Portfolio Diversification

Portfolio diversification in litigation finance refers to spreading funded capital across multiple uncorrelated claims to reduce the binary loss risk inherent in any single case. A well-diversified litigation finance portfolio — spanning multiple practice areas, jurisdictions, defendants, and case types — can produce relatively predictable aggregate returns even when individual case outcomes are uncertain. Correlation is a key underwriting consideration: cases against the same defendant, in the same industry, or turning on the same legal theory carry correlated risk that limits diversification benefit. Institutional funders typically set concentration limits by defendant, counsel, jurisdiction, and case type as a portfolio management discipline.

Funders set concentration limits by defendant, counsel, jurisdiction, and case type as an explicit portfolio-construction discipline, because correlated risk — multiple cases against the same defendant, or resting on the same untested legal theory — can defeat the diversification benefit a portfolio is supposed to provide. A portfolio that looks diversified by case count but is concentrated in a single legal theory or defendant industry is underwritten as effectively a single large bet, not a diversified book.