Why do things always get crazy when corporate investors get involved?
Take a look at alternative investing. As it’s commonly understood, alternative assets are those investment products which don’t commonly fall under the Wall Street banner. On the individual level these can be great retirement products. With a self-directed IRA, an investor can place her retirement funds in a conservative piece of real estate and earn substantially better returns than with a mutual fund. However, when big business takes this route, the “what?!!” quotient quickly escalates.
Imagine the scenario. You’re in a charge of a medium sized hedge fund, and you need to place your cash in some solid and hopefully spectacular investment. After all, the success of your fund is dependent upon the continued satisfaction of your investors. You could continue stock picking, but the returns are iffy, and even when they’re positive, chances are you’re not got going to knock it out of the park. So what’s left? Real estate is a winner but it takes a lot of work to manage. VC investing can also score big, but it could be a long time before you find the gold. So what can you do to juice profits by merely throwing money around?
Did somebody say lawsuit?
Yes, that’s right, lawsuits. No longer the get-rich-quick scheme of the disenfranchised, lawsuits are growing in popularity as the get-rich-quick scheme of hedge funds and other big investors. A number of firms have popped up that specialize in litigation finance, and they are attracting a wide array of professional investors. They’re not household names yet – Bentham, Burford, Lake Whillans – but they’re growing and perfecting this area of investment. The system works similarly to any other investment process: identify a potentially profitable asset, infuse it with large amounts of green, and then sit back until (hopefully) the profits start rolling in. With lawsuits, the litigation finance firms identify cases where there is a potentially large return, finance the plaintiff to the tune of millions of dollars, and then (supposedly) sit back and let the system do its work.
At first glance the world seems to have skewed a little bit more to the ridiculous. It’s just what we need: massive lawsuits being funded by massive financial firms. It puts everything that’s wrong with the legal and banking systems in one giant gift wrapped package. (Although it is an incredible gift for comedians; a collusion of bankers and lawyers can provide the setup to who knows how many jokes.) And still the firms themselves posit that they take on these lawsuits with the best of ethical intentions. The defendants in these cases are almost invariably some deep pocketed corporation, and the plaintiff is a virtual gnat in comparison. It’s just not fair that the defendant should be at a loss because he doesn’t have the funds to battle a corporation. Alas.
For all intents and purposes, this doesn’t look like a trend that can be reversed. The financial firms will throw money at it, the lawyers will put it on legal footing, and no plaintiff is going to say no to free legal funding. Most probably there won’t be any checks on the system until other firms figure out a way to successfully “short” these cases by swinging cases in the opposite direction. Maybe they could even do so by bringing legal challenges as to the permissibility of third party funding sources. Although that in turn should instantly invoke an equal and opposite response from the original firms (who would now be acting as defendants) as to the permissibility of the fourth party seeking to abrogate the case on behalf of the corporation. Then all the parties together would have to ask for a delay in proceedings while they work it out legally, bring in more legal assistance to deal with the growing complexity, and request more funding to finance the ever burgeoning operation.
You know it’s a sad day in America when your good old meat and potatoes stock broker actually look morally attractive. Mutual funds – we hardly knew you!
Original article posted by Broad Financial March 23, 2015
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