Are hedge funds the new way to finance your divorce?

How to finance your divorce

Riveting article in today’s that leaves me wondering whether American couples going through divorce may soon fund their divorce expenses through hedge funds. You can find the article here: It is slightly dense if one is not a financial brain, but what seems to be the basic point is that if you can’t pay your attorney’s fees and other related litigation expenses in a divorce action, a viable solution to that might be to obtain funding (at a premium) from a hedge fund.

Funding litigation is not new, of course. Personal injury firms are pretty much in bed with funding companies which front litigation expenses and then take a big chunk of the payout on the back end once the case reaches judgment. It’s a risk. A calculated one. But it’s been happening in personal injury and commercial litigation cases for quite some time.
But it has not, historically, been happening in the family law arena until now. Hedge funds around the world, but particularly in Britain (always the trendsetting Brits) have found a new way to make a killing now that housing has so spectacularly imploded. It is pretty much tantamount to them securitizing your divorce if you think about it. How that works (and please don’t quote me on this part about the securitization as I am not a financial mind and am really only interpreting the facts the way it makes sense to me) but how I think that happens is that they invest in your divorce by fronting the costs, then they broker whatever returns they get (they ask for up to 40% of whatever you recover from your spouse) and that money makes its way through a whole labyrinth that eventually winds up as part of a bundle of stocks or bonds or mutual funds that are then managed by the hedge funds and which in turn pays hefty returns to investors – sometimes up to 23%. So it is really the people who invest in the hedge funds who pay for your divorce. It’s like this cyclical, insane process that, ultimately, I’m not even sure would pass muster once the whole thing is exposed as a scheme that injures the “sanctity of marriage and family” and “encourages divorce.” Because think about it: These companies would be totally adverse to a reconciliation if it means that in any way, they don’t get their investment back. They are literally invested in you getting a divorce. Unlike lawyers who are usually villainized in the divorce arena, hedge funds actually put their money where their mouth is!
Raj Rajaratnam’s fund, Galleon Group, routinely paid up to 23% on his funds to his investors. Who is Raj Rajaratnam? He’s the Sri Lankan born American billionaire who was arrested last week for insider trading. You can read all our posts about him and his wife Asha here:
I don’t know if Rajaratnam speculated in divorces, however. But if he didn’t, it is probably because he was slightly behind the trend, being that he was mostly based on this side of the Pond. His outfit has an office in London, don’t get me wrong. So it’s not like they are not aware of the new trends in litigation funding. I just don’t think he got around to speculating on divorces yet. He was too busy studying companies like Hilton Hotels and Google.
In any event, this “divorce funding arrangement” of using punts and puts and shorts and whatever else it’s called to finance your divorce through hedge funds is not for everyone. It only works in high net worth cases where the fund managers are pretty sure that they will get a good return on their investment. For instance, according to the Guardian, UK tycoon Scot Young’s wife Michelle is utilizing the services of a hedge fund to pay her lawyers. We have done several posts on the Young case. This is the case where a multimillionaire husband claims to have suddenly and spectacularly and mysteriously gone broke. He’s due to be jailed by November 17,2009 if he does not provide the court with a proper accounting of what happened to 400 million pounds.
His wife, meanwhile, would be on public assistance if she didn’t have the benefit of funding through a hedgie or other litigation funding company, according to the Guardian:

Mayfair-based Harbour Litigation Funding is financing the legal battle of Michelle Young, wife of the property tycoon Scot Young, who claims to have lost most of what was once a £400m fortune.
“Collectively the Harbour team has funded 66 general commercial cases since 2003. While the Young case is a divorce matter, in truth it is about asset recovery and has the same elements as a commercial dispute, and as such it fits with the core business that we undertake,” Harbour says.
Some funding parties in divorce cases require between 20% and 30% of the final payout for taking the risk, says Christian Stuerwald, head of the UK office of Allianz Litigation Funding, which is part of the German insurance group Allianz. His team has already funded divorces in Germany and Switzerland.

Wow. This is either brilliant, or it’s the next housing crisis/economic meltdown waiting to happen. Only time will tell.
By New York Divorce Attorney
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Originally published October 21, 2009