We live in extraordinary times. Many fund values are seeing as rapid a descent in value as they did a meteoric rise. The current financial crisis and liquidity problems are a wholly different animal to typical market turbulence. For many, the impact on fund value is not necessarily a lack of judgement by fund managers but rather a consequence of the mistakes of others. During the last recession, pursuing claims through the courts was an expensive exercise. For some, the cost of litigating and the associated risks of losing often tipped the balance in favour of simply writing off losses altogether. For others, litigation was the only way to survive, although cost proved to be an insurmountable catch 22.

Litigation is generally the option of last resort. There are exceptions, in particular where it is necessary to freeze assets quickly before the opponent can dissipate. In addition to financial considerations, the sheer distraction of management time carries an opportunity cost in itself. But when other methods to mitigate fail, litigation becomes inevitable. Fortunately, it is not all doom and gloom, fund managers can take some solace from the financial options now available if pursuing litigation.

In the last two months there has been an unprecedented rise in applications for litigation funding from lawyers on behalf of hedge funds, and in some cases by funds directly, regarding current or contemplated litigation. The types of cases are diverse, ranging from fraud actions to defamation proceedings against the financial press as a result of alleged misstatements and their effect on fund values. Claims brought by funds against investment banks also appear to be increasing. For example, the collapse of Lehman Brothers has sparked a raft of asset recovery claims, as has the demise of a number of other investment banks.

The seismic shift in referrals to TheJudge from hedge fund claimants can be attributed, in part, to the increased awareness among law firms of ways in which their clients can mitigate the cost risk involved in pursuing litigation. In today’s unprecedented times, it is possible to hedge the cost risk of litigation. Ironically, litigation risk transfer options have developed during a decade of a booming economy, when litigation levels remained largely stagnant. Much of the stress-testing of this market has been undertaken during a relatively flat litigation period, which is fortuitous. The risk transfer market is better placed now than ever before to respond rapidly as litigation levels soar.

Third Party Funding (TPF) has hogged the headlines but, in truth, TPF is merely the little brother of a burgeoning litigation insurance industry. The products available in this most developed of litigation risk transfer markets offer a life raft to financial sector businesses caught in a perfect storm. England and Wales is now arguably the most attractive jurisdiction in which to litigate because of the availability of litigation insurance, funding and commercial conditional fees.