Litigation funding vs. traditional investments: key differences and benefits

Growing numbers of Investors today are looking beyond traditional assets like stocks and bonds to achieve their goals. As the financial landscape evolves, alternative investments have gained traction, offering innovative ways to diversify and stabilize portfolios while delivering attractive returns.

One such alternative is litigation funding – a high-potential opportunity where investors fund legal cases in return for a share of the proceeds. Delivering uncorrelated returns – those independent of financial market fluctuations – litigation finance is an appealing option for those seeking stability in times of economic uncertainty.

In this post, we compare litigation funding with traditional investments, highlighting key differences as well as potential advantages.

What is litigation funding?

A relative newcomer to the alternatives scene, litigation funding is a financial product where third-party investors cover legal costs in exchange for a share of the settlement. It’s growing in popularity, partly because it provides steady returns, as outcomes are case-dependent and uncorrelated to financial market fluctuations.

Beyond financial gains, litigation finance attracts investors as it promotes access to justice by enabling individuals and businesses to pursue claims they couldn’t otherwise afford; an analogy we often use is that of David and Goliath.

Commonly funded cases range from commercial disputes to intellectual property claims, insolvency proceedings and class actions – with industries including technology, healthcare and energy frequently benefitting. There’s also a growing alignment between litigation finance and ESG, as investors seek out opportunities that promote social justice – one litigation funding trend that we’re expecting to continue in 2025 and beyond.

What are traditional investments?

Traditional asset classes – primarily stocks, bonds and cash – are well-established investments that are a staple feature in investor portfolios. Historically, stocks have been favored for their potential for high returns through capital appreciation and dividends – with bonds providing stability, thanks to their fixed-interest payments. Generally viewed as liquid, stocks and bonds are publicly traded on markets.

However, traditional investments are not without drawbacks. Stocks are vulnerable to market volatility, with prices impacted by economic cycles, geopolitical instability and company performance. Meanwhile, traditional bonds often underperform in low-interest-rate environments – and their value can fluctuate with inflation. And for high-net-worth qualified individuals (HNWIs) in particular, traditional investments alone struggle to deliver the right level of portfolio diversification.

As HNWIs look for strategies to reduce risk and optimize returns, they’re increasingly turning to alternative assets – private equity, hedge funds or commodities, to name a few. In fact, the wealthier you are, the more likely you are to favor them – 14% of the mass affluent invest in alternatives, with the figure rising to 29% for HNWIs and a whopping 81% for ultra-high-net-worth individuals, according to EY. What’s more, wealthier investors are more likely to allocate a higher proportion of their portfolio to alternative asset classes.

So, what’s attracting them? Alternative assets often offer non-correlated returns, for one. They also provide protection against market fluctuations, helping HNWIs balance risk and returns.

Key benefits of litigation funding

Increasingly a feature of HNWI portfolios, the litigation finance market is growing fast – and is projected to reach a value of USD 67.2 billion by 2037. But what makes it such a compelling prospect as an alternative to traditional asset classes?

• Uncorrelated returns – As an alternative asset class, litigation finance is largely unaffected by market volatility. As litigation outcomes depend on legal proceedings rather than financial markets, it can act as a stabilizing force in a diversified portfolio, especially during times of economic uncertainty.
• Strong returns – Successful legal cases often result in substantial financial payouts, leading to returns that can significantly outperform traditional investments. Of course, success depends on the merits of the case, so it’s crucial for litigation financiers to perform extensive due diligence. Plus, it’s strategically important to invest across a variety of cases – those spanning different sectors and geographic regions, for example.
• Diversification – By exposing investors to legal outcomes rather than relying on stock market or bond performance, litigation finance investments provide diversification, and therefore the potential to reduce overall portfolio risk. This makes it an attractive complement to traditional investment vehicles. As indicated above, there’s also opportunity to diversify within the asset class by choosing a funder that incorporates a variety of cases in its portfolio.
• Social impact – Enabling access to justice for individuals or businesses who might otherwise lack the resources to pursue their legal claims, litigation finance is often used to support ethical causes – climate justice or human rights cases, for example. Plus, it helps secure fair treatment in the legal system.

Litigation funding and traditional investments: A comparison

Traditional investments are comforting in their familiarity, but their return profiles fluctuate based on economic conditions and financial market performance. And when those conditions are anything but optimal, it’s unsurprising that HNWIs are broadening their horizons. So, how does litigation finance measure up against its traditional asset class competitors – when it comes to return profiles, risk factors and time horizons?

Return profiles – Volatile stocks, underperforming bonds or uncorrelated litigation finance products?

When it comes to profiling investment returns, it’s no surprise to discover that stocks are highly volatile. Their performance is impacted by everything from geopolitical tensions to inflation and corporate earnings. In recent years in particular, equities have experienced significant fluctuations. Meanwhile, traditional bonds have underperformed due to rising interest rates, leaving investors with lower yields and fewer opportunities for growth.

In contrast, litigation funding offers the potential for higher returns which, crucially, are uncorrelated to economic cycles or financial market ebbs and flows. With outcomes tied to legal proceedings rather than market trends, this alternative asset class offers a chance for significant payouts. The potential for returns that are both lucrative and stable makes it an attractive alternative – especially in the current climate when traditional assets are struggling to deliver consistency.

Risk factors – Highly exposed traditional assets, low-risk, low-return government bonds or defined risks based on litigation case merits?

Of course, it’s vital to choose an investment – whether traditional or litigation-based – that aligns with an appropriate risk profile, recognizing that no investment is risk free. For example, traditional assets are highly exposed to market volatility, as witnessed by the collapse of several major sectors during recent economic downturns. Products such as government bonds offer high levels of security and reliability, but their potential for portfolio growth is limited due to lower returns.

Conversely, litigation funding risks link to the outcomes of individual legal cases, with defined exposures based on case merits rather than wider macroeconomic factors. Leading litigation financiers conduct meticulous due diligence prior to investing – and by constructing portfolios that span different sectors, stages and geographies, they ensure that returns aren’t dependent on the outcome of any single case, reducing overall risk for investors.

As an additional point, it’s worth noting that litigation finance products often incorporate security structures to further mitigate risk – debenture loans, insurance policies or performance guarantees, for example.

Time horizons – Does the old adage ‘it’s not about timing the market but time in the market’ hold true for traditional and litigation products?

Financial advisers are always keen to emphasize that those who stay invested over the long term – in a portfolio that’s well diversified across asset types – will generally do better than investors who try to beat the market and profit from turning points. However, when the market is as unpredictable as it has been in recent years, investors relying solely on traditional investments are often failing to achieve competitive longer-term returns.

But what kind of time horizons are investors in litigation finance contemplating? It varies depending on the product. Some litigation financiers require longer-term commitments, with investments locked in until cases are resolved. While this can be seen as a drawback, it can lead to significant returns for patient investors. However, others offer investments over timeframes of around 18 months. Investors also benefit from regular coupon payments, providing a consistent income stream that’s attractive to HNWIs at all stages of the investing cycle.

Who should consider litigation funding?

Once restricted to an institutional audience, litigation funding is now an appealing option for a broader range of individual investors looking to diversify beyond traditional assets.

HNWIs – especially qualified investors – are ideally positioned to benefit from the potential high returns offered by litigation funding products – using this innovative alternative asset class to help reduce overall portfolio risk. Likewise, investors seeking opportunities that don’t rely on stock market performance are choosing litigation finance as it offers exposure to legal outcomes – rather than economic cycles – and provides low to no correlation with financial markets.

As an asset class, litigation finance also suits those interested in ethical investing. By funding legal cases, investors support access to justice for individuals or organizations who otherwise wouldn’t be able to finance it. Plus, there’s scope to fund cases that align with investor passions, including those that promote corporate accountability or social justice.

What’s more, litigation funding adds value to investment strategies. Not only does it provide diversification from traditional asset classes. It offers the potential for stability and high returns, both of which are beneficial during times of market volatility. For investors in need of long-term growth, the extended time horizon of some products allows for significant rewards after cases conclude – while shorter term opportunities offer scope for those looking to diversify over the immediate future. Litigation finance also provides a hedge against market fluctuations or economic downturns.

Concerns and misconceptions about litigation funding

As with any investment, there are potential risks when you invest in with litigation finance – so it’s crucial to choose a high-quality product that aligns with investor your risk profile and investment time horizon. However, there are common misconceptions, too – which we dispel below.

“Isn’t it excessively risky due to the uncertainty of legal outcomes?” is a question we regularly encounter. Of course, litigation is inherently uncertain. However, the meticulous due diligence process involved in selecting cases for funding significantly mitigates this risk. As part of this process, litigation financiers carefully assess factors including the strength of the claim, the likelihood of success, and the financial stability of the parties involved. Plus, as detailed above, litigation financiers tend to fund a portfolio of cases.

Another concern relates to the perceived lack of transparency in litigation finance. However, the reality is that litigation funders operate with stringent disclosure and high reporting standards. Investors typically receive regular updates– and quality funders work with experienced legal experts to ensure transparency and manage the investment effectively.

Regulatory worries also deter some investors. What happens if an unexpected ruling (such as the Supreme Court’s 2023 decision that litigation funding agreements are damage-based agreements) negatively impacts the outcome of cases? This is a valid concern – but can be mitigated by selecting a litigation finance product that isn’t exclusively focused on one jurisdiction.

Lastly, litigation funding is sometimes viewed as a niche or illiquid investment. However, successful cases offer substantial, non-correlated returns, making it a valuable diversification tool – and there are a variety of products available, including those with far shorter time horizons.

The future of litigation funding

Litigation finance – the third-party funding of legal cases in exchange for a share of proceeds – is a unique, forward-thinking investment opportunity. Driven by legal merit rather than market trends, it’s increasingly attractive to qualified HNWIs looking to diversify their portfolios. Unlike investments in traditional asset classes, litigation finance performance is uncorrelated with financial markets, which means it provides a hedge against economic uncertainty and market fluctuations.

And that’s not all. Pairing the potential for high returns with the ability to support access to justice, litigation funding also offers societal benefit by enabling claimants to pursue valid legal claims. As the global legal funding market grows, this alternative asset class is providing investors with a chance to participate in a validated sector experiencing robust demand.

Interested in finding out more about incorporating litigation funding into your portfolio? Let us help. At DFC, we’re experts in a wide variety of alternative asset classes, including litigation funding.