In the first article of this two-part series, I provided an overview of some of the issues related to duration in the litigation finance asset class. In this article, I discuss some of the ways in which investors can manage duration risk, both before they invest and after they have invested.

When you are speaking to an institutional investor about litigation, it doesn’t take long until the concept of “duration risk” enters the discussion. Everyone seems to have a story about that one piece of patent litigation or commercial dispute that went on for over a decade that seems to have marked them for life even though they weren’t in any way involved.

In part one of this two-part series, we explored the importance of partnerships and we started to discuss elements of portfolio construction.  In part two, we further delve into portfolio construction issues and then discuss the appropriateness of utilizing debt within the context of commercial litigation finance.

A number of years have passed since the commercial litigation finance industry was established in the UK, USA & Australia (the more mature markets of the global industry), and so I thought it appropriate to reflect on some of the lessons learned within the industry to extract insights both for investors and fund managers.

In part one of this two part series, which can be found here, I explored a variety of portfolio theories and applied them to the litigation finance asset class. This second article continues the application to commercial litigation finance and discusses implications for portfolio construction.

Portfolio risk is generally influenced by three main factors: volatility of results, correlation (of outcomes within a given portfolio) and the size of the portfolio.  For the purposes of this article, I have assumed that correlation within a portfolio is non-existent, as each case stands on its own and is not influenced by others in the portfolio.