How Litigation Finance Works

Litigation finance provides capital to plaintiffs and law firms to pursue legal claims. In exchange, investors receive a share of any settlement or judgment. The asset class offers attractive returns completely uncorrelated to financial markets.

The Investment Structure

Platforms like Yieldstreet aggregate investor capital into funds that finance multiple legal cases. This diversification reduces the binary risk of any single case.

Case Selection Criteria

Professional litigation funders evaluate cases based on:

Legal Merit: Strength of the claim based on law and facts
Damages: Size of potential recovery if successful
Defendant Ability to Pay: Whether the defendant can satisfy a judgment
Duration: Expected time to resolution
Legal Team: Quality and experience of plaintiff attorneys

Return Mechanics

Returns are generated when cases resolve favorably:

Settlement: Parties agree to a payment (most common outcome)
Judgment: Court awards damages after trial
Loss: If case loses, investors may lose some or all capital

Sample Return Scenarios

Investment Amount$25,000

Best Case (Large Settlement)$40,000 (60% return)

Base Case (Modest Settlement)$32,500 (30% return)

Worst Case (Case Lost)$0 (100% loss)

Why Zero Correlation?

Case outcomes depend on legal merit, evidence, and court decisions, not economic conditions. Whether the stock market rises or falls has no bearing on whether a patent infringement claim succeeds.

Risks to Consider

Who Should Consider Litigation Finance?

This asset class may suit investors who:

Seek truly uncorrelated returns
Can lock up capital for 2 to 5 years
Understand binary risk and potential for total loss
Want exposure beyond traditional asset classes
Have a diversified portfolio and appropriate risk tolerance

Tax Considerations

Litigation finance returns are typically taxed as ordinary income or capital gains depending on structure. Consult a tax professional for guidance on your specific situation.