Claims Traders Beware: More Risk Than You Bargained For!

David Karp, Co-Head of Special Situations & Alternative Investments, examines the evolving and increasingly sophisticated bankruptcy claims trading market, highlighting how the entry of hedge funds and financial institutions has expanded both its scale and complexity. He outlines key risks facing investors, including notional amount risk, counterparty credit risk and potential claim impairment, and explains how these risks can materially affect the value of a traded claim. Karp emphasizes that careful diligence and well-structured transfer documentation, including appropriate recourse and indemnification provisions, are critical to mitigating risk and protecting investors in this largely unregulated market.