Exchange Trade Funds

Some of the biggest trends in finance as of this decade are the shift from active to passive management and efforts across the industry to offer novel investment products within the confines of the Investment Company Act of 1940.  These trends have given rise to exchange traded funds (ETFs), and the shift by hedge funds to offer Investment Company Act compliant vehicles in an attempt to drive up assets under management.  Despite this innovation, there are still multiple asset classes that remain unavailable to many investors.  Litigation finance is one of these limited opportunities.

Currently, litigation finance vehicles are available only to the most qualified investors who have an “in” into the market.  There are some platforms that will allow individuals directly invest in lawsuits, but these have severe limitations, one of which is the limited ability to diversify across investments.  This is obviously a problem.

ETFs are a solution.  ETFs are becoming broader and incredibly diverse as an asset class.  For example, ETFs have generally been a passive investment vehicle, but recently, several asset management firms have offered ETFs as active vehicles.  Because of this, litigation-oriented ETFs present a great opportunity in the investment market.

In some respects, the situation regarding litigation finance is similar to the market for bank loans decades ago, before the rise of syndicated bank loans and their secondary market.  Today, bank loans are offered through ETF vehicles.  Similar to bank loans, there is also a secondary market that is liquid, of which includes independent platforms that help buy and sell these instruments. Maybe the future of litigation finance holds a similar opportunity

Keywords: litigation finance, asset class, ETFs, problem

Work Cited:  Michael McDonald, Finance and Law: Litigation Finance ETFs, Above the Law (September 27, 2016)