Ellington runs 500 rate scenarios across $24B mortgage funds

Ellington Management Group runs 500 interest-rate scenarios and layers assumptions about prepayments and credit performance to size positions and assess risk across more than $24 billion in mortgage and structured credit funds.

The firm applies the scenario outputs to position sizing and risk controls across a range of strategies, including daily liquid lower-risk funds, drawdown vehicles and permanent capital funds focused on mortgage and structured credit exposures.

Greg Valli, a senior manager at Ellington, traced the firm’s expansion over roughly three decades from agency mortgage prepayment strategies to a broader set of products as assets grew. The firm’s track record includes periods of market stress such as the global financial crisis and the COVID market shock, events that exposed weaknesses in some securities not designed for a severe housing downturn.

Market composition has shifted, Valli noted, from an environment that was largely investment grade to one where much of the investable universe sits below investment grade. That change has altered how the firm evaluates risk and return, increasing attention to structural features, the interaction of different capital-stack pieces and contractual triggers that can change cash-flow patterns under stress.

Ellington’s vertical integration allows analysts to examine whole loans, securitizations and capital structures together rather than in isolation. That integrated view is used to identify where incentives or structural clauses could amplify losses or affect liquidity and payment priority under stress scenarios.

Valli described the firm’s modelling process as running 500 distinct interest-rate paths, then adding prepayment and credit assumptions to produce distributions of outcomes. Those outputs inform how the firm sizes positions and allocates across liquid and longer-dated or less liquid strategies without relying on a single forecast for interest rates.

On due diligence, Valli said, “You have to understand exactly what you’re buying and think through different scenarios.” He added that analysts question why a seller is offering an asset and run tests that ask what would make the firm decline a purchase.

On the outlook, Valli expressed a positive view of mortgage credit, citing what he described as a favorable U.S. housing backdrop and several supporting factors for performance. Ellington today manages more than $24 billion in structured credit and mortgage assets and has widened its product lineup as capital has increased.