Why hedge funds love litigation finance?

Hedge funds have emerged as some of the biggest investors in litigation financing deals, and when you look at exactly how many of these deals are typically structured, it’s easy to understand why.

The litigation financer invests $100,000 and the case settles for 10 times that. The litigation financing arm gets back the first $100,000. They then get back 100 percent of that. And then they typically get a percentage of everything else,” says Jay Auslander, a litigation partner at Wilk Auslander, a firm with experience in these cases.

That chunk of the remainder varies from case to case, deals are individually negotiated but often ranges from 10 to 20 percent. That’s not a bad return. In Auslander’s example, assuming a 15 percent rate on the remainder ($800,000), the financier alone walks away with $320,000, a 220 percent return a 32 percent cut of the settlement, and if it settles for $250,000? The same structure applies. The financier collects his $100,000 investment plus another $100,000, then 15 percent of the remaining $50,000. The fund gets paid before anyone else, and in this case takes $207,500, or 83 percent, of the ultimate settlement.

What’s the downside? “If there’s no win they get nothing.” As in stocks, your loss is limited to your investment. That said, these funds protect their downside risk pretty aggressively. All of these funds do vary extensively due diligence before the case, they won’t take it if you don’t have a good shot.

Another plus for hedge funds is Settlement funding. It is what Wall Street pros call an uncorrelated asset class. The returns on legal financing are almost entirely independent of the stock market. They are more than willing to make this calculated risk because it diversifies their investments and provides a nice return most of the time.

For hedge funds, which are designed to make money in both up and down markets, this is the perfect alternative investment.

Topics: Wilk Auslander | Wall Street | Perfect Alternative Investment

Work cited: John Divine | U.S. News | January 22, 2018