risk factors to evaluate include strength of legal merits, plaintiff’s financial situation, defendant’s ability to pay, expected duration and legal jurisdiction. Diversifying across multiple small investments can also reduce concentration risk.
Focus on experienced litigation funding firms with proven track record
For investors new to litigation finance, partnering with established funding firms is advisable. Top players like Burford Capital and Bentham IMF have the expertise to thoroughly assess case risks and structure customized financing solutions. Their diversified portfolios across jurisdictions and case types also maximize risk-adjusted returns. Investors should look for long operating history, solid investment performance and fair fee structures when selecting funding partners.
Litigation funding provides attractive uncorrelated returns compared to traditional assets. With prudent risk management and partnering with experienced funding firms, investors can realize upside potential while diversifying their portfolios.