How reaching my first million transformed my investment strategy and led me to explore litigation finance—including the risks, rewards, and lessons learned from concentrated alternative asset investing.
Disclaimer: This article describes my personal investment experience and should not be construed as investment advice. Litigation finance involves substantial risk, including total loss of capital. Always conduct thorough due diligence and consult with qualified financial advisors before making investment decisions.
The Psychological Shift
Crossing the $1 million threshold wasn’t just a financial milestone—it fundamentally changed how I thought about risk and portfolio construction. With a solid foundation established, I began exploring the question: what does the path from $1 million to $3-5 million look like?
The answer, I concluded, required a different strategy than the one that got me to my first million. I had built my wealth primarily through high savings and strategic career moves. But accelerating from $1M to $3-5M would mean embracing alternative asset classes with higher risk-return profiles.
Portfolio Strategy Evolution
The Strategic Shift
After extensive research into emerging alternative asset classes, I made a deliberate decision to concentrate a significant portion of my portfolio in litigation finance. This strategy represented a major departure from conventional wisdom about diversification, and it came with serious trade-offs:
- Higher Return Potential: Litigation finance offers venture capital-like returns (typically 1.5x-3x+ multiples) not available in traditional fixed-income investments
- Emerging Market Opportunity: As an underdeveloped asset class with limited retail access, early participants may benefit from market inefficiencies
- Low Correlation: Litigation outcomes are generally uncorrelated with stock market performance, providing portfolio diversification benefits
- Significant Risks: Binary outcomes (win or lose), illiquidity (multi-year hold periods), opacity (limited transparency), and concentration risk
Important context: This concentration strategy is appropriate for my specific situation—married with no dependents at the time, stable high income, and sufficient liquidity outside this allocation. This approach would be inappropriate for most investors, particularly those nearing retirement or with financial dependents.
Asset Allocation (November 2018)
My portfolio allocation reflected an aggressive growth stance:
- Litigation Finance (Commercial): ~40% – Individual case investments through LexShares
- Litigation Finance (Consumer): ~15% – Diversified pre-settlement portfolios through YieldStreet
- Public Equities: ~25% – Tech-heavy concentration reflecting my RSU compensation
- Alternative Fixed Income: ~10% – Liquidating positions in P2P lending and hard money loans
- Cash & Short-term: ~10% – Emergency fund and dry powder for opportunities
The Concentration Decision
Why concentrate rather than maintain broad diversification? The math is compelling but so are the risks:
The Case For: Concentration accelerates wealth accumulation when you’re right. A diversified portfolio returning 8-10% annually takes decades to compound significantly. A concentrated position returning 25-30% can compress that timeline—if the thesis plays out.
The Case Against: Concentration amplifies losses when you’re wrong. A single sector downturn, regulatory change, or thesis breakdown can set you back years. Most professional investors diversify for good reason—survival matters more than maximum returns.
My decision to concentrate stemmed from:
- Time horizon: I could absorb multi-year illiquidity and recover from potential losses
- Income stability: My W-2 income would continue regardless of investment performance
- Risk capacity: Potential losses, while painful, wouldn’t materially impact my lifestyle
- Conviction: Extensive research convinced me the risk-return trade-off was favorable
That said, this remained a high-risk strategy. I was sacrificing safety for upside potential, and that’s not a sacrifice everyone should make.
Understanding Litigation Finance
The Fundamental Concept
Litigation finance treats lawsuits as investable assets. The basic structure is straightforward:
- A plaintiff has a meritorious legal claim but lacks capital for legal fees and expenses
- A litigation funder provides capital on a non-recourse basis
- If the case succeeds, the funder receives a predetermined return (multiple of investment or percentage of recovery)
- If the case fails, the funder loses its investment—the plaintiff owes nothing
This non-recourse structure means funders bear 100% of the downside risk, which is why returns must be substantial to justify the risk.
Market Evolution
The litigation finance industry has matured from its early days:
First Generation (Single-Case Funding): Financing individual lawsuits with binary outcomes. High risk, high return, significant volatility.
Second Generation (Portfolio Funding): Bundling multiple cases into diversified portfolios, often with cross-collateralization. Returns depend on aggregate performance rather than individual case outcomes, reducing volatility while maintaining attractive returns.
Current Trends (as of 2018): Increasing institutionalization, sophisticated underwriting, and expansion into new litigation types. Major law firms now regularly use litigation finance for capital management and risk sharing.
Return Structures and Expectations
Litigation finance returns vary significantly by case type and risk profile:
- Low Risk (Appeals, Strong Cases): 1.5x-2x multiple or 15-25% IRR
- Medium Risk (Commercial Disputes): 2x-3x multiple or 20-35% IRR
- High Risk (IP, Complex Cases): 3x-10x multiple or 30-50%+ IRR
Critical caveat: These are target returns, not guaranteed outcomes. Actual returns depend on case success rates, timing, and settlement amounts—all highly uncertain. Some cases return 5-10x; others return zero. Portfolio construction is essential.
The Risk Reality
While litigation finance appears attractive on paper, the risks are substantial:
- Binary Outcomes: Cases win or lose—there’s no middle ground in many instances
- Illiquidity: Capital is tied up for 2-5+ years with no secondary market
- Opacity: Limited ability to monitor case progress or verify valuations
- Adverse Judgments: Unexpected legal rulings can destroy case value overnight
- Settlement Timing: Cases often take longer than projected, impacting IRR
- Platform Risk: Dependence on platform due diligence and case selection
- Regulatory Risk: Potential future regulations could impact economics
Investment Platforms: A Comparison
LexShares: Commercial Litigation
Focus: Business disputes including contracts, patents, intellectual property, antitrust, fraud, and whistleblower cases
Structure: Individual case investments with minimum investments typically $5,000-$10,000 per case. Investors select specific cases after reviewing details.
Target Returns: 2x-3x+ multiples over 2-4 year timeframes
My Strategy: Building a diversified portfolio of 20+ individual cases with staggered timing to manage liquidity and reduce single-case dependency
Pros: Case selection control, higher return potential, detailed case information
Cons: Requires significant capital for diversification, longer hold periods, higher individual case risk
YieldStreet: Consumer Litigation
Focus: Pre-settlement advances on personal injury, medical malpractice, motor vehicle accidents, and general liability claims
Structure: Pre-diversified portfolios of mature cases with high settlement probability. Lower minimum investments ($5,000-$10,000 per portfolio)
Target Returns: 10-18% annually with quarterly distributions
Pros: Instant diversification, more predictable cash flows, lower individual case risk, shorter duration
Cons: Lower return potential, cash drag from distributions, less control over case selection, platform fee structure
Institutional Litigation Funds
Future Consideration: As my liquid assets grow beyond $3 million, I planned to explore institutional litigation finance funds that offer:
- Professional management and due diligence teams
- Access to larger, more sophisticated cases
- Enhanced diversification across litigation types
- Potential access to secondary market liquidity
These funds have high barriers to entry: $500,000 minimum for accredited investor funds, or $5,000,000+ for funds requiring Qualified Purchaser status.
My Portfolio Performance and Projections
LexShares Performance Tracking (November 2018)
Portfolio snapshot as of November 2018:
- Total invested capital: ~$600,000 across 15+ cases
- Accrued value (estimated): ~$800,000 based on projected settlement ranges
- Realized returns: 3 cases settled, average 2.4x multiple
- Active cases: 12 in various stages of litigation
Important notes on “accrued value”: This represents estimated potential value based on current case assessments, not actual returns. Accrued values can change dramatically as cases progress. Some cases may settle for less than projected; others may lose entirely. These projections proved overly optimistic.
Projected annual increase: At the time, I projected accrued value could grow by $400,000+ annually if cases resolved as projected. This assumed optimistic outcomes and ignored the possibility of adverse judgments or lower-than-expected settlements—assumptions that ultimately didn’t materialize.
Portfolio Diversification Strategy
To manage concentration risk within litigation finance, I implemented:
- Case Type Diversity: Mix of contract disputes, IP cases, commercial tort, and fraud cases
- Temporal Diversity: Staggered case selection across multiple years to avoid vintage risk
- Platform Diversity: Splitting capital between LexShares (commercial) and YieldStreet (consumer)
- Geographic Diversity: Cases across multiple jurisdictions to reduce single-court dependency
Lessons Learned and Strategic Insights
Risk Capacity vs. Risk Tolerance
The biggest lesson: understanding the difference between risk capacity (ability to absorb losses) and risk tolerance (emotional comfort with volatility). I had high risk capacity due to stable income and no dependents at the time, but even with that, watching hundreds of thousands tied up in illiquid, binary-outcome investments tested my risk tolerance.
Concentration Requires Conviction
Concentrated positions demand deep research and conviction. I spent months studying litigation finance—reading industry reports, analyzing historical returns, understanding legal processes, and evaluating platform due diligence—before committing capital. Half-knowledge with concentrated positions is a recipe for disaster.
Timing Matters, But Is Unpredictable
I entered litigation finance believing I was early to an emerging asset class. While the asset class itself grew, my specific execution through retail platforms ultimately delivered break-even results. Early movers can capture significant value or become cautionary tales—timing and execution both matter.
Liquidity Has Value
Illiquidity is a real cost, not just a theoretical concern. Having capital locked up for 3-5 years means missing other opportunities, whether that’s real estate deals, market corrections, or simply having dry powder when attractive investments appear. The return premium must justify this opportunity cost—in my case, it ultimately didn’t.
Embrace Uncertainty, Not Recklessness
There’s a difference between calculated risk-taking and recklessness. Calculated risk means:
- Understanding what you don’t know
- Sizing positions appropriately for worst-case scenarios
- Having contingency plans
- Being emotionally prepared for losses
Earlier I wrote “a wrong decision is better than no decision.” That was overly simplistic. More accurate: an informed decision with manageable downside is better than paralysis, but a wrong decision can be devastating if poorly sized or structured.
Looking Forward: The Path to $3-5 Million
Financial Targets (as of November 2018)
My financial targets at the time:
- Minimum goal: $3 million in investable assets
- Target goal: $5 million in investable assets
- Timeline: 5-7 years from reaching $1 million (2023-2025)
Achieving this would require approximately 25-30% annual returns—aggressive targets that assumed:
- Continued high W-2 income and savings rate (50%+ of gross)
- Strong performance from litigation finance portfolio (2-3x multiples)
- Continued appreciation of equity compensation
- No major setbacks (health issues, job loss, market crashes)
Reality check: These projections proved overly optimistic. My litigation finance portfolio ultimately broke even rather than delivering 2-3x returns, significantly extending the timeline to reach these targets. See LexShares: $2.3M In, $2.3M Out for the complete story.
Evolution of Strategy
As my portfolio grew, I anticipated gradually reducing concentration risk:
- $2-3M: Begin diversifying into other alternative assets (private equity, venture capital, real estate syndications)
- $3-5M: Transition to institutional litigation funds with professional management
- $5M+: Rebalance toward more conservative allocation as financial independence approaches
Key Investment Principles
- Research Obsessively: Deep knowledge is your only edge as a retail investor
- Size Appropriately: Never bet more than you can afford to lose
- Diversify Within Concentration: Even focused portfolios need internal diversification
- Stay Flexible: Be willing to change course if the thesis breaks
- Learn Continuously: Markets evolve; your knowledge must evolve with them
Final Thoughts
My journey into litigation finance represented a personal bet on an emerging asset class. It ultimately proved costly in terms of opportunity cost—years of capital tied up for break-even returns. What I can say with certainty is that this strategy was appropriate for my specific circumstances and risk profile at the time, but would be inappropriate for most investors.
If you’re considering alternative investments like litigation finance:
- Ensure you have sufficient risk capacity (stable income, emergency fund, no near-term liquidity needs)
- Invest significant time in research and due diligence
- Start small to test your actual risk tolerance
- Never invest capital you can’t afford to lose entirely
- Consider consulting with qualified financial advisors
- Prioritize execution quality over thesis conviction—I had the right thesis but chose suboptimal platforms
The path beyond the first million is different for everyone. This was mine—thoughtfully constructed, carefully monitored, and fully acknowledged to carry substantial risk. For the complete outcome of this strategy, see my detailed case studies and portfolio analysis in subsequent posts.
