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The simulator below helps litigation investors to quantify the potential benefits of varying levels of diversification. Diversification aims to reduce the volatility of return without impacting the expected return.
Although cases on the platform have been carefully pre-vetted, each individual case investment has three possible outcomes ( win, lose, or lose with adverse cost liability) implying an uncertain investor return as shown in our single case simulator. In contrast, the simulator below is based on a hypothetical portfolio of between 1 and 50 uncorrelated case investments of the type shown in the single case simulator and shows how the variability of the portfolio return distribution decreases as more cases are added.
To illustrate, the default Base Case option (press button to select) assumes that an investor commits a total of £10,000, investing £1,000 into each of 10 cases, and assumes that the probability of winning any particular case is 72%. The other assumptions are as shown. The simulator shows that there is an estimated probability of c 51% that the investor will make a profit in the range [£9,000 to £11,000]. Similarly, the estimated probability of making a profit of c £1,000 is 3% and so on.
However, it is possible that the portfolio may not perform as well as expected, or even that it performs very badly - just as it is possible to toss a coin and observe ten tails in a row. In the Base Case scenario, with 10 cases, the probability of losing money on the portfolio overall is 0.9%. If we reduce the number of investments from 10 to 3 (keeping the other assumptions unchanged), the probability of losing money on the portfolio overall increases to 19.1%. Conversely, increasing the number of cases to 20 reduces the probability of an overall loss to just 0.1%. Furthermore, if we assume each case has a lower probability of winning, all else equal, the importance of diversification increases for investors seeking more stable potential portfolio returns.
Our blog post Single Case versus Portfolio Litigation Funding discusses the benefits of diversification in more detail.
This simulator is not intended to correspond to any particular case available for investment on our platform. This tool is being provided for illustrative purposes only. Investors should read the full offer materials on any specific case to understand its details before deciding to invest.
The bar graph output shows the Net Portfolio Gain under the assumptions selected. We show the Net Portfolio Gain rather than Final Portfolio Value to make it easier to identify if there is a profit or loss on the portfolio.
Methodology
The simulator is based on the trinomial distribution of possible outcomes. The three outcomes being ‘Win’, ‘Loss’ and the more remote possibility of ‘Loss with adverse cost liability’. These are described more fully in our blog post Risks for investors in litigation funding. See our single case simulator for more assumptions regarding each individual case.
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