Diversification, Uncorrelated Assets, and Litigation Funding

Written by LexShares Team | Jul 13, 2016 11:50:52 AM | 0 Comments

Written by LexShares Team | Jul 13, 2016 11:50:52 AM | 0 Comments

Diversification, Uncorrelated Assets, and Litigation Funding

Financial advisors have always stressed the importance of mitigating risk by diversifying portfolios through investment in a wide range of uncorrelated assets. Nowhere is this point illustrated more saliently than in times of great market volatility, such as the 2007-2008 financial market crisis and the recent short-term volatility following the United Kingdom’s Brexit vote, where value slowly accumulated over the course of many years can evaporate in a span of minutes. Such instability heralds a heightened opportunity for both risk and reward; whether the latter is worth the former, however, largely depends on an investor's temperament and financial goals.  Those who can ill afford a rapid depreciation in the value of their portfolios may be wise to heed the call for diversification.

Traditionally, diversifying an investment portfolio entails finding and investing in securities that represent assets of vastly different types or characteristics, or which hail from highly disparate geographies, industries, or even economies.  These dissimilarities mean that the underlying assets are uncorrelated—that is, a loss of value in one is unlikely to precipitate either a corresponding loss of (called a positive correlation) or increase in (called a negative correlation) value in another. This lack of correlation insulates the risks inherent to each assets class from one another, minimizing the likelihood of those risks being realized all at once.  In an era of ever-increasing globalization, however, pressures in one market, industry, or region will often yield repercussions for the next.  That means a modern investor's ability to find truly uncorrelated assets is continually diminishing.

Litigation finance, also called lawsuit funding or litigation funding, is a relatively new asset class distinctive from customary alternative assets in that it grants investors the ability to invest in legal claims.  Such legal claims, by their very nature, are largely uncorrelated to capital markets, provide moderate times to liquidity, and historically have offered the potential for returns larger than those gained from many other asset classes.  This distinctiveness positions litigation finance as a potentially powerful and useful form of investment for those seeking to mitigate portfolio risk through diversification. Litigation finance is also an asset class that traditionally has been unattainable by individual investors, as the high cost of litigation frequently meant that only institutional investors could expect to mobilize the volume of capital necessary to fund a legal case in entirety.  Moreover, unlike traditional securities, the assessment of case merits requires a degree of legal expertise to which many investors lack access.

Today, however, specialized knowledge and a bountiful war chest no longer bar ordinary investors from litigation finance.  LexShares’ online platform makes the litigation finance process straightforward for all involved.  Plaintiffs seeking capital simply apply for funding.  All cases are reviewed by LexShares’ experienced team of legal professionals, and those found to have strong merits are posted as investment opportunities with specific funding goals.  Accredited investors can review case details and decide whether and how much to invest.  Plaintiffs receive funds for litigation expenses and working capital when their funding goals are reached.  Cases are continually monitored as litigation proceeds, and when plaintiffs settle or receive a favorable judgment, investors receive their agreed-upon portion of the recovery.

Beyond helping to moderate risk and diversify a portfolio’s interests, litigation finance also benefits all parties involved.  It allows legal claimants to finance the costs of pursuing a lawsuit without having to deplete or extinguish their own personal or business finances.  It places them on a more equal footing with wealthier defendants by granting access to premier legal counsel and a full arsenal of litigation resources.  Litigation finance also empowers attorneys and law firms to take on cases from plaintiffs who would otherwise be unable to afford their fees, allows them to offer clients more flexible payment arrangements, and generally makes fairer and fuller recoveries more readily achievable—which then comes full circle in granting investors their share of those recoveries.  In this way, litigation finance not only strengthens an investment portfolio; it furthers public policy and promotes both justice and access to justice.

 A Guide to Litigation Finance Download Now

 

Topics: Litigation Funding, Diversification, Investing