Litigation Funding as a Stock Market Alternative

As investors remain wary of the stock market, they’re left wondering how to invest effectively. Litigation Funding may prove an attractive alternative for investors depending on their risk tolerance. Litigation funding is uncorrelated to stock trading, and largely insulated from economic conditions.

Business Day explains that litigation funding is a strong choice for investors owing to its high-alpha/low-beta risk-return. As an asset class, litigation funding maintains a global presence. More than half of all international investments in litigation funding comes from the US, UK, and Australia. The global market value of the legal funding industry is believed to be around $100 billion. 

One of the most attractive aspects of third-party legal funding as an investment is the asymmetrical return profiles. Essentially, the possible payout is far greater than the possible losses—even if the entire investment is lost in an unfavorable verdict or judgment.

Funding agreements between third-party funders and clients are generally non-recourse. So claimants aren’t required to pay funders back if their case is unsuccessful. If the case succeeds, however, funders receive an agreed-upon percentage, an award, or a multiple of the monies provided.

Success is not guaranteed, and wait times between investments and payouts can take years. Three to five years is common for a commercial dispute to reach completion. But every suit will eventually conclude with either a judgment or a settlement, thus it is ultimately a binary outcome.

Profitability via investments in litigation funding rest largely on vetting cases. Considering the merits is merely the beginning—whether or not a defendant can make good on a judgment should also be heavily considered.

What we do know is that demand for litigation funding from clients shows no sign of slowing.