UBS's long-standing and profitable Willow Fund, whose assets approached $500 million in 2006, recently began the process of liquidation after the fund's portfolio manager, Sam S. Kim, switched strategies in 2012—a move that not only increased risk, but highlighted a key flaw in supervisory structure.
A 2012 year-end Ernst & Young LLP audit of the Willow Fund found total assets in the amount of $21.7 million with liabilities of $11.5 million; the Willow Fund's Board of Directors approved liquidation in October 2012.
The Willow Fund had specialized in distressed debt instruments—securities such as bonds and bank debt of companies or governments under bankruptcy protection, in default or otherwise in distress and trending toward such financial crises.
Specifically, the Willow Fund had concentrated on corporate, private debt, an investment strategy that, until recently, seemed to pay off.
Described by brokers as an expert in analyzing distressed debt instruments, Kim suddenly changed Willow's investment strategy over the past few years, moving focus from the corporate world and domestic debt securities to derivatives trades involving the debt of European nations.
Now, instead of betting against private corporations, Kim's Willow Fund entered a world of credit default swaps on the government debts of the likes of France, Germany, Spain and Sweden, betting that problems in these countries would get worse.
Once comprising only 0.18% of Willow Fund's total portfolio in 2006, after Kim's strategy change, credit default swaps amounted to nearly half of the portfolio just five years later.
After losing 89 percent value in 2012, the Willow Fund will liquidate in June, returning pennies on the dollar to investors who were largely kept in the dark about Kim's titanic change in investment strategy and about the increased risk posed by Kim's investments in derivatives trading.
According to investors, Kim's abrupt change in strategy highlights a supervisory shortcoming as the Willow Fund's Board of Directors allegedly failed to detect and/or halt the increasingly risky investment activity associated with derivatives trading. Willow Fund is also accused of failing to disclose to investors the increased risk posed by the change.
If you have invested with UBS, its Willow Fund, portfolio manager Sam S. Kim or with any broker, other financial professional or firm whose abrupt and largely unannounced strategy change has increased risk and resulted in losses that have proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.