Level 1 valuation methodologies include the observation of quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 valuation methodologies include the observation of (i) quoted prices for similar assets or liabilities in active markets, (ii) inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves) in active markets and (iii) quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 fair value methodologies include (i) the solicitation of valuations from third parties (typically, broker-dealers), (ii) the use of proprietary models that require the use of a significant amount of judgment and the application of various assumptions including, but not limited to, prepayment assumptions and default rate assumptions, and (iii) the assessment of observable or reported recent trading activity. The Fund utilizes such information to assign a good faith fair value (the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction at the valuation date) to each such financial instrument.
Market quotations are not typically readily available for the majority of the Fund’s securities, they are often valued at fair value as determined by the Fund’s Advisor, in its capacity as Valuation Designee (the “Valuation Designee”). The Valuation Designee seeks to obtain at least one third-party indicative valuation for each instrument and obtains multiple indicative valuations when available. Third-party valuation providers often utilize proprietary models that are highly subjective and also require the use of a significant amount of judgment and the application of various assumptions including, but not limited to, prepayment and default rate assumptions. The Valuation Designee has been able to obtain third-party indicative valuations on the vast majority of the Fund’s investments and expects to continue to solicit third-party valuations on substantially all investments in the future to the extent practical. The Valuation Designee generally values each financial instrument using a third-party valuation received. However, such third-party valuations are not binding, and while the Valuation Designee generally does not adjust such valuations, the Valuation Designee may challenge or reject a valuation when, based on validation criteria, the Valuation Designee determines that such valuation is unreasonable or erroneous. Furthermore, the Valuation Designee may determine, based on validation criteria, that for a given instrument the third-party valuations received does not result in what the Valuation Designee believes to be fair value, and in such circumstances the Valuation Designee may override the third-party valuation with its own good faith valuation. The validation criteria include the use of the Valuation Designee’s own models, recent trading activity in the same or similar instruments, and valuations received from third parties.
The Valuation Designee’s valuation process, including the application of validation criteria, is overseen and periodically reviewed by the Fund’s Board of Trustees. Because of the inherent uncertainty of valuations, these estimated values may differ significantly from the values that would have been used had a ready market for the financial instruments existed, and the differences could be material to the financial statements.
| Ellington Income Opportunities Fund |
Notes to Schedule of Investments (continued)
|
| September 30, 2023 (Unaudited) |
The table below reflects the value of the Fund’s Level 1, Level 2 and Level 3 financial instruments measured at fair value as of September 30, 2023:
| Description | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments | | | | | | | | | | | | |
| Asset Backed Securities | | $ | - | | | $ | 22,714,666 | | | $ | 7,673,417 | | | $ | 30,388,083 | |
| Preferred Stocks | | | 1,465,998 | | | | - | | | | - | | | | 1,465,998 | |
Short-Term Investments | | | 2,630,493 | | | | - | | | | - | | | | 2,630,493 | |
| Total Investments | | $ | 4,096,491 | | | $ | 22,714,666 | | | $ | 7,673,417 | | | $ | 34,484,574 | |
| | | | | | | | | | | | | | | | | |
| Other Financial Instruments* | | | | | | | | | | | | | | | | |
| Interest Rate Swaps | | $ | - | | | $ | 91,974 | | | $ | - | | | $ | 91,974 | |
| Credit Default Swaps | | | - | | | | 31,330 | | | | - | | | | 31,330 | |
| Total Swaps Contracts | | $ | - | | | $ | 123,304 | | | $ | - | | | $ | 123,304 | |
*Other financial instruments are derivative instruments, such as swap contacts, which are reported at market value. | |
The Fund generally uses prices provided by an independent pricing service, broker, or agent bank, which provide non-binding indicative prices on or near the valuation date as the primary basis for fair value determinations for certain instruments. The independent pricing services typically value such securities based on one or more inputs, including but not limited to benchmark yields, transactions, bids, offers, quotations from dealers and trading systems, new issues, spreads and other relationships observed in the markets among comparable securities, and pricing models such as yield measurers calculated using factors such as cash flows, financial or collateral performance and other reference data. In addition to these inputs, mortgage-backed and asset-backed obligations may utilize cash flows, prepayment information, default rates, delinquency and loss assumptions, collateral characteristics, credit enhancements, and specific deal information. These values are non-binding, and may not be determinative of fair value. Values are evaluated during the Fund's valuation process by management in conjunction with additional information about the instrument, similar instruments, market indicators and other information.
Below is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value:
Description | | | |
| Balance as of December 31, 2022 | | $
| 11,458,577 |
|
| Purchases | | | 866,418 | |
| Sales proceeds and paydowns | | | (4,113,069) |
|
| Realized gain / (loss) | | | (230,377) |
|
| Payment-in-kind | | | - | |
| Change in unrealized gain / (loss) | | | (308,713) |
|
| Transfers into / (out of) Level 3 | | | 581 | |
| Ending Balance – September 30, 2023 | | $ | 7,673,417 | |
| | | | | |
| Change in unrealized appreciation / (depreciation) during the period for Level 3 investments held at September 30, 2023 | | $ | (355,492) |
|
| Ellington Income Opportunities Fund |
Notes to Schedule of Investments (continued)
|
| September 30, 2023 (Unaudited) |
The following table presents information about unobservable inputs related to the Fund’s categories of Level 3 investments as of September 30, 2023:
| | Fair Value at 9/30/2023 | Valuation Methodology | Unobservable Inputs | Input Value / Range | Weighted Average |
| | | | | | |
| | | | | | |
| Collateralized Loan Obligation | $1,531,183 | Dealer Marked with Odd Lot Sizing Adjustment | Odd Lot Sizing Adjustment | - 0.83% to - 1.26% | - 1.07% |
| | | | | | |
| Residential Mortgage-Backed Securities | $912,465 | Dealer Marked with Odd Lot Sizing Adjustment | Odd Lot Sizing Adjustment | - 0.28% to -3.00% | - 1.65% |
Certain of the Fund’s Level 3 investments have been valued using unadjusted inputs that have not been internally developed by the Fund, including third-party transaction and quotations. As a result, fair value assets of $5,229,769 have been excluded from the proceeding table.
Reverse Repurchase Agreements: As of September 30, 2023, the Fund had the following reverse repurchase agreements outstanding, which were equal to 57.44% of the Fund’s net assets:
| Counterparty | Amount Borrowed | Borrowing Rate | Borrowing Date | Maturity Date | Borrowing & Interest |
| Lucid Management LP | 1,062,000 | 6.75% | 07/20/2023 | 10/19/2023 | 1,076,000 |
| RBC Capital Markets | 624,000 | 6.97% | 08/07/2023 | 10/10/2023 | 630,645 |
| RBC Capital Markets | 528,000 | 6.97% | 08/07/2023 | 10/10/2023 | 533,622 |
| RBC Capital Markets | 662,000 | 6.83% | 08/21/2023 | 10/23/2023 | 667,149 |
| RBC Capital Markets | 582,000 | 6.89% | 08/28/2023 | 10/30/2023 | 583,774 |
| JP Morgan Securities | 1,455,000 | 6.80% | 09/07/2023 | 12/07/2023 | 1,472,644 |
| JP Morgan Securities | 1,698,000 | 6.80% | 09/07/2023 | 12/07/2023 | 1,705,695 |
| RBC Capital Markets | 316,000 | 7.01% | 09/11/2023 | 11/13/2023 | 317,231 |
| Lucid Management LP | 786,000 | 6.75% | 09/14/2023 | 10/19/2023 | 788,507 |
| RBC Capital Markets | 664,000 | 6.98% | 09/29/2023 | 11/29/2023 | 664,257 |
| RBC Capital Markets | 676,000 | 6.98% | 09/29/2023 | 11/29/2023 | 676,262 |
| RBC Capital Markets | 1,044,000 | 6.93% | 09/29/2023 | 11/29/2023 | 1,044,402 |
| Totals | $ 10,106,000 | | | | $ 10,160,716 |
As of September 30, 2023, the fair value of securities held as collateral for reverse repurchase agreements was $14,147,714 as noted on the Schedule of Investments. Reverse repurchase agreements are not included in the fair value hierarchy because they are carried at face value. For the period ended September 30, 2023, the average daily balance and average interest rate in effect for reverse repurchase agreements were $10,803,793 and 6.41%, respectively.
