A British hedge fund has hired a former litigator to invest $100 million (£48 million) in European legal disputes in what is believed to be the first formal arrangement of its kind.

MKM Longboat, a Jersey-based, London-run hedge fund that manages $2.3 billion in assets, has hired Susan Dunn, formerly managing director of IM Litigation Funding, to explore litigation-based investments.

Hedge funds seeking novel ways to invest spare cash are already involved in third-party litigation funding – whereby investors cover the costs of a court dispute in return for a share of any eventual winnings – on an ad hoc basis. MKM Longboat is believed to be the first to have hired a dedicated fund manager with a specific pool of money to invest.

Ms Dunn, one of the pioneers of the litigation funding market in the UK, has been given an initial $100 million to invest in British and European legal disputes. She expects more money to be made available as necessary.

A founder of IM Litigation Funding, Ms Dunn was involved in backing a £90 million negligence claim against Moore Stephens, the accountant, the highest-value claim known to have been funded by a third party in the UK courts. In her new role, the former litigator with the law firm Wragge & Co will seek to invest in disputes worth upwards of £3 million.

John Godden, a hedge fund consultant at IGS Group, said that hedge funds were becoming increasingly interested in funding legal disputes. He said: “If you can get a strong legal opinion to say the case is likely to be successful, then it can be a favourable investment with a hedge fund willing to stake the money up front.”

MKM Longboat faces competition in the field. In addition to Ms Dunn’s former firm, the financial services group Smith & Williamson has also set up a litigation fund, as has Allianz, the German insurance giant.

Growth in the market has been tempered by concerns over whether it is appropriate – or legal – for a third party to be allowed to profit from it. Opinions differ on the morality of the business, but lawyers say that a recent ruling in the Court of Appeal confirmed the acceptability of outsiders bankrolling and profiting from a dispute so long as they do not attempt to influence the outcome.

This has led to accusations – strongly denied – that although funders appear to keep their distance from the proceedings, they still seek to influence cases in subtle ways.

Although the market is in its infancy, it was given a significant boost in the summer when Herbert Smith, the prominent City law firm, set up a working group to address the issue.

Sonya Leydecker, the head of dispute resolution for the firm, said: “Third-party litigation funding is now an established factor in the UK market and we expect it to grow.

“Litigation can be expensive and carries risks, and clients want to know what options are available to offset this. Large firms cannot simply ignore this important change in the market.”

In a related development, two former investment bankers set up a business to advise litigants on how to navigate the funding market. Calunius Capital, which asserts that it is the only business of its kind in Britain that is regulated by the Financial Services Authority, acts as an independent intermediary between institutions that are seeking to invest in UK disputes and claimants who are seeking funding.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive