Key Takeaways
- • The UBS-sponsored Willow Fund, a closed-end fund that held about $500 million in assets in 2006, was liquidated in October 2012 after heavy losses.
- • The fund lost almost 80 percent in the first three quarters of 2012 after its longtime manager, Sam S. Kim, abandoned corporate debt for large derivatives trades that bet against European sovereign debt.
- • Investor Ken Boudreau of Farmington, Conn., invested $350,000 beginning in mid-2009, lost $300,000, and has filed an arbitration case against UBS.
- • The case highlights two investor risks: abrupt strategy shifts by fund managers and inadequate oversight by independent directors.
Summary
Last October, shareholders in the Willow Fund, a closed-end investment fund sponsored and sold by UBS, learned the fund was being liquidated, according to a New York Times report by Gretchen Morgenson. The fund had held almost $500 million in assets in 2006. Specializing in distressed debt instruments, it suffered losses of almost 80 percent in the first three quarters of 2012 after its longtime manager switched strategies. He moved away from the corporate debt markets he knew well and invested heavily in derivatives trades, including positions against the debt of European nations. Many investors reportedly did not realize they held a portfolio carrying such risks.
The Times presents the Willow Fund as a cautionary tale about two governance issues. The first is the danger of a sharp change in investment strategy by a portfolio manager. The second concerns how closely the fund's independent directors monitored the manager as he raised the portfolio's risk levels.
Ken Boudreau, 70, of Farmington, Conn., has filed an arbitration case against UBS to recover his losses. He began investing in the fund in mid-2009 and put in a total of $350,000, losing $300,000. In an interview, Boudreau said UBS brokers had argued that the fund's distressed debt holdings were well positioned for gains as the economy recovered from the credit crisis. They also cited the track record of Sam S. Kim, who had managed Willow since its launch in 2000 and was described to Boudreau as an expert in distressed debt. "I try to be a disciplined buyer and seller, buying in when markets are down," Boudreau said. "In mid-2009, distressed debt seemed to me a home run."
The Times presents the Willow Fund as a cautionary tale about two governance issues. The first is the danger of a sharp change in investment strategy by a portfolio manager. The second concerns how closely the fund's independent directors monitored the manager as he raised the portfolio's risk levels.
Ken Boudreau, 70, of Farmington, Conn., has filed an arbitration case against UBS to recover his losses. He began investing in the fund in mid-2009 and put in a total of $350,000, losing $300,000. In an interview, Boudreau said UBS brokers had argued that the fund's distressed debt holdings were well positioned for gains as the economy recovered from the credit crisis. They also cited the track record of Sam S. Kim, who had managed Willow since its launch in 2000 and was described to Boudreau as an expert in distressed debt. "I try to be a disciplined buyer and seller, buying in when markets are down," Boudreau said. "In mid-2009, distressed debt seemed to me a home run."
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