Ellington Income Opportunities (EIO) performance was relatively flat in the third quarter with volatile market conditions persisting. After rallying in late July and the beginning of August, interest rates and credit spreads sold off as investors priced in hawkish central bank developments. Credit spreads, as measured by the corporate high yield index, tightened over 150 basis points intra-quarter before giving up all these gains and then some. Many structured credit assets experienced similar volatility over the time period. Spreads for on-the-run structured products fluctuated in tandem with broader moves in liquid credit indices, though pockets of the structured market experienced less drastic moves. Despite a difficult environment, the fund has continued to perform well on a relative basis to the broader credit market and we think is positioned to take advantage of the substantial opportunities that now exist within the securitized credit markets.
A focus on more mature assets aided performance in Q3. Strong primary issuance amidst a backdrop of weaker demand has pushed on-the-run spreads wider. Seasoned assets tend to trade with a lower beta to general credit markets given lower fundamental risk, thus experiencing more stable performance.
The fund’s credit and interest rate hedges were an important component of returns in the third quarter. Maintaining exposure to higher yielding structured credit assets without taking an explicit rates-oriented view has been a central tenet of our investment process in this fund, helping to preserve capital in a year where realized rate volatility has been elevated.
Exposure to UK and European assets hurt performance in Q3 as sweeping fiscal policy changes caused heavy selling pressure from pension funds and other liability-driven investors in the region. Asset prices have also been dampened due to other funds needing to sell assets to meet redemptions. This is a risk in investing in less frequently traded assets as this fund does. Although these assets underperformed, we view it as an opportunity to add risk given the technical nature of the widening. Additionally, the fund hedges currency risk on non-dollar assets and thus was insulated from moves in foreign exchange markets.
Having reached the second half of 2022, it is notable in retrospect how quickly market narratives flipped from a “reach for yield” to one of more defensive positioning. In our view, the current market is one of the most attractive entry points for structured products in quite some time. Assets that traditionally have had little to no credit risk, even in the face of harsh economic shocks, now trade at some of the widest levels in product history. However, the current trading environment is extremely challenging as spreads have steadily widened this year without a clear catalyst for reversal. Although spread volatility may persist, the carry profile on the fund’s assets have improved as well, which may create a strong entry point with an attractive upside.
Ellington Income Opportunities Fund is a continuously offered, closed-end management investment company that is operated as an interval fund.
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Example Analyses or Portfolios
Example analyses and portfolios included herein are for illustrative purposes only and are intended to illustrate Ellington’s analytic approach and approach to portfolio construction. They are not and should not be considered a recommendation to purchase or sell any security. The example analyses are only as of the date specified and do not reflect changes since that time. There is no assurance that Ellington will be able to secure investment in securities substantially like those discussed, construct a portfolio substantially like that discussed, or that the composition of any portfolio will resemble discussed examples at any future date.
Estimated P/L Attributions
P/L attributions discussed herein have been prepared in good faith by Ellington. These attributions, however, depend upon a number of assumptions, the use of Ellington’s models, and the application of judgment during preparation of the attributions. Moreover, the tools used to calculate these attributions may be refined over time, and not all data used to prepare these estimates may be available for all periods. The attributions shown may, consequently, differ from those that would be shown had a different methodology, including past methodologies, been employed or had different judgments or assumptions been made during their preparation. The methodology used herein for classifying P/L as “realized” or “unrealized” may differ from methodologies consistent with GAAP and the resulting attributions may, consequently, differ substantially from those that would result from methodologies consistent with GAAP. For these and other reasons, these attributions are of limited utility and are provided for informational purposes only. This attribution information should be read in the context of historical fund net performance provided to you separately.
Some of the statements in these materials constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, estimates, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements in these materials are subject to inherent qualifications and are based on a number of assumptions. The forward-looking statements in these materials involve risks and uncertainties, including statements as to: (i) general volatility of the securities markets in which we plan to trade; (ii) changes in strategy; (iii) availability, terms, and deployment of capital; (iv) availability of qualified personnel; (v) changes in interest rates, the debt securities markets or the general economy; (vi) increased rates of default and/or decreased recovery rates on our investments; (vii) increased prepayments of the mortgage and other loans underlying our mortgage-backed or other asset-backed securities; (viii) changes in governmental regulations, tax rates, and similar matters; (ix) changes in generally accepted accounting principles by standard-setting bodies; (x) availability of trading opportunities in mortgage-backed, asset-backed, and other securities, (xi) changes in the customer base for our business, (xii) changes in the competitive landscape within our industry and (xiii) the continued availability to the business of the Ellington resources described herein on reasonable terms.
The forward-looking statements are based on our beliefs, assumptions, and expectations, taking into account all information currently available to us. These beliefs, assumptions, and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, the performance of instruments and business discussed herein may vary materially from those expressed, anticipated or contemplated in our forward-looking statements.
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call 1-855-862-6092 or visit our website at www.ellingtonincomefund.com. Read the prospectus or summary prospectus carefully before investing.
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