From May 8, 2000 until June 30, 2007, the UBS Willow Fund was invested in distressed obligations with offsetting but smaller cash and synthetic short debt positions through credit default swaps (CDS). After June 2007 the Fund dramatically increased its purchases of CDS and became massively short distressed debt. Investors in the Fund lost $278.4 million during this second period from June 2007 to December 2012 and the Willow Fund was liquidated in 2013.
The Willow Fund understated the risk of its CDS portfolio and did not disclose the dramatic increase in the Fund's risks. In fact, the Willow Fund stopped reporting the CDS premiums it paid as a line item expense and thereafter bundled them with realized and unrealized gains on losses on its overall securities and derivatives portfolio making it nearly impossible for investors to discern the impact of the Fund's change in strategy and dramatic increase in risk. Investors in the Willow Fund suffered losses of between $351 million and $419 million compared to diversified portfolios of junks bonds while UBS made over $100 million selling and managing the Fund.