What if the smartest money on Wall Street decided the best place to park capital was inside the ashes of one of the costliest wildfires in recent American history? Nearly two years after the Eaton and Palisades fires tore through Los Angeles and left behind an estimated $40 billion in insured losses, the question of who ultimately pays remains wide open. And that uncertainty has turned into pure opportunity for a growing group of hedge funds.
Hedge Funds Dive Into Discounted LA Fire Claims
I’ve been following the secondary market for insurance recovery rights for years, and the speed of this particular trade still catches me off guard. Hedge funds are aggressively buying subrogation claims linked to the January 2025 Los Angeles fires now that Sacramento’s attempt to rein in the practice has effectively collapsed. Prices currently range from a rock-bottom 3 cents on the dollar all the way up to around 60 cents, depending on which fire the claim comes from.
Bradley Max of broker Cherokee Acquisition recently noted that the market mood has completely reversed from the chill that settled over deals last year. “There’s plenty of appetite for buyers and sellers,” he observed. According to the firm, Eaton-related claims are changing hands at 55 to 60 cents while Palisades claims trade for a mere 3 to 5 cents. Cherokee itself has acquired roughly $100 million in Palisades claims for less than a dime on the dollar. Most of these funds are aiming for returns in the low-to-mid teens, and the transactions usually close within a couple of weeks.
Subrogation is the legal process that lets an insurance company pursue a third party—often a utility company whose equipment started the blaze—to recover the money it already paid out to policyholders. Instead of waiting years for court outcomes, insurers sell those recovery rights at a discount for immediate cash. Investors then bet that the eventual settlement or judgment will exceed the purchase price by enough to deliver solid profits. California remains especially attractive because of a legal doctrine called inverse condemnation. Under that rule, plaintiffs suing investor-owned utilities do not need to prove negligence.
The Political Push That Lost Momentum
Last summer the California Earthquake Authority, which manages the state’s Wildfire Fund, publicly labeled these purchases as opportunistic speculation and vowed to confront the hedge funds involved. Officials argued that utilities were settling subrogation claims too generously, frequently with investors who had bought the rights at steep discounts and then pushed for higher payouts. That dynamic, they claimed, was draining the very fund designed to protect ratepayers.
By mid-April 2025, one investment bank had already tallied at least ten separate deals totaling more than $1 billion in recovery rights across the two fires. Eaton claims had briefly reached 50 cents before the Authority’s criticism pushed prices down a few points. The pressure never fully stopped the flow of capital, though. Eaton paper has since climbed past its previous high.
Lawmakers responded with Senate Bill 254, signed into law in September 2025. For any fire that damages more than 1,000 structures, insurers and their assignees—typically the hedge funds—must give the utility a right of first refusal to settle the claim directly. The legislation also created an $18 billion Continuation Account to bolster the Wildfire Fund. In practice, that right of first refusal has not killed a single deal, according to market participants. Utilities and government entities simply lack the ready capital or appetite to step in at the prices being offered.
Then came the more dramatic confrontation in August 2026. In a last-minute move, the governor’s office proposed limiting or even eliminating insurers’ ability to recover wildfire costs from utilities. Lawmakers pushed back hard, warning that removing subrogation rights would further destabilize California’s already fragile insurance market, drive premiums higher, and encourage more carriers to exit the state. A compromise measure, Senate Bill 492, would have barred private equity from investing in wildfire claims. On the final day of the session the Assembly allowed the bill to die without a vote. The one provision that could have truly shut down the trade disappeared along with it.
The market reaction was swift and brutal. Shares of the major investor-owned utilities involved dropped sharply—one fell as much as 21 percent, its worst one-day decline since 2020, while the other plunged as much as 24 percent, its steepest drop since 2018. A wave of credit rating downgrades followed. One analyst sketched a downside scenario in which the stock of one utility could fall to just $3 a share if wildfire claims exhausted the state fund and regulatory outcomes turned adverse. Executives from both companies later told legislative leaders that their firms had collectively lost roughly $20 billion in market value within a matter of days.
Six weeks later, little has changed. The stocks remain essentially where they closed on the day the bill died, each still sitting about a quarter below the levels they held just before the sell-off began. One CEO is now quietly lobbying for a special legislative session before the end of the year, noting that only the outgoing governor can call it.
Why Eaton Claims Command 60 Cents and Palisades Trade at 3
The price gap between the two sets of claims tells you almost everything you need to know about risk and recovery potential. Eaton is considered the cleaner trade, at least relatively speaking. In early August, state and county fire investigators released a report concluding that the blaze started because of electrical arcing on an out-of-service transmission tower owned by a major utility. That finding hands buyers a confirmed cause and a defendant with deep pockets.
Even so, the legal path is far from smooth. A judge recently issued a tentative ruling denying the insurers’ motion for summary judgment. The court found that the companies had not shown, as a matter of law, that wildfire is an inherent risk of the utility’s idle lines. The company argues the tower had been out of service since 1971 and therefore no longer qualifies as the kind of public infrastructure that triggers strict liability. That dispute now heads to a jury. The first bellwether trial is scheduled for late January 2027.
Meanwhile the utility has launched its own compensation program. By mid-August it had extended more than $820 million in offers to roughly 5,800 claimants and paid out about $410 million, with a November 30 deadline for remaining claims. Officials emphasize the program is not an admission of liability. Overhanging the entire situation is a warning from the Wildfire Fund’s own administrators that Eaton claims alone could exhaust the fund if the utility is ultimately found responsible.
Palisades presents a completely different picture. There is no investor-owned utility to pursue. Federal prosecutors allege the fire was a holdover from a New Year’s Day blaze started by an individual. That theory suffered a setback when the first trial ended in a mistrial, with ten jurors favoring acquittal. Prosecutors responded with a new indictment focused more narrowly on the earlier fire, and the retrial has been pushed into early November.
Even a conviction would not produce a solvent defendant. The deep pockets in this case are public entities: the city, the local water and power department, and the state. Property owners have sued over an empty reservoir, dry hydrants, and the alleged failure to fully extinguish the earlier fire. A judge has already ruled that owners can pursue the water department for failing to supply enough water. Mediation is under way with the city and the utility, but the state has so far declined to participate. Anyone buying Palisades claims at 3 to 5 cents is essentially purchasing a long-shot ticket on the willingness of taxpayers and ratepayers to cover the losses.
Liquidity Providers or Opportunistic Players?
Market participants argue that portraying hedge funds as villains misunderstands their actual role. One broker quipped that going after them “makes for great press for a politician.” The core point is straightforward: a utility owes the same amount whether the claim sits with an insurance company or with an investor who bought it later. Critics counter that selling claims to sophisticated funds introduces third parties whose sole interest is maximizing payouts from wildfire disasters.
History offers a useful parallel. During one major utility’s bankruptcy, a well-known investment firm reportedly acquired $6.8 billion in subrogation claims, some at roughly 35 cents on the dollar. The eventual settlement with insurers came in at $11 billion—well below the $20 billion the carriers had sought—translating to about 55 cents on the dollar. That is roughly the same level at which Eaton claims trade today. A buyer paying 55 to 60 cents who only achieves a similar recovery would essentially break even rather than earn the mid-teens returns most funds are targeting. The crucial difference is that the earlier case involved a company in Chapter 11, while the current defendant remains solvent and has the Wildfire Fund standing behind it. That distinction is precisely why buyers expect stronger outcomes this time.
One utility has already reported about 2,000 Eaton-related lawsuits covering roughly 32,000 plaintiffs. As one attorney close to the cases put it, “Billions of dollars are in play now.” The near-term calendar is crowded with potential catalysts: the individual retrial in early November, the utility’s November 30 compensation deadline, the possibility of a lame-duck special legislative session, and the first Eaton bellwether trial in January.
How the Secondary Market for Claims Actually Works
For those less familiar with the mechanics, the process is surprisingly straightforward once you strip away the legal jargon. After a major disaster, insurers pay their policyholders and then look for ways to recover those funds from any responsible third party. Rather than tying up capital for years in litigation, they can sell the recovery rights to specialized buyers. Those buyers perform their own due diligence on the strength of the case, the solvency of the defendant, and the likely timeline, then bid accordingly.
In the current environment, the presence of the state Wildfire Fund adds another layer. The fund was created to help utilities cover catastrophic wildfire liabilities so that ordinary ratepayers would not bear the full burden. When hedge funds step in and push for higher recoveries, critics argue the fund ends up paying more, which ultimately affects the broader rate base. Supporters of the secondary market counter that efficient capital allocation and faster resolution of claims ultimately benefit the system by reducing the uncertainty that has driven so many traditional insurers out of the California market.
I’ve found that the most interesting aspect of this entire story is how quickly political pressure can reshape—or fail to reshape—private market behavior. Last year’s chill evaporated the moment it became clear that the most restrictive proposals would not become law. Capital is patient when the underlying economics still look attractive, and in this case the combination of confirmed causes, solvent defendants, and a supportive legal doctrine continues to draw sophisticated money.
Risk Factors That Could Still Derail Returns
None of this is risk-free, of course. A jury could side with the utility on the question of whether idle infrastructure triggers strict liability. The Wildfire Fund could run short of resources and force more limited recoveries. Legislative action in a special session or under a new administration could still change the rules of the game. And for the Palisades claims, the absence of a private-sector defendant means any recovery depends on the political willingness of public entities to settle rather than litigate indefinitely.
Timing also matters. Funds targeting mid-teens returns need the litigation or settlement process to move at a reasonable pace. Prolonged appeals or repeated mistrials could erode the internal rate of return even if the ultimate recovery percentage looks healthy on paper. That is why so many of the current buyers are carefully matching their purchase prices to the specific risk profile of each set of claims.
Perhaps the most telling detail is the willingness of funds to pay 55 to 60 cents for Eaton paper while offering only a few cents for Palisades. The market is drawing a very clear distinction between a case with a confirmed electrical cause and a deep-pocketed corporate defendant versus a case that hinges on public-entity liability and a criminal prosecution that has already produced a mistrial. That kind of price differentiation is exactly what you would expect in a functioning secondary market.
What This Means for the Broader Insurance Landscape
California’s insurance market has been under strain for years. Rising wildfire losses, combined with regulatory constraints on rate increases, have prompted several major carriers to restrict new business or exit certain regions entirely. The ability to sell subrogation rights provides one of the few remaining avenues for insurers to free up capital after a major event. If that channel were closed, the pressure on premiums and market participation would almost certainly intensify.
At the same time, the involvement of hedge funds introduces a new set of incentives. These investors have no long-term relationship with the state’s ratepayers and no obligation to consider the broader health of the insurance market. Their sole mandate is to maximize returns on the capital they deploy. Whether that dynamic ultimately helps or harms the system depends on whether the higher recoveries they seek force genuine improvements in utility safety practices or simply transfer more costs onto the Wildfire Fund and, eventually, ordinary customers.
In my view, the current equilibrium is fragile. The secondary market is providing genuine liquidity at a moment when traditional capital is scarce. Yet the political system continues to view the activity with suspicion. The failure of the most restrictive proposals this year does not mean the issue has disappeared. It simply means the next round of debate will likely occur under different leadership and against the backdrop of whatever outcomes emerge from the pending trials and compensation programs.
Looking Ahead to the Next Wave of Catalysts
The calendar over the next few months will go a long way toward clarifying the value of these claims. The retrial involving the individual accused of starting the earlier fire could reshape perceptions of the Palisades case, even if it does not produce a financially responsible defendant. The utility’s compensation deadline at the end of November will reveal how many claimants are willing to accept offers rather than wait for litigation outcomes. And the first Eaton bellwether trial in January will provide the first real courtroom test of the strict-liability theory that underpins the higher trading prices for those claims.
Any special legislative session would inject additional uncertainty. Lawmakers could revisit the right of first refusal, attempt to limit the role of private capital once again, or explore new ways to protect the Wildfire Fund. Given the scale of the market-value losses the utilities already absorbed, executives will almost certainly continue pressing for some form of relief.
For the funds already positioned in the trade, the coming months represent both opportunity and risk. Those who bought early at lower prices enjoy a meaningful cushion. Newer buyers at the higher end of the range for Eaton claims need the litigation process to move efficiently and the ultimate recoveries to come in stronger than the historical bankruptcy precedent. The Palisades buyers, by contrast, are playing a different game entirely—one that depends more on political and public-entity dynamics than on traditional corporate liability.
What remains clear is that the secondary market for wildfire recovery rights has matured into a legitimate, if controversial, asset class. Capital continues to flow because the underlying legal and financial mechanics still support attractive risk-adjusted returns for those willing to underwrite the complexity. Whether that capital ultimately functions as a stabilizing force or as a source of additional pressure on the system is a question that will be answered in courtrooms and legislative chambers over the next year.
In the meantime, the price tags themselves tell the story more clearly than any political statement. Three cents on the dollar for one set of claims. Sixty cents for another. Somewhere between those two numbers lies a sophisticated calculation of probability, timeline, and recovery potential that pure speculation alone cannot explain. The hedge funds gorging on these claims are not simply betting on chaos. They are underwriting a very specific set of legal and financial outcomes in one of the most complex disaster-recovery environments in the country. And for now, at least, the political obstacles that once threatened to shut the trade down have largely gone up in smoke.
