Not only do law departments have cause to worry about the funds contingency fee firms receive in massive settlements only to invest in further litigation (See my post of Aug. 24, 2005 on the dollars involved). They also can fret now about another litigation financing source: specialized hedge funds.
According to James Altucher, in the Fin. Times, July 18, 2006 at 7, several hedge funds lend to law firms, “with loans backed by cash flows from the firm as a whole, and from personal guarantees from attorneys.” The interest rates are lucrative and the hedge funds diversify their risk by lending to different law firms and collateralizing their loans by proceeds from various kinds of litigation recoveries. Law departments bear the brunt of that litigation liquidity.