Structured & alternative-income investments
Litigation-Finance Funds
A fund that pays a claimant's legal costs in exchange for a share of any award or settlement, and receives nothing at all if the case is lost.
A litigation-finance fund advances money to claimants or law firms to pursue legal claims, on a non-recourse basis: repayment comes only out of a successful award or settlement. Returns are expressed as a multiple of the capital deployed or a percentage of proceeds rather than as a yield, and no cash arrives until cases resolve. The two things that decide the outcome are case selection and duration, because a good result reached slowly is a poor investment.
Interest from lending Truly passive
The labels above place this income type before you read a word. The first is the mechanism — how the money actually reaches you, whether by lending it out, owning a slice of something, renting an asset, licensing a right, selling an option or owning a business somebody else runs. The second says whether the income keeps arriving on its own once it is running, or whether it needs work from you to keep coming. Both are descriptions of how the thing is built, not verdicts on it.
How it works
The funder advances money against a claim, paying for legal fees, expert witnesses, discovery costs, and sometimes working capital for the claimant itself. The advance is non-recourse: if the case fails, the claimant and the law firm owe the funder nothing back. The funder's only path to repayment runs through a successful award or settlement, which is what separates this from an ordinary loan.
A litigation funding agreement spells out what the funder is owed if the case succeeds, commonly a multiple of the capital deployed, a percentage of the proceeds, or whichever of the two is larger. That multiple typically steps up the longer the case runs, which is the contractual mechanism that tries to compensate the funder for duration risk.
Commercial litigation finance covers business disputes, patent enforcement, international arbitration, and antitrust claims. Consumer legal funding, which advances cash to individual plaintiffs against personal injury claims, is a separate and more heavily regulated business with different economics and different investors. Portfolio funding, which advances against a bundle of a law firm's cases rather than a single claim, spreads outcome risk across several matters and now makes up a large share of the market.
Underwriting looks past the case itself to the law firm bringing it, since contingency-fee firms use funding to smooth their own cash flow, and to the defendant's actual ability to pay a judgment. Investors reach the asset class through closed-end private funds, a small number of listed funders, or occasional syndications of single cases. In nearly all US jurisdictions, ethical rules keep control of the litigation and any settlement decision with the client and the lawyer, so the funder's capital is committed to someone else's judgment throughout the case.
What it pays
Returns are quoted as a multiple on invested capital and an internal rate of return, not as a yield, and there is no coupon. No cash arrives until a case resolves, which can be years after the initial advance. The realised return is driven by the win rate across a fund's cases, the size of the recovery relative to what was claimed, and, more than either of those, by how long resolution takes: the same 2x multiple earned in three years and in seven years are very different investments once annualised.
Some funds also hold notes or receivables against law firms that pay a current coupon; those positions behave like specialty lending against a firm's balance sheet rather than like funding of a specific case, and they are usually reported separately.
Outcomes across a portfolio are lumpy and skewed. A small number of large wins typically carries the fund's return, while the median case contributes little or nothing. Between resolutions, fund managers mark positions to a model based on case milestones such as motions won or a trial date set, so the interim return an investor sees is partly an accounting estimate rather than cash in hand.
Correlation with equity and credit markets is low by construction, because a court's ruling does not depend on the business cycle. That describes where the risk comes from, not how large it is. Fees on private funds tend to run high relative to the small number of positions held, so gross and net returns to the investor can diverge substantially.
Costs and taxes
Private funds charge a management fee on committed or invested capital, plus a performance fee above a hurdle rate. Diligence on each case, legal review, damages modeling, background checks on the defendant, is expensive and is borne by the fund rather than billed separately to investors.
In jurisdictions that apply adverse costs rules, where the losing side pays the winner's legal costs, the fund may need after-the-event insurance to cap that exposure, and the premium is a direct drag on returns.
US federal tax treatment sits at a genuinely unsettled edge of the code. Depending on how the funding agreement is drafted, proceeds can be characterized as interest income, as a prepaid forward contract, as a partnership interest in the underlying claim, or as capital gain, and the IRS has scrutinized several of these structures. Fund investors typically receive a Schedule K-1 with income generally treated as ordinary, though the analysis is deal-by-deal.
Offshore feeder vehicles used by some international funders can create passive foreign investment company exposure for US investors, usually managed through a qualified electing fund election or by routing through a US onshore feeder. State tax and filing obligations follow wherever the fund and its cases sit, which can mean exposure in several states at once. Legal costs advanced by the fund are the fund's own expense, not billed to the investor directly, but they consume committed capital whether or not the case ultimately succeeds.
Liquidity and time commitment
Closed-end fund terms typically run several years: capital is called over an investment period and returned only as individual cases resolve, on no fixed schedule. There is no secondary market for a stake in a single case, and secondary sales of interests in litigation funds happen through privately negotiated transactions, usually at a discount to the manager's stated valuation.
Duration is the defining feature of the asset class. Courts, appeals, and post-judgment enforcement proceedings set the pace, and none of them run on an investor's calendar. A case underwritten to resolve in two years can take six once appeals are exhausted.
Effort for the investor is minimal once capital is committed. All of the ongoing work, sourcing cases, underwriting, monitoring litigation progress, sits with the fund manager, and the investor's role is largely limited to meeting capital calls and reading periodic reports.
Access is generally restricted to accredited or institutional investors through private placements, though a handful of listed litigation funders trade on public exchanges and offer daily liquidity at a market price. Distributions from private funds are unpredictable in both timing and size, which makes the structure a poor fit for anyone building a plan around scheduled payments.
How it goes wrong
The most basic failure mode is also the intended one: the case is lost, and the entire advance against that position is written off with no recourse to the claimant or law firm. This is not a malfunction of the structure; non-recourse funding is designed to produce total losses on unsuccessful cases in exchange for outsized payouts on the ones that win.
A case can be won and still fail to pay, if the defendant cannot satisfy the judgment or if enforcement against a sovereign entity or a shell company drags on for years after the ruling. Duration drift is a related and more common problem: an expected two-year case runs six years through appeals, and a multiple that looked attractive at the outset collapses into a mediocre annualized return even though the fund technically won.
Settlement well below the modeled damages is the single most common resolution, and it frequently lands below the fair value mark the fund had been carrying on its books, producing a markdown even on a case counted as a win. Valuation marks that build up as a case progresses can reverse sharply on one adverse ruling, which means investors subscribing to or redeeming from a fund in the interim are transacting at an estimate, not a realized number.
Regulatory and judicial risk runs alongside case risk: disclosure requirements for third-party funding are expanding in some federal courts, several US states apply champerty and maintenance doctrines that restrict who may fund litigation, and periodic legislative proposals aim to tax or limit funding arrangements. Concentration compounds all of this. A fund holding only a few positions is making a small number of binary bets, and a single adverse ruling can define the return of an entire vintage.
What to remember
- Litigation-finance funds advance non-recourse capital against legal claims and are repaid only from a successful award or settlement.
- Returns are expressed as a multiple on capital and an IRR, not a yield, and duration, how long a case takes to resolve, drives the annualized outcome as much as winning does.
- A lost case produces a total loss by design, and a won case can still fail to pay if the defendant cannot be made to satisfy the judgment.
- Interim valuations are model-based estimates tied to case milestones, not realized cash, so reported returns between resolutions carry judgment risk.
- US tax characterization of proceeds is unsettled and deal-specific, typically producing ordinary income on a Schedule K-1.
- Capital is locked for years on the court's timetable, with no secondary market for single cases and only privately negotiated, discounted exits from fund interests.
This page explains how the income type works, which does not change from week to week, so it deliberately carries no rate and no price. The links below go to the pages that hold the current figures for it, each one stamped with the date the data was pulled. Read the mechanism here first: the numbers there are far easier to judge once you know what they are measuring.
See the live numbers: Private Credit.
Frequently asked
Does a litigation-finance fund produce income while the cases run?
What happens to my money if a case is lost?
Why does duration matter so much?
Is third-party litigation funding legal in the United States?
Written for information only. Nothing here is investment, tax or legal advice, and no page on this site recommends buying or selling anything. Rules and tax treatment change; verify anything that matters with a professional who knows your situation. This explainer was drafted by a language model (claude-sonnet-5) from an editor-approved outline and fact sheet, under the rules set out in our editorial policy, and carries no market figures. Last updated Jul 29, 2026.