posted
An interesting article from Tuesday's Financial Times talks about the slowly building use of hedge funds to spread law firm risk in high stakes cases.
There's a startup looking to do it on a large scale for the first time.
quote:But without the access to capital, law firms and their clients are up against the deep pockets of the insurance companies orthe other larger defendants in the big class actionsuits.
"We lend to law firms to help them reduce that risk and we reduce our own risk through our analysis of the collateral as well as through diversification," said the hedge fund.
"What we do is analyse the risk using historical analysis of similar cases, the track record of the law firm and its historicalcash flows.
Hedge funds cannot fund any individual lawsuit directly, and their returns are not contingent on the success of a lawsuit. Instead, they fund the law firms themselves, with loans backed by cash flows from the firm as a whole, and from personal guarantees from attorneys.
Also interesting are the potential implications of developments related to this statement:
quote:Second, there is no secondary market. Unlike mortgages, which are securitised and packaged for the secondary markets, no such market exists in litigation finance.
There's not necessarily a reason there couldn't be a secondary market in litigation instruments.
Posts: 15770 | Registered: Dec 2001
| IP: Logged |
posted
Oh, wow. Imagine securities in individual case outcomes. I wonder if the market prediction of payouts in litigation would be accurate?
Posts: 26071 | Registered: Oct 2003
| IP: Logged |
posted
OK I confess idiocy I do not quite understand what this is all about. Is this discussing the possibility of a market in litigation anticipation?
Or am I completely off?
Posts: 14316 | Registered: Jul 2005
| IP: Logged |
posted
They only have to be moderately accurate in aggregate, of course. Also, there would be significant packaging issues, since the law firms themselves can, for legal reasons, only hedge their performance as a whole, not in any particular case. Therefore that overall performance would need to be repackaged into constituent parcels.
I'm seriously considering sending the author of the piece my resume and cover letter to forward to the startup firm (they've asked to remain anonymous, so asking for the name is out). I think this sort of work is tremendously interesting, and will graduate in december with a background that might make me useful (very good grades in economics courses, graduate coursework in game theory, math minor, et cetera).
Posts: 15770 | Registered: Dec 2001
| IP: Logged |
Basically, law firms take on large risks by spending money on cases, particularly big cases where hope of winning may be very hard to ascertain in advance. Imagine if you could buy some of that risk with some percentage of the potential payout, such that you'd get all of the payout if they win the case and none of the payout if they lose. In that sense it is a market in litigation anticipation, though you're not able to buy an interest in one case at a time, only one law firm at a time (and this hedge fund, were you to buy into it, would involve many many law firms at a time). Suddenly the law firms can rest comfortably, since they've traded their risk for guaranteed revenue, while you, the risk taker, stand to make significantly higher, if uncertain, returns.
Posts: 15770 | Registered: Dec 2001
| IP: Logged |
Basically, law firms take on large risks by spending money on cases, particularly big cases where hope of winning may be very hard to ascertain in advance. Imagine if you could buy some of that risk with some percentage of the potential payout, such that you'd get all of the payout if they win the case and none of the payout if they lose. In that sense it is a market in litigation anticipation, though you're not able to buy an interest in one case at a time, only one law firm at a time (and this hedge fund, were you to buy into it, would involve many many law firms at a time). Suddenly the law firms can rest comfortably, since they've traded their risk for guaranteed revenue, while you, the risk taker, stand to make significantly higher, if uncertain, returns.
That makes complete sense. What a strange system, thats really all I can call it.
Posts: 14316 | Registered: Jul 2005
| IP: Logged |
posted
Heh, the only reason it hasn't taken off before is difficulties in valuation and legality. Hedge funds are extremely important ways of hedging (unsurprisingly) risk.
Posts: 15770 | Registered: Dec 2001
| IP: Logged |
quote:They only have to be moderately accurate in aggregate, of course.
True. I'm imagining litigation day traders trying to beat the litigation market.
quote:Also, there would be significant packaging issues, since the law firms themselves can, for legal reasons, only hedge their performance as a whole, not in any particular case.
True. I was engaging in pure fantasy. "RIAA v. XM fell on the release of a new law review article skewering RIAA's central claim. SCO v. IBM rose 1/8."
It's just fun for me. Posts: 26071 | Registered: Oct 2003
| IP: Logged |
quote:They only have to be moderately accurate in aggregate, of course.
True. I'm imagining litigation day traders trying to beat the litigation market.
quote:Also, there would be significant packaging issues, since the law firms themselves can, for legal reasons, only hedge their performance as a whole, not in any particular case.
True. I was engaging in pure fantasy. "RIAA v. XM fell on the release of a new law review article skewering RIAA's central claim. SCO v. IBM rose 1/8."
It's just fun for me.
quote:I'm seriously considering sending the author of the piece my resume and cover letter to forward to the startup firm (they've asked to remain anonymous, so asking for the name is out). I think this sort of work is tremendously interesting, and will graduate in december with a background that might make me useful (very good grades in economics courses, graduate coursework in game theory, math minor, et cetera).
Sounds very cool. Good luck if you go through with it.
I imagine some lawyers could find this very rewarding.
Posts: 26071 | Registered: Oct 2003
| IP: Logged |
Printer-friendly view of this topic
![[Smile]](smile.gif)
