Ellington Freezes Withdrawals From Two Mortgage Funds (Update1) By Jody Shenn and Katherine Burton Oct. 8 (Bloomberg) -- Ellington Management Group LLC, the Old Greenwich, Connecticut-based hedge-fund firm that focuses on mortgage securities, suspended client redemptions from two funds because it's too hard to value their assets. Investors won't be able to withdraw money from New Ellington Credit Overseas Ltd. and New Ellington Credit Partners LP, according to a copy of the letter posted on the Internet blog nakedshorts.com. There's been little or no trading in some low-rated or unrated securities backed by subprime home loans, making valuations difficult, the Sept. 30 letter said. Setting asset values wouldn't be ``simultaneously fair both to investors redeeming from these funds and to investors remaining in these funds,'' Chief Executive Officer Michael Vranos and Vice Chairman Richard Brounstein wrote. Funds run by New York-based Bear Stearns Cos. and Basis Capital Fund Management Ltd. of Sydney collapsed because of losses on bonds linked to subprime mortgages. Subprime securities with the lowest investment-grade rating may be worth an average of 32 cents on the dollar, according to a report last month by Bear Stearns. Ellington's temporary freeze isn't a response to redemption requests, which have been ``unexceptional,'' or margin calls by creditors, which have ``generally been in line with our expectations and have been easily handled by our cash positions,'' the letter said. `Enormously Wide Spreads' The New York Post reported the redemption halt Oct. 6. The funds have about $1.9 billion of assets, according to the paper. Subprime mortgages are made to borrowers with poor credit histories or high debt. Vranos, a former head of mortgage-backed securities trading at Kidder Peabody, didn't immediately return a phone call seeking comment. The letter said ``enormously wide spreads have developed'' between the asking and selling prices for some subprime bonds. The highest-rated subprime securities have been trading more regularly than bonds with low ratings or ``equity'' investments in the loan pools, which have no ratings. ``Getting prices by the laws of supply and demand seems to be a broken mechanism right now'' for low-rated securities, Mark Adelson at Adelson & Jacob Consulting LLC in New York said in an interview last week. Bid-ask spreads often run 10 percent or more of the face value of the bonds, based on the prices for derivative versions of the debt, he said. Valuations based on mathematical models are also more troublesome, as it's unclear exactly how many subprime loans will default and exactly how big the losses after foreclosures will be, Adelson said. Getting Prices Ellington will receive valuations of its assets from dealers and disclose the funds' net asset values at the end of the third quarter, the letter said. The firm hopes to allow redemptions ``very soon'' and would distribute some cash from the ``substantial'' amount the funds have available regularly if it can't, it said. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall. Derivatives linked to subprime-mortgage bonds offer payments if the securities aren't paid off as expected, in return for regular insurance-like premiums. To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net ; Katherine Burton in New York at kburton@bloomberg.net Last Updated: October 8, 2007 17:46 EDT