3 Cents On The Dollar: Hedge Funds Gorge On LA Fire Claims As Sacramento’s Crackdown Goes Up In Smoke

Nearly two years after the Eaton and Palisades fires torched an estimated $40 billion in insured property, nobody has figured out who ultimately pays. Wall Street has decided that’s the perfect time to buy.

Hedge funds are stepping up purchases of subrogation claims tied to the January 2025 Los Angeles fires now that the political push to curb the trade has stalled, Bloomberg reports. Prices range from as little as 3 cents on the dollar to around 60 cents.

Bradley Max of broker Cherokee Acquisition, who last year described a “chill” in the market, says the mood has flipped: “There’s plenty of appetite for buyers and sellers.” Per Cherokee, Eaton claims are trading at 55-60 cents while Palisades claims fetch just 3-5 cents. The firm recently bought roughly $100 million of Palisades-related claims for under a dime on the dollar. Funds are targeting returns in the low-to-mid teens, and deals typically fund within a couple of weeks.

Subrogation lets an insurer go after a third party, such as a utility whose lines sparked a blaze, to recover what it paid policyholders. Rather than wait years for litigation, insurers sell those rights at a discount for cash today, and investors bet the eventual recovery beats the purchase price. California is fertile ground because under “inverse condemnation,” plaintiffs suing investor-owned utilities don’t have to prove negligence.

The Crackdown That Wasn’t

Last summer, the California Earthquake Authority, which administers the state Wildfire Fund, branded these bets as opportunistic speculation and pledged to take on the hedge funds behind them. Newsom’s office argued that utilities were settling subrogation claims too generously, often with hedge funds that had bought the claims hoping for bigger payouts, and that this was draining the fund.

By mid-April 2025, investment bank Oppenheimer had already counted at least 10 transactions totaling more than $1 billion in recovery rights across the two fires. Eaton claims had traded as high as 50 cents on the dollar before the Earthquake Authority’s broadside knocked them “at least a few points lower,” Max said at the time, adding that it hadn’t held back deals. Eaton paper has since climbed past that old high.

The result was SB 254, signed in September 2025. For fires damaging more than 1,000 structures, insurers and their assignees (typically hedge funds) must give the utility a right of first refusal to settle the claim directly. The bill also created an $18 billion Continuation Account to supplement the Wildfire Fund. Max says the right of first refusal hasn’t cost him a single deal, and he’d be surprised if utilities or government entities had the means to buy the claims themselves.

Then came the August 2026 showdown. In a last-minute push, Newsom proposed limiting or entirely eliminating insurers’ right to recover wildfire costs from utilities. Lawmakers refused, warning that killing subrogation would destabilize the state’s fragile insurance market, raise premiums and drive insurers out of California. The resulting compromise, SB 492, would have prohibited private equity from investing in wildfire claims. Then the Assembly let the compromise die on the last day of session without a vote.

The one provision that would actually have shut the trade down died along with the bill.

As we noted at the time, PG&E plunged as much as 21%, its worst drop since 2020, while Edison crashed as much as 24%, its biggest since 2018. A wave of downgrades followed, and BMO’s Thalacker wrote that SB 492 “sets fire to hopes for meaningful reform” and sketched a downside case valuing PG&E at just $3 a share if wildfire claims exhaust the state fund and regulatory outcomes turn adverse. The CEOs of PG&E and Edison told legislative leaders their companies had collectively lost $20 billion in market value in a matter of days.

Six weeks later, there has been no recovery. Edison closed Friday at $55.30 and PG&E at $13.13, essentially where they ended crash day: EIX closed at $54 on August 31 and PCG at $13.27. Edison bounced 9% and PG&E 6% the day after the bill died, and both had given those gains back by late September. Each still sits roughly a quarter below its August 27 close, before the selloff began. Edison CEO Pedro Pizarro is now lobbying for a special session before year-end, noting that Newsom would have to call it, since his term ends in January.

Why Eaton Trades At 60 And Palisades At 3

Eaton is the “clean” trade, at least relative to Palisades. On August 4, Cal Fire and LA County Fire released their report concluding that the fire was caused by electrical arcing on an out-of-service Edison transmission tower. That gives buyers a confirmed cause and a deep-pocketed defendant.

But a week later the insurers hit a snag. Judge Laura Seigle tentatively denied their summary judgment motion, ruling they hadn’t shown that wildfire is an inherent risk of Edison’s idle lines as a matter of law. Edison argues the tower had been idle since 1971 and therefore no longer qualifies as the kind of public infrastructure that triggers strict liability. That fight now goes to a jury, with the first bellwether trial scheduled for January 25, 2027.

Edison, meanwhile, is trying to pay people off before that trial. Its compensation program had extended more than $820 million in offers to 5,800 claimants and paid out $410 million as of mid-August, with a November 30 deadline for claims. The utility says the program is not an admission of guilt. Overhanging everything, the Wildfire Fund’s own administrators warned last year that Eaton claims alone could fully exhaust the fund if Edison is found liable.

Palisades is a different beast, because there’s no investor-owned utility to sue. Federal prosecutors say the blaze was a holdover from the New Year’s Day Lachman Fire, allegedly set by Jonathan Rinderknecht. That theory took a hit when his first trial ended in a mistrial, with 10 jurors favoring acquittal and two wanting to convict. Prosecutors responded with a new indictment whose first charge covers only the Lachman Fire, not the Palisades Fire, and the retrial was pushed from October to early November.

Even a conviction wouldn’t produce a defendant with money. The deep pockets here are public. The defendants are the City of Los Angeles, LADWP and the State of California, sued over the empty Santa Ynez Reservoir, dry hydrants, and the alleged failure to fully put out the Lachman Fire. In February, a judge ruled that property owners can pursue LADWP for failing to supply enough water to fight the fire. The city and LADWP have agreed to mediation, but the state has declined.

Translation: anyone buying Palisades paper at 3-5 cents is effectively buying a lottery ticket on LA ratepayers and taxpayers.

Vultures Or Liquidity Providers?

Max argues that casting hedge funds as villains misreads their role, quipping that going after them “makes for great press for a politician.” His point is that a utility owes the same amount whether the claim sits with an insurer or an investor. Sacramento’s counter is that selling claims to hedge funds adds third parties looking to profit from wildfire payouts.

The template is PG&E. Baupost reportedly bought $6.8 billion in subrogation claims during PG&E’s bankruptcy, some at about 35 cents on the dollar, and profited handsomely. PG&E ultimately settled with insurers for $11 billion, far below the $20 billion they had sought. That works out to roughly 55 cents on the dollar, which is about where Eaton paper trades today. A buyer at 55-60 cents who only gets PG&E-style recovery would roughly break even, not earn teens returns. The difference is that PG&E was in Chapter 11, while Edison is solvent and has the Wildfire Fund behind it. That is presumably why buyers expect to do better.

Edison reported about 2,000 Eaton fire lawsuits covering roughly 32,000 plaintiffs as of July. As Nossaman’s Willis Hon put it: “Billions of dollars are in play now.”

The near-term catalysts are the Rinderknecht retrial in early November, Edison’s November 30 compensation deadline, a possible lame-duck special session, and the Eaton bellwether in January.

Related:

• Palisades Fire Fraud: Man Headed To Prison After Scamming $64K Out Of FEMA