As John Paulson, founder of Paulson & Co, recently stated in an article in Alternative Investment News, the subprime fallout and correction in housing “has only just started.” I concur. I believe that what we’ve seen recently will result in more litigations going forward particularly in hedge funds that bet too much in this area. In particular, I believe that those funds that did not adequately prepare risk models with appropriate disclosures in anticipation of a potential downturn will suffer at the expense of the plaintiffs’ bar.
Indeed, I believe that any funds with large exposures to the subprime market would be wise to prepare for that eventuality by beginning to prepare themselves for those potential lawsuits. I also think they would be wise to update their offering documents (PPMs) and, to avoid a likely conflict of interest assertion by plaintiffs, they would be well served to hire different counsel to review their documents.