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UBS Willow Fund, L.L.C. – ‘N-CSRS’ for 6/30/12

On:  Wednesday, 9/5/12, at 3:32pm ET   ·   Effective:  9/5/12   ·   For:  6/30/12   ·   Accession #:  1193125-12-380821   ·   File #:  811-09841

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 9/05/12  UBS Willow Fund, L.L.C.           N-CSRS      6/30/12    2:488K                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: N-CSRS      Form N-CSRS Reporting Period June 30, 2012          HTML    330K 
 2: EX-99.CERT  Miscellaneous Exhibit                               HTML     21K 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

The Report to Shareholders is attached herewith.

UBS WILLOW FUND, L.L.C.

Financial Statements

(Unaudited)

Semi-Annual Report

Period from January 1, 2012 to June 30, 2012

UBS WILLOW FUND, L.L.C.

Financial Statements

(Unaudited)

Semi-Annual Report

Period from January 1, 2012 to June 30, 2012

Contents

UBS Willow Fund, L.L.C.

Statement of Assets, Liabilities and Members’ Capital

(Unaudited)

June 30, 2012

The accompanying notes are an integral part of these financial statements.

1

UBS Willow Fund, L.L.C.

Statement of Operations

(Unaudited)

Period from January 1, 2012 to June 30, 2012

The accompanying notes are an integral part of these financial statements.

2

UBS Willow Fund, L.L.C.

Statements of Changes in Members’ Capital

Year Ended December 31, 2011 and Period from January 1, 2012 to June 30, 2012 (Unaudited)

The accompanying notes are an integral part of these financial statements.

3

UBS Willow Fund, L.L.C.

Statement of Cash Flows

(Unaudited)

Period from January 1, 2012 to June 30, 2012

The accompanying notes are an integral part of these financial statements.

4

UBS Willow Fund, L.L.C.

Financial Highlights

June 30, 2012

The following represents the ratios to average members’ capital and other supplemental information for all Members, excluding the Manager, for the periods indicated.

An individual Member’s ratios and returns may vary from the below based on the timing of capital transactions, management fee arrangements and the Incentive Allocation.

The accompanying notes are an integral part of these financial statements.

5

UBS Willow Fund, L.L.C.

Notes to Financial Statements

(Unaudited)

June 30, 2012

UBS Willow Fund, L.L.C. (the “Fund”) was organized as a limited liability company under the laws of Delaware on February 1, 2000. The Fund is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as a closed-end, non-diversified management investment company. The Fund’s investment objective is to maximize total return with low volatility by making investments in distressed investments. The Fund pursues its investment objective by investing primarily in debt securities and other obligations and to a lesser extent equity securities of U.S. companies that are experiencing significant financial or business difficulties (collectively, “Distressed Obligations”). The Fund also may invest in Distressed Obligations of foreign issuers and other privately held obligations. The Fund may use a variety of special investment techniques to hedge a portion of its investment portfolio against various risks or other factors that generally affect the values of securities and for non-hedging purposes to pursue the Fund’s investment objective. These techniques may involve the use of derivative transactions, including credit default swaps. The Fund commenced operations on May 8, 2000.

The Fund’s Board of Directors (the “Directors”) has overall responsibility to manage and control the business affairs of the Fund, including the exclusive authority to oversee and to establish policies regarding the management, conduct and operation of the Fund’s business. The Directors have engaged UBS Willow Management, L.L.C. (the “Manager”), a Delaware limited liability company, to provide investment advice to the Fund.

The Manager is a joint venture between UBS Alternative and Quantitative Investments LLC (“UBS A&Q”) and Bond Street Capital, L.L.C. (“Bond Street”). UBS A&Q is the managing member of the Manager, is a wholly owned subsidiary of UBS AG, and is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Investment professionals employed by Bond Street manage the Fund’s investment portfolio on behalf of the Manager under the oversight of UBS A&Q’s personnel. Bond Street is also registered as an investment adviser under the Advisers Act.

Initial and additional applications for interests by eligible investors may be accepted at such times as the Directors may determine and are generally accepted monthly. The Directors reserve the right to reject any application for interests.

The Fund, from time to time, may offer to repurchase interests pursuant to written tenders to members (the “Members”). These repurchases will be made at such times and on such terms as may be determined by the Directors, in their sole and absolute discretion. The Manager expects that, generally, it will recommend to the Directors that the Fund offers to repurchase interests from Members once per year, near year-end. A Member’s interest, or portion thereof, in the Fund can only be transferred or assigned (i) by operation of law pursuant to the death, bankruptcy, insolvency

6

UBS Willow Fund, L.L.C.

Notes to Financial Statements (continued)

(Unaudited)

June 30, 2012

or dissolution of a Member, or (ii) with the written approval of the Directors, which may be withheld in their sole and absolute discretion. Such transfers may be made even if the balance of the capital account to such transferee is equal to or less than the transferor’s initial capital contribution.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 amends ASC Topic 210, Balance Sheet, which requires enhanced disclosures on both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 is effective for fiscal years beginning on or after January 1, 2013 and for interim periods within those fiscal years. The adoption of ASU 2011-11 is currently being assessed but is not expected to have a material impact on the Fund’s financial statements.

The Fund values its investments at fair value, in accordance with U.S. generally accepted accounting principles (“GAAP”), which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Various inputs are used in determining the fair value of the Fund’s investments which are summarized in the three broad levels listed below.

Level 1—quoted prices in active markets for identical securities.

Level 2—other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment spreads, credit spread, etc.)

Level 3—significant unobservable inputs (including the Fund’s own assumptions and indicative non-binding broker quotes.)

The Fund recognizes transfers into and out of the levels indicated above at the end of the reporting period. All transfers into and out of Level 3 can be found in the Level 3 reconciliation table within the Schedule of Portfolio Investments.

GAAP provides guidance in determining whether there has been a significant decrease in the volume and level of activity for an asset or liability when compared with normal market activity for such asset or liability (or similar assets or liabilities). GAAP also provides guidance on identifying

7

UBS Willow Fund, L.L.C.

Notes to Financial Statements (continued)

(Unaudited)

June 30, 2012

circumstances that indicate a transaction with regards to such an asset or liability is not orderly. In its consideration, the Fund must consider inputs and valuation techniques used for each class of assets and liabilities. Judgment is used to determine the appropriate classes of assets and liabilities for which disclosures about fair value measurements are provided. Fair value measurement disclosure for each class of assets and liabilities requires greater disaggregation than the Fund’s line items in the Statement of Assets, Liabilities and Members’ Capital. The Fund determines the appropriate classes for those disclosures on the basis of the nature and risks of the assets and liabilities and their classification in the fair value hierarchy (i.e., Level 1, Level 2, and Level 3).

For assets and liabilities measured at fair value on a recurring basis during the period, the Fund provides quantitative disclosures about the fair value measurements separately for each class of assets and liabilities, as well as a reconciliation of beginning and ending balances of Level 3 assets and liabilities broken down by class.

The valuation process is governed by a Valuation Policy and Procedures document (the “Valuation Policy”) which has been approved by the Directors of the Fund. The Valuation Policy governs the valuation of all securities comprising the net asset value of the Fund and defines the valuation principles and pricing conventions for each security type as described below. If there is a difference between the Valuation Policy and the Fund’s offering documents, the Fund’s offering documents will be used as the basis of the valuation process. In addition, the Valuation Policy establishes a valuation committee (the “Valuation Committee”). The Valuation Committee is specifically responsible for the implementation of the Valuation Policy. The Valuation Committee reviews policy exceptions and the implementation of the Valuation Policy. The Valuation Committee will escalate issues to the Directors as required. The Valuation Committee also reviews and approves the specific valuation methodology implemented for new and existing investments in securities of private companies that are held in the Fund. The voting members of the Valuation Committee are non-investment team personnel.

A breakdown of the Fund’s portfolio into the fair value measurement levels can be found in the tables following the Schedule of Portfolio Investments.

Net asset value of the Fund is determined by the Fund’s administrator, under the oversight of the Manager, as of the close of business at the end of any fiscal period in accordance with the valuation principles set forth below or as may be determined from time to time pursuant to policies established by the Directors.

8

UBS Willow Fund, L.L.C.

Notes to Financial Statements (continued)

(Unaudited)

June 30, 2012

Securities and securities sold, not yet purchased that are not listed or admitted to trading on any securities exchange, including bank debt and corporate debt obligations, are valued using the average of the final bid and ask prices as of the measurement date from external pricing sources and from reputable dealers or market makers that regularly trade such securities.

Securities and securities sold, not yet purchased, other than options and warrants, that are listed or admitted to trading on one or more securities exchanges are valued at the last sale price on the principal exchange of trading. If no trade took place, the securities are valued using the average of the final bid and ask prices as of the measurement date.

Options and warrants that are listed or admitted to trading on one or more exchanges will be valued at the last sale price, if such price is equal to or is between the bid and the ask prices (otherwise, the average of the final bid and ask prices as of the measurement date will be used), on the principal exchange of trading.

Options and warrants that are not listed or admitted to trading on an exchange or that are listed on an exchange which does not accurately represent such securities’ true value will be valued at the average of the final bid and ask prices provided by a reputable dealer. Options and warrants may also be valued according to a valuation model or volatility formula pursuant to the Fund’s valuation policy and procedures using inputs such as the price of underlying or reference assets, the terms of the option or warrant position, the amount of time until exercise and volatility levels which may be adjusted to more accurately reflect fair value. Due to these factors, the Fund may classify these securities as Level 3 positions.

Open credit default swap agreements are valued using independent valuation models. Inputs to the model are contractual terms and quoted inputs for credit spreads, recovery rates and interest rates. Related unrealized gains and losses on open credit default swap agreements are recorded on the Statement of Assets, Liabilities and Members’ Capital.

Consistent with its strategy, a significant portion of the Fund’s long portfolio ($9,990,260 at June 30, 2012) and short portfolio ($516,587 at June 30, 2012) is comprised of relatively illiquid or thinly traded investments that are not actively traded on a recognized security exchange. All such securities held by the Fund at June 30, 2012 were valued on the basis of indicative prices provided by external pricing sources including dealers active in the relevant markets. Due to the nature of the Fund’s strategy, multiple pricing sources on individual securities may not be available. Values assigned at June 30, 2012 may differ significantly from values that would have been used had a broader market for the investments existed. In the case where multiple pricing sources are not available, the Fund classifies these securities as Level 3 positions.

9

UBS Willow Fund, L.L.C.

Notes to Financial Statements (continued)

(Unaudited)

June 30, 2012

For non exchange traded securities, the valuation process described above represents a good faith approximation of the fair value of an asset and is used where there is no public market or possibly no market at all for a company’s securities. The fair value established may differ significantly from the values that would have been used had a ready market for the securities existed and the differences could be material. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. As a result, the Fund’s issuance or repurchase of its interests at a time when it owns securities which utilize valuation techniques that are not readily observable and significant to the fair value measurement may have the effect of diluting or increasing the economic interest of existing investors.

All assets and liabilities initially expressed in foreign currencies are converted into U.S. dollars using foreign exchange rates provided by a pricing service compiled as of 4:00 p.m. London time. Trading in foreign securities generally is completed, and the values of such securities are determined, prior to the close of securities markets in the U.S. Foreign exchange rates are also determined prior to such close.

On occasion, the fair value of such foreign securities and exchange rates may be affected by significant events occurring between the time when determination of such values or exchange rates are made and the time that the net asset value of the Fund is determined. When such significant events materially affect the values of securities held by the Fund or its other assets and liabilities, such securities and other assets and liabilities are valued as determined in good faith by, or under the supervision of, the Directors. The Fund had no such foreign securities valued by the Directors at June 30, 2012.

The fair value of the Fund’s assets and liabilities which qualify as financial instruments approximates the carrying amounts presented in the Statement of Assets, Liabilities and Members’ Capital.

Securities transactions, including related revenue and expenses, are recorded on the trade-date basis and dividends are recorded on the ex-dividend date basis net of foreign withholding taxes and reclaims, if applicable. Interest income and expenses are recorded on the accrual basis. Premiums and discounts on debt securities are amortized/accreted to interest expense/income using the effective yield method. Realized gains and losses from investments in securities, securities sold, not yet purchased and foreign currency transactions are calculated on the identified cost basis. The Fund does not isolate the portion of operations resulting from changes in foreign exchange rates on

10

UBS Willow Fund, L.L.C.

Notes to Financial Statements (continued)

(Unaudited)

June 30, 2012

investments in securities and securities sold, not yet purchased from the fluctuations arising from changes in market prices of foreign securities held. Such fluctuations are included in net realized and unrealized gain or loss from investments in securities and securities sold, not yet purchased. Net realized gain or loss from foreign currency transactions represents net foreign exchange gain or loss from disposition of foreign currencies and the difference between the amount of net investment income recorded on the Fund’s accounting records and the U.S. dollar equivalent amounts actually received or paid. Net unrealized gain or loss from foreign currency translations arise from changes in the value of assets and liabilities, other than investments in securities and securities sold, not yet purchased, as a result of changes in exchange rates. For securities in default, the Fund writes off any related interest receivable upon default and discontinues accruing interest income and amortizing/accreting the premiums/discounts on such securities. Purchased interest, if any, is added to the cost of the related security upon default.

The Fund bears all expenses incurred in its business, including, but not limited to, the following: all costs and expenses related to portfolio transactions and positions for the Fund’s account; legal fees; accounting and auditing fees; custodial fees; costs of computing the Fund’s net asset value, including valuation services provided by third parties; costs of insurance; registration expenses; organization costs; due diligence, including travel and related expenses; expenses of meetings of Directors; all costs with respect to communications to Members; and other types of expenses approved by the Directors.

The Fund has reclassified $1,346,457 and $21,766,440 from accumulated net investment loss and accumulated net realized loss from investments in securities, securities sold, not yet purchased and swaps respectively, to net capital contributions during the six month period ended June 30, 2012. The reclassification was to reflect, as an adjustment to net contributions, the amount of estimated taxable income or loss that has been allocated to the Fund’s Members as of June 30, 2012 and had no effect on members’ capital.

The Fund files income tax returns in the U.S. federal jurisdiction and applicable states. Management has analyzed the Fund’s tax positions taken on its federal and state income tax returns for all open tax years, and has concluded that no provision for federal or state income tax is required in the Fund’s financial statements. The Fund’s federal and state income tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal

11

UBS Willow Fund, L.L.C.

Notes to Financial Statements (continued)

(Unaudited)

June 30, 2012

Revenue Service and state departments of revenue. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. For the six month period ended June 30, 2012, the Fund did not incur any interest or penalties.

Each Member is individually required to report on its own tax return its distributive share of the Fund’s taxable income or loss.

Cash consists of monies held at The Bank of New York Mellon (the “Custodian”). Such cash, at times, may exceed federally insured limits. The Fund has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on such accounts.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in members’ capital from operations during the reporting period. Actual results could differ from those estimates. Because of the uncertainty of valuation, such estimates may differ significantly from values that would have been used had a ready market existed, and the differences could be material.

UBS A&Q provides certain management and administrative services to the Fund, including, among other things, providing office space and other support services to the Fund. In consideration for such services, the Fund pays UBS A&Q a monthly management fee (the “Management Fee”) at an annual rate of 1.25% of the Fund’s members’ capital, excluding the capital account attributable to the Manager. The Management Fee is debited against the Members’ capital accounts, excluding the Manager’s or Special Advisory Account and paid to UBS A&Q and Bond Street, respectively.

UBS Financial Services Inc. (“UBS FSI”), a wholly-owned subsidiary of UBS Americas, Inc., acts as a placement agent for the Fund, without special compensation from the Fund, and bears its own costs associated with its activities as placement agent. Placement fees, if any, charged on contributions are debited against the contribution amounts to arrive at a net subscription amount. The placement fee does not constitute assets of the Fund.

12

UBS Willow Fund, L.L.C.

Notes to Financial Statements (continued)

(Unaudited)

June 30, 2012

The Fund may execute portfolio transactions through UBS FSI and its affiliates. For the six month period ended June 30, 2012, UBS FSI and its affiliates did not execute portfolio transactions on behalf of the Fund.

The net increase or decrease in members’ capital derived from operations (net income or loss) is initially allocated to the capital accounts of all Members on a pro-rata basis, other than the Management Fee which is similarly allocated to all Members other than the Manager, as described above. At the end of the twelve month period following the admission of a Member to the Fund and generally at the end of each fiscal year thereafter, the Manager is entitled to an incentive allocation (the “Incentive Allocation”) of 20% of the net profits, (defined as net increase in members’ capital derived from operations on the Statement of Operations) if any, that would have been credited to the Member’s capital account for such period. The Incentive Allocation will be made only with respect to net profits that exceed any net losses previously debited from the account of such Member which have not been offset by any net profits subsequently credited to the account of the Member.

For the six month period ended June 30, 2012, there was a reversal of a prior period accrued Incentive Allocation of $11,821. The Incentive Allocation for the year ended December 31, 2011 was $62,759, and has been recorded as a net increase to the Manager’s capital account. Such amounts are not eligible to receive a pro-rata share of the income/expense and gain or loss of the Fund.

Each Director of the Fund receives a retainer of $8,250 plus a fee for each meeting attended. The Chairman of the Board of Directors and the Chairman of the Audit Committee of the Board of Directors each receive an additional annual retainer in the amount of $20,000. These additional annual retainer amounts are paid for by the Fund on a pro-rata basis with nine other UBS funds where UBS A&Q is the investment adviser. All Directors are reimbursed by the Fund for all reasonable out-of-pocket expenses.

BNY Mellon Investment Servicing (US) Inc. (“BNY Mellon”) serves as accounting and investor servicing agent to the Fund and in that capacity provides certain administrative, accounting, record keeping, tax and Member related services. BNY Mellon receives a monthly fee primarily based upon (i) the average members’ capital of the Fund subject to a minimum monthly fee, and (ii) the aggregate members’ capital of the Fund and certain other investment funds sponsored or advised by UBS AG, UBS Americas, Inc. or their affiliates. Additionally, the Fund reimburses certain out of pocket expenses incurred by BNY Mellon.

The Custodian has entered into a service agreement whereby it provides securities servicing and settlement services for the Fund.

13

UBS Willow Fund, L.L.C.

Notes to Financial Statements (continued)

(Unaudited)

June 30, 2012

Aggregate purchases and proceeds from sales of investment securities for the six month period ended June 30, 2012 amounted to $0 and $12,155,391, respectively. There were no purchases closing out securities sold, not yet purchased for the six month period ended June 30, 2012.

At December 31, 2011, the tax basis of investments was $140,676,841 resulting in accumulated net unrealized depreciation on investments of $66,617,113 which consists of $52,810,581 gross unrealized appreciation and $119,427,694 gross unrealized depreciation. The difference between the book and tax basis of investments is primarily attributable to book to tax differences for accounting for reorganizations and credit default swaps. The tax basis of investments for 2012 will not be finalized by the Fund until after the fiscal year end.

The Fund has the ability to trade on margin and, in that connection, may borrow funds from brokers and banks for investment purposes. Trading in debt securities on margin requires collateral that is adequate in the broker’s reasonable judgment under the margin rules of the applicable market and the internal policies of the broker. The 1940 Act requires the Fund to satisfy an asset coverage requirement of 300% of its indebtedness, including amounts borrowed, measured at the time the Fund incurs the indebtedness. The Fund pledges securities as collateral for the margin borrowings. The Fund had no borrowings outstanding for the six month period ended June 30, 2012.

Goldman Sachs & Co. (“Goldman Sachs”) is the prime broker for the Fund. The cash due from broker is primarily related to securities sold, not yet purchased; its use is therefore restricted. Securities sold, not yet purchased represents obligations of the Fund to deliver specified securities and thereby creates a liability to purchase such securities in the market at prevailing prices. Accordingly, these transactions result in off-balance sheet risk as the Fund’s ultimate obligation to satisfy the sale of securities sold, not yet purchased may exceed the amount indicated in the Statement of Assets, Liabilities and Members’ Capital. Accordingly, the Fund has a concentration of individual counterparty credit risk with the prime broker.

In the normal course of business, the Fund may trade various financial instruments and enter into various investment activities with off-balance sheet risk. These financial instruments include swaps and securities sold, not yet purchased. Generally, these financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at specified future dates.

14

UBS Willow Fund, L.L.C.

Notes to Financial Statements (continued)

(Unaudited)

June 30, 2012

Each of these financial instruments contain varying degrees of off-balance sheet risk whereby changes in the fair value of securities underlying the financial instruments may be in excess of the amounts recognized in the Statement of Assets, Liabilities, and Members’ Capital. Due to the nature of the Fund’s strategy, the Fund’s portfolio consists of a high number of relatively illiquid or thinly traded investments having a greater amount of both market and credit risk than many other fixed income instruments. These investments trade in a limited market and may not be able to be immediately liquidated if needed. Fair value assigned to these investments may differ significantly from the values that would have been used had a broader market for the investments existed.

Foreign-denominated assets may involve more risks than domestic transactions, including political, economic, and regulatory risk. Risks may also arise from the potential inability of a counterparty to meet the terms of a contract and from unanticipated movements in the value of foreign currencies relative to the U.S. dollar.

The Fund uses a variety of special investment techniques to hedge a portion of its investment portfolio against various risks or other factors that generally affect the values of the securities and for non-hedging purposes to pursue the Fund’s investment objective. These techniques involve the use of derivative transactions, including credit default swaps.

The Fund is required to present enhanced information in order to provide users of financial statements with an improved degree of transparency and understanding of how and why an entity uses derivative instruments, how derivative instruments are accounted for, and how derivative instruments affect an entity’s financial position, results of operations and its cash flows. In order to provide such information to financial statement users, the Fund provides qualitative disclosures about an entity’s associated risk exposures, quantitative disclosures about fair value amounts of derivative instruments and the gains and losses from derivative instruments, and disclosures of credit-risk-related contingent features in derivative agreements, which are all contained within this note.

The Fund invests in bonds and bank debt. Bonds and bank debt (loan assignments and participations) have exposure to certain degrees of risk, including interest rate, market risk and the potential non-payment of principal and interest, including default or bankruptcy of the issuer or the intermediary in the case of participation. Loans are generally subject to prepayment risk, which will affect the maturity of such loans. The Fund has no unfunded commitments on investments at June 30, 2012.

15

UBS Willow Fund, L.L.C.

Notes to Financial Statements (continued)

(Unaudited)

June 30, 2012

For the six month period ended June 30, 2012, the Fund entered into credit default swaps for speculative purposes as a “protection buyer”. The credit default swaps entered into by the Fund involve payments of fixed rate amounts on a notional principal amount to a “protection seller” in exchange for agreed upon payment amounts to the Fund by the protection seller if specified credit events occur related to an underlying reference security. A credit event is typically defined as the occurrence of a payment default or the bankruptcy or insolvency of the issuer or guarantor of the reference security. The Fund does not own the underlying reference security.

The swap agreements provide for net cash settlement in the event of a credit event and therefore do not require the Fund to segregate assets to cover the underlying reference security. The Manager believes that the transactions do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as subject to the Fund’s borrowing restriction.

Risks may arise as a result of the failure of the counterparty (protection seller) to perform under the agreement. The loss incurred by the failure of a counterparty is generally limited to the fair value and premium amounts recorded. The Fund considers the creditworthiness of each counterparty to a swap agreement in evaluating potential credit risk. Additionally, risks may arise from the unanticipated movements in the interest rates or in the value of the underlying reference securities.

The Fund currently has significant counterparty risk exposure with Goldman Sachs as of June 30, 2012 due to the volume of credit default contracts where Goldman Sachs is the counterparty. Refer to the Schedule of Portfolio Investments for a detailed listing of the credit default swap agreements listed by counterparty, which indicates the notional amounts and fair values as of June 30, 2012. The gross unrealized gains and losses recognized by the Fund at June 30, 2012 on credit default swaps where Goldman Sachs is the counterparty are $13,861,986 and $(10,678,954), respectively.

Certain of the Fund’s credit default swap agreements set forth each party’s basic rights, responsibilities and duties. These agreements also contain information regarding financial terms and conditions, as well as termination and events of default provisions. The Fund’s counterparties usually have multiple specified events under which they can terminate individual transactions or the entire agreement. These events are most commonly related to declines in assets under management during a specified period, which may require closer monitoring of positions or posting of additional collateral. It is not guaranteed that counterparties will move to terminate individual transactions or entire agreements if a “trigger event” were to occur; however, it is their right to do so, which could severely impact the Fund’s portfolio. The counterparties did not terminate transactions or agreements based on such “trigger events” during the six month period ended June 30, 2012.

16

UBS Willow Fund, L.L.C.

Notes to Financial Statements (continued)

(Unaudited)

June 30, 2012

The Fund is required to post cash as collateral with the counterparty pursuant to each counterparty agreement. The Fund has posted $25,720,418 as collateral at June 30, 2012 related to its credit default swap contracts. This amount is recorded as collateral deposited with brokers on credit default swaps on the Statement of Assets, Liabilities and Members’ Capital. At June 30, 2012, the Fund is not currently required to post any additional collateral relating to its credit default swap contracts. The accrued expense related to the periodic payments on credit default swaps is included in net realized and net change in unrealized gain/(loss) on swaps in the Statement of Operations.

Fluctuations in the value of credit default swaps are recorded in net change in unrealized appreciation/depreciation on swaps in the Statement of Operations.

The net realized and net change in unrealized gain/(loss) on credit default swaps are $1,505,443 and $(35,155,638), respectively, and are separately disclosed on the Statement of Operations. Unrealized appreciation and depreciation on credit default swap contracts is included as unrealized appreciation on credit default swaps and unrealized depreciation on credit default swaps, respectively, on the Statement of Assets, Liabilities and Members’ Capital.

The volume of activity of credit default swaps that is presented in the Schedule of Portfolio Investments is consistent with the derivative activity during the six month period ended June 30, 2012.

In the ordinary course of business, the Fund may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Fund. Based on its history and experience, the Fund believes that the likelihood of such an event is remote.

17

UBS Willow Fund, L.L.C.

Schedule of Portfolio Investments

(Unaudited)

June 30, 2012

The preceding notes are an integral part of these financial statements.

18

UBS Willow Fund, L.L.C.

Schedule of Portfolio Investments (continued)

(Unaudited)

June 30, 2012

Percentages shown represent a percentage of members’ capital as of June 30, 2012.

The preceding notes are an integral part of these financial statements.

19

UBS Willow Fund, L.L.C.

Schedule of Portfolio Investments (continued)

(Unaudited)

June 30, 2012

CREDIT DEFAULT SWAPS

The preceding notes are an integral part of these financial statements.

20

UBS Willow Fund, L.L.C.

Schedule of Portfolio Investments (continued)

(Unaudited)

June 30, 2012

CREDIT DEFAULT SWAPS (CONTINUED)

The preceding notes are an integral part of these financial statements.

21

UBS Willow Fund, L.L.C.

Schedule of Portfolio Investments (continued)

(Unaudited)

June 30, 2012