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Legal Alpha is the extra performance generated in a specific, diversified investment portfolio by using opportunistic and selective legal activism to obtain compensation for under-performance related to legally relevant unforeseen and uncontrollable circumstances.
Traditionally, fund managers have been focusing on generating economic alpha by making effective investment decisions before the investment assets are allocated and deployed, followed by an active performance and benchmark related monitoring of the portfolio’s performance. Several methods and theories for the generation of alpha exist and new methods and theories are constantly developed and tested.
Legal Alpha is generated by a pro-active but selective cooperation between the internal legal/portfolio management department and its external legal advisor of institutional investors or
“Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in Securities Class Action Settlements”
''Stanford Law Review'', 2005 Hence, opportunistic activism, as described above, is increasingly occurring and customers demand a systematic approach to generating Legal Alpha.
Legal Alpha is the extra performance generated in a specific, diversified investment portfolio by using opportunistic and selective legal activism to obtain compensation for under-performance related to legally relevant unforeseen and uncontrollable circumstances.
Traditionally, fund managers have been focusing on generating economic alpha by making effective investment decisions before the investment assets are allocated and deployed, followed by an active performance and benchmark related monitoring of the portfolio’s performance. Several methods and theories for the generation of alpha exist and new methods and theories are constantly developed and tested.
Ways of generating Legal Alpha
Legal Alpha is generated by a pro-active but selective cooperation between the internal legal/portfolio management department and its external legal advisor of institutional investors or asset managers
Asset management is a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings ...
. These need to responsibly, and in the best interest of clients, consider all legal and economic options of enforcing claims attached to any assets managed. Hence, legal and economic positions must be analyzed together and enforcement/compensation option must be selectively used in combination with the appropriate jurisdiction and methods for the pursuit and recovery of losses in situations involving securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in lo ...
, misrepresentation or other unforeseen and uncontrollable events causing losses in a portfolio investment due to the fault of an issuer. Options to increase a portfolio's performance by generating Legal Alpha include for example (a) active, coordinated proxy voting
Proxy voting is a form of voting whereby a member of a decision-making body may delegate their voting power to a representative, to enable a vote in absence. The representative may be another member of the same body, or external. A person so d ...
and shareholder activism to produce sustainable, long-term value of the target company, (b) the systematic pursuit and recovery of losses by participating in class-action settlement disbursements, (c) actively pursuing compensation claims in private or class action
A class action, also known as a class-action lawsuit, class suit, or representative action, is a type of lawsuit where one of the parties is a group of people who are represented collectively by a member or members of that group. The class actio ...
s, or (d) the selective pursuit of appraisal actions.
While Legal Alpha is never an absolute performance increase indicator, it is always a relative performance enhancer in situations where a portfolio was affected by external, uncontrollable circumstances such as fraud. However, a portfolio must not have suffered a negative performance in order to warrant the efforts to generate Legal Alpha.
Fiduciary duties of institutional asset managers
Many jurisdictions around the world require a fund manager to act in the "best" or even "exclusive" interest of its clients, members (pension
A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
schemes) or investors, including the duty to preserve, protect but also to increase the funds entrusted to and managed by them. Having a pro-active portfolio monitoring system in place to generate Legal Alpha in the various manners available (see above) has become an industry standard among the world’s largest and respected asset managers and reflects the minimum duty of asset managers or other institutional investor
An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked ...
who manage third-party assets.Cox/Thomas“Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in Securities Class Action Settlements”
''Stanford Law Review'', 2005 Hence, opportunistic activism, as described above, is increasingly occurring and customers demand a systematic approach to generating Legal Alpha.
References
{{Reflist Investment indicators