market folly

We came across this interesting piece in Dealbook the other day and thought it was very intriguing. Simply put: hedge funds are now investing in lawsuits now. The premise is pretty simple: they invest in one side of the lawsuit and get a share of the winnings (if, of course, they win the case).

Dealbook specifically cites Juridica Capital Management who made 17 investments out of the 122 different cases they looked at, usually investing $7.5 million each case (they have $200 million AUM). Juridica shares have stair-stepped up 24% since their IPO on the London Stock Exchange in 2007. Additionally, Juris Capital in Chicago executes a similar strategy while Credit Suisse also has a unit dedicated to this type of strategy. Juris invests between $500,000 and $3 million per case and their portfolio is seeing 20% returns a year. Apparently, things are going well for funds executing this strategy.

If you think about it, it makes sense. These investors essentially 'bankroll' a litigation team, thus giving them access to all kinds of different tools. The defendant/prosecutor obviously enjoys knowing that their team has deep pockets and the lawyers themselves will find comfort in the fact that they will have no problem getting paid. (Aside: Do you think this would de-incentivize them from working harder since they know they'll get paid regardless?)

Either way, we kind of equate this to a rich investor coming in and purchasing a sports team in an effort to 'turn them around' and ensure they are competitive by providing whatever resources possible (namely: cash). For baseball fans, think the New York Yankees at their recent peak when they were buying everyone in sight. For soccer/futbol fans, think Roman Abramovich at Chelsea FC in the English Premier League. They both spent large amounts of cash and found reasonable amounts of success. The question here is: can this strategy stand the test of time? If these hedge funds can generate solid returns on an annualized basis, things could get intriguing here.

So, what's the key to this type of investment? Avoiding juries. Those in the field equate jury decisions to coin-flips and spins of the roulette wheel. And, in hedge fund land, that's a bit too much uncertainty. (Well, for most hedge funds at least... there are some crazy ones still out there). Overall, an intriguing concept that seems to be gaining more popularity. We're always on the lookout for interesting opportunities like these, so let us know if you find anymore. In the past, we've highlighted some other unique plays that hedge funds have executed, including investing in art, investing in guitars, and investing in wine. We'll have to see what comes next!