Greg Valli has been part of two of the three decades of Ellington Management Group. During that period, the firm has enjoyed a rapid rise to now manage over $24bn in structured credit and mortgage assets. As capital has accumulated, the firm’s investment universe has continued to expand. Valli notes Ellintgon has grown beyond just focusing on agency mortgage prepayment strategies, to now manage “daily liquid, lower-risk funds, as well as drawdown funds and permanent capital vehicles.”

This evolution has seen the fund generate significant returns but also navigate several market downturns, including the GFC and COVID, where much of the commonly held investment consensus was challenged. Valli believes the biggest shift in this period is where the market moved from being “essentially all investment grade to being entirely below investment grade.” Moreover, the importance of modelling and being forensic in the research process was made clear, with “many of the securities simply not being designed for the kind of housing crisis we experienced.”

For Valli, due diligence has been a central tenet of his investment process and is constantly being honed. “You have to understand exactly what you're buying and think through different scenarios. You also need to be skeptical and ask yourself why the other side of the trade is selling the asset to you. We are often asking ourselves, " Why should we not buy this bond.” Valli cites an example of the firm's modelling capabilities. Running 500 different interest-rate paths and then layering in different assumptions around prepayments and credit performance, helping to inform sizing and positioning. 

Assessing the current opportunity set today. Valli sees prescient investment opportunities at the lower-risk end of the spectrum, where spreads have tightened. He also sees attractive opportunities in mortgages and structured credit. Valli is keen to point out the flexibility of the portfolio, one that is not built for a particular outcome and/or trying to predict the direction of interest rates. 

This agile positioning coupled with the complexity of the sector is one of Ellington’s defining features, as Valli explains. “It’s a complex sector, and that requires deep expertise and sophisticated modelling. Or vertical integration allows us to look at whole loans and the capital structure, and how the different pieces interact, including triggers and other structural features.” 

Looking ahead, Valli is bullish on the sector and on Ellington’s ability to navigate it and generate returns. “We’re excited about mortgage credit. The US housing backdrop is favourable, and there are several tailwinds, with strong performance.”  

You watch the full interview here.