How Litigation Finance Compares to Traditional Investments

Comparing Litigation Funding with Traditional Investments

As market dynamics become increasingly complex, sophisticated investors are broadening their horizons beyond traditional asset classes like stocks and bonds. The rise of alternative investments reflects a growing appetite for portfolio diversification, capital preservation and risk-adjusted returns – amidst ongoing market turbulence and uncertainty.

Among these alternatives, litigation finance stands out as a compelling opportunity. By funding legal claims in exchange for a portion of the settlement or judgment, investors can access returns that are largely uncorrelated with broader financial markets.

This article explores the fundamental differences between litigation finance and traditional investments – and outlines why the former is gaining traction among experienced investors seeking stable, non-market-correlated returns.

Litigation Finance – A Purpose-Driven, Uncorrelated Asset Class

While still relatively new to the alternatives space, litigation finance has rapidly established itself as a credible asset class. In essence, it involves third parties funding legal proceedings in return for a share of the proceeds – and it generates returns largely independent of traditional market forces, as they’re driven by legal outcomes rather than economic cycles.

Beyond its financial appeal, litigation finance resonates with investors seeking purpose alongside performance. By enabling individuals and businesses to pursue claims they might otherwise be unable to afford, it serves a vital role in levelling the legal playing field – and is frequently framed as a modern-day “David vs. Goliath” dynamic.

From commercial disputes to intellectual property claims, insolvency proceedings, and class actions, cases are funded across a range of sectors – technology, healthcare, and energy, for example. Increasingly, litigation finance aligns with ESG objectives, as investors recognise its potential to promote access to justice and drive positive social impact – a trend we expect to gain further momentum.

Traditional Investments – and Why Many Investors Are Looking Beyond Them

Traditional asset classes – by which we mean equities, bonds and cash – have long been the foundation of investor portfolios. Equities are popular for their potential to generate capital appreciation and dividend income, while bonds offer capital preservation through predictable interest payments. These assets are typically liquid and publicly traded, making them widely accessible.

That said, traditional investments are limited. Equity markets are inherently volatile, with fluctuations driven by macroeconomic cycles, geopolitical risk and company-specific factors. Meanwhile, bonds tend to underperform in low or rising interest rate environments – plus, they’re vulnerable to inflationary pressures. For high-net-worth individuals (HNWIs) and sophisticated investors, these challenges are compounded by the fact that traditional portfolios no longer provide the diversification or downside protection required to preserve and grow wealth.

In response, an increasing number of sophisticated investors are turning to alternative asset classes – including private equity, hedge funds, real assets and litigation finance – to complement their traditional investments. The appeal is clear: alternatives often provide returns uncorrelated with mainstream markets, helping to reduce overall portfolio risk while boosting return potential.

According to EY, the appetite for alternatives increases with wealth: while 14% of mass affluent investors allocate to alternatives, that number rises to 29% among HNWIs and a striking 81% among ultra-high-net-worth individuals. Bear in mind too that wealthier investors tend to allocate a greater proportion of their portfolios to alternatives – reflecting their deeper understanding of the strategic role these assets can play in building resilient, performance-driven portfolios.

Key Advantages of Litigation Finance

Litigation finance is becoming an increasingly prominent feature in high-net-worth and institutional portfolios. As the global market continues its rapid expansion – projected to reach USD 67.2 billion by 2037 – it’s gaining recognition not just for its strong return potential, but for its distinct strategic advantages over traditional asset classes. Here are some of the key benefits:

• Uncorrelated returns – Because litigation finance outcomes are driven by the resolution of legal disputes rather than macroeconomic trends or financial market performance, the asset class can serve as a powerful stabiliser within a diversified portfolio – particularly valuable in periods of economic or geopolitical uncertainty.
• Attractive return potential – Successful litigation outcomes can deliver substantial financial rewards, often exceeding traditional investments performance. However, returns are case-dependent, which makes rigorous due diligence – from assessing claim merits to diversifying across sectors claim types and jurisdictions – essential.
• Enhanced portfolio diversification – As it’s rooted in legal outcomes rather than equity markets, litigation finance can reduce overall portfolio correlation and risk while offering a differentiated return profile. Additional diversification is also achievable within the asset class itself, by selecting funders with broad and balanced case portfolios.
• Positive social impact – Increasingly recognised for its contribution to social justice, litigation finance enables individuals and businesses to pursue claims they might otherwise be unable to afford, promoting fair access to the legal system. Many investors are also drawn to its potential to support causes aligned with environmental, social, and governance (ESG) principles – such as climate litigation or human rights cases.

Litigation Finance vs. Traditional Investments: A Strategic Comparison

While traditional investments remain portfolio mainstays, their performance is increasingly challenged by market volatility, rising interest rates, and inflationary pressures. In contrast, litigation finance offers a differentiated return profile, defined risk exposure, and time horizons that can align with both short- and medium-term objectives.

Return Profiles

Influenced by macroeconomic shifts and geopolitical instability, equities remain volatile – while bonds, traditionally seen as a safe haven, have underperformed in recent years due to rising rates and inflation. In contrast, litigation finance delivers returns uncorrelated to financial markets, driven instead by legal outcomes. For investors seeking stable, high-yield opportunities amid market turbulence, it presents a compelling alternative.

Risk Factors

Traditional assets carry systemic risk, particularly during downturns. While government bonds offer stability, they often lack growth potential. With litigation finance, risk is defined, case-specific and mitigated through robust due diligence and portfolio diversification across sectors, jurisdictions and case stages. Moreover, some litigation investment structures feature capital protection frameworks that insure the capital investment.

Time Horizons

Conventional wisdom encourages long-term investment in traditional markets. However, unpredictable conditions mean that consistent returns over time are harder to achieve. Litigation finance typically involves short- to medium-term commitments, with some products offering time horizons of 1 or 2 years along with regular income via fixed coupon payments – providing liquidity and income stability.

Who Should Consider Litigation Finance?

Once the domain of institutions, litigation finance is now increasingly accessible to high-net-worth and sophisticated investors seeking diversification, stable returns and exposure to non-market-correlated assets.

Litigation funding is particularly well-suited to those searching for strategies to reduce portfolio volatility while accessing attractive, risk-adjusted returns. And if you’re looking beyond traditional equities and bonds, litigation finance offers exposure to legal outcomes independent of broader economic cycles.

The asset class also resonates with ethically minded investors. By funding meritorious legal claims, you’re contributing to access to justice and can support cases aligned with your personal values – such as environmental, social or governance-related causes.

With both short- and longer-term investment structures available, litigation finance provides flexibility, income potential through regular coupon payments, and the opportunity for capital growth. Increasingly seen as a strategic hedge during periods of market instability, it’s a valuable addition to well-diversified, resilient portfolios.

Addressing Common Concerns in Litigation Finance

Like any investment, litigation finance carries risk – so it’s crucial to select products that align with your objectives and risk appetite. However, several common misconceptions can lead to undue hesitation:

“Isn’t it too risky given the uncertainty of legal outcomes?”

Legal proceedings carry inherent uncertainty. However, reputable funders mitigate this with meticulous due diligence, with cases selected on legal merit, enforceability and the financial viability of involved parties. Importantly, investments should be diversified across a portfolio of cases, reducing exposure to any single outcome.

“Isn’t the industry opaque?”

Transparency is a growing priority for credible litigation financiers. Investors receive regular reporting and performance updates, while cases are managed by experienced professionals. High standards of disclosure and oversight are becoming the norm.

“What about regulatory risk?”

Evolving regulation – such as the UK Supreme Court’s 2023 ruling on damages-based agreements – has raised valid questions. However, regulatory exposure can be mitigated by investing in products diversified across jurisdictions and legal systems.

“Isn’t it too niche or illiquid?”

Historically viewed as niche, litigation finance is now a fast-growing and increasingly mainstream alternative asset class. A range of structures exists, including shorter-duration products offering regular income and partial liquidity – broadening both access and suitability for a wider variety of investor profiles.

Looking Ahead: The Evolving Role of Litigation Finance

Litigation finance – the third-party funding of legal claims in exchange for a share of the proceeds – continues to gain momentum as a forward-looking alternative investment. Uncorrelated with financial markets, it offers a powerful hedge against economic volatility and provides portfolio diversification. Beyond financial performance, litigation finance delivers positive social impact by expanding access to justice.

As global demand for legal funding accelerates, this asset class is evolving into a mainstream option for high-net-worth and sophisticated investors seeking strong, stable returns with ethical alignment. Ready to explore litigation finance?

Get in touch to learn how we can help you access this fast-growing asset class.