Valuation

6 Months Ended

Jun. 30, 2011

Valuation

Valuation

3. Valuation

The following is a description of the valuation methodologies used for the Company's financial instruments.

Level 1 valuation methodologies include the observation of quoted prices (unadjusted) for identical assets or liabilities in active markets, often received from widely recognized data providers.

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 valuation methodologies include (i) 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 and default rate assumptions, and (ii) the solicitation of valuations from third parties (typically, broker-dealers). 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 Manager utilizes such information to assign a good faith valuation (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 such financial instruments. The Manager has been able to obtain third-party valuations on the vast majority of the Company's financial instruments and expects to continue to solicit third-party valuations on substantially all of the Company's financial instruments in the future to the extent practical.

The Manager uses its judgment based on its own models, the assessments of its portfolio managers, and third-party valuations it obtains, to determine and assign fair values to the Company's Level 3 financial instruments. Because of the inherent uncertainty of valuation, 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 consolidated financial statements.

The table below reflects the value of the Company's Level 1, Level 2, and Level 3 financial instruments at June 30, 2011:

Description	Level 1			Level 2			Level 3		Total
Assets:
Investments at value-
U.S. Treasury and Agency residential mortgage-backed securities	$	—		$	823,143,747		$	5,227,032	$	828,370,779
Private label residential mortgage-backed securities		—			—			357,894,063		357,894,063
Private label commercial mortgage-backed securities		—			—			10,942,490		10,942,490
Commercial Mortgage Loans		—			—			4,650,000		4,650,000
Total investments at value		—			823,143,747			378,713,585		1,201,857,332
Financial derivatives-assets-
Credit default swaps on asset backed securities		—			—			69,828,936		69,828,936
Credit default swaps on asset backed indices		—			54,923,398			—		54,923,398
Interest rate swaps		—			959,933			—		959,933
Total financial derivatives-assets		—			55,883,331			69,828,936		125,712,267
Repurchase agreements		—			22,437,500			—		22,437,500
Total investments, financial derivatives-assets and repurchase agreements	$	—		$	901,464,578		$	448,542,521	$	1,350,007,099
Liabilities:
Investments sold short-
U.S. Treasury and Agency residential mortgage-backed securities	$	—		$	(540,155,406	)	$	—	$	(540,155,406	)
Financial derivatives-liabilities-
Credit default swaps on corporate indices		—			(220,124	)		—		(220,124	)
Credit default swaps on asset backed indices		—			(5,031,909	)		—		(5,031,909	)
Interest rate swaps		—			(5,366,758	)		—		(5,366,758	)
Unrealized depreciation on futures contracts		(368,863	)		—			—		(368,863	)
Total financial derivatives-liabilities		(368,863	)		(10,618,791	)		—		(10,987,654	)
Total investments sold short and financial derivatives-liabilities	$	(368,863	)	$	(550,774,197	)	$	—	$	(551,143,060	)

Investments under the U.S. Treasury and Agency residential mortgage-backed securities Level 3 category are investments in Agency interest only RMBS securities. There were no transfers of financial instruments between Level 1, Level 2, or Level 3 during the six month period ended June 30, 2011.

The table below reflects the value of the Company's Level 1, Level 2, and Level 3 financial instruments at December 31, 2010:

Description	Level 1			Level 2			Level 3		Total
Assets:
Investments at value-
U.S. Treasury and Agency residential mortgage-backed securities	$	—		$	905,377,119		$	—	$	905,377,119
Private label residential mortgage-backed securities		—			—			338,839,441		338,839,441
Private label commercial mortgage-backed securities		—			—			1,850,000		1,850,000
Total investments at value		—			905,377,119			340,689,441		1,246,066,560
Financial derivatives-assets-
Credit default swaps on asset backed securities		—			—			102,851,109		102,851,109
Credit default swaps on asset backed indices		—			96,689,232			—		96,689,232
Interest rate swaps		—			1,795,031			—		1,795,031
Total financial derivatives-assets		—			98,484,263			102,851,109		201,335,372
Repurchase agreements		—			25,683,750			—		25,683,750
Total investments, financial derivatives-assets and repurchase agreements	$	—		$	1,029,545,132		$	443,540,550	$	1,473,085,682
Liabilities:
Investments sold short-
U.S. Treasury and Agency residential mortgage-backed securities	$	—		$	(775,145,098	)	$	—	$	(775,145,098	)
Financial derivatives-liabilities-
Credit default swaps on corporate indices		—			(185,847	)		—		(185,847	)
Credit default swaps on asset backed indices		—			(18,277,976	)		—		(18,277,976	)
Interest rate swaps		—			(1,676,505	)		—		(1,676,505	)
Unrealized depreciation on futures contracts		(890,001	)		—			—		(890,001	)
Total financial derivatives-liabilities		(890,001	)		(20,140,328	)		—		(21,030,329	)
Total investments sold short and financial derivatives-liabilities	$	(890,001	)	$	(795,285,426	)	$	—	$	(796,175,427	)

There were no transfers of financial instruments between Level 1, Level 2, or Level 3 during the year ended December 31, 2010.

At December 31, 2010, the Company held money market investments that are included in cash and cash equivalents on the Consolidated Statement of Assets, Liabilities and Shareholders' Equity and are considered Level 1 financial instruments.

The tables below include a roll-forward of the Company's financial instruments for the three month periods ended June 30, 2011 and 2010, respectively (including the change in fair value), for financial instruments classified by the Company within Level 3 of the valuation hierarchy.

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended June 30, 2011

	Beginning Balance as of March 31, 2011		Accreted Discounts / Amortized Premiums			Realized Gain/(Loss)		Change in Net Unrealized Gain/(Loss)			Purchases		Sales			Transfers In and/or Out of Level 3		Ending Balance as of June 30, 2011
Assets:
Investments at value-
U.S. Treasury and Agency residential mortgage-backed securities	$	4,298,160	$	(326,936	)	$	97,393	$	(158,414	)	$	2,471,946	$	(1,155,117	)	$	—	$	5,227,032
Private label residential mortgage-backed securities		354,681,940		3,671,436			3,380,108		(15,999,987	)		89,832,304		(77,671,738	)		—		357,894,063
Private label commercial mortgage-backed securities		13,083,485		148,163			125,553		(1,230,947	)		1,405,580		(2,589,344	)		—		10,942,490
Commercial Mortgage Loans		4,675,000		46,142			—		(71,142	)		—		—			—		4,650,000
Total investments at value		376,738,585		3,538,805			3,603,054		(17,460,490	)		93,709,830		(81,416,199	)		—		378,713,585
Financial derivatives- assets
Credit default swaps on asset backed securities		90,382,805		—			2,627,724		(1,489,650	)		27,971		(21,719,914	)		—		69,828,936
Total financial derivatives- assets		90,382,805		—			2,627,724		(1,489,650	)		27,971		(21,719,914	)		—		69,828,936
Total investments and financial derivatives-assets	$	467,121,390	$	3,538,805		$	6,230,778	$	(18,950,140	)	$	93,737,801	$	(103,136,113	)	$	—	$	448,542,521

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at June 30, 2011, as well as Level 3 financial instruments disposed of by the Company during the three month period ended June 30, 2011. For Level 3 financial instruments held by the Company at June 30, 2011, change in net unrealized gain (loss) of $(16.6) million and $(1.5) million, for the three month period ended June 30, 2011 relate to investments and financial derivative-assets, respectively.

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended June 30, 2010

	Beginning Balance as of March 31, 2010			Accreted Discounts / Amortized Premiums		Realized Gain/(Loss)			Change in Net Unrealized Gain/(Loss)			Purchases		Sales			Transfers In and/or Out of Level 3		Ending Balance as of June 30, 2010
Assets:
Investments at value-
Private label residential mortgage-backed securities	$	234,944,268		$	3,155,804	$	9,654,774		$	(2,744,250	)	$	94,980,740	$	(94,472,719	)	$	—	$	245,518,617
Total investments at value		234,944,268			3,155,804		9,654,774			(2,744,250	)		94,980,740		(94,472,719	)		—		245,518,617
Financial derivatives- assets
Credit default swaps on corporate bonds		4,547,488			—		(4,560,582	)		803,011			393,489		(1,183,406	)		—		—
Credit default swaps on asset backed securities		119,540,520			—		3,365,728			(6,216,478	)		3,817,848		(7,082,327	)		—		113,425,291
Other swaps		323,021			—		335,312			(323,021	)		—		(335,312	)		—		—
Total financial derivatives- assets		124,411,029			—		(859,542	)		(5,736,488	)		4,211,337		(8,601,045	)		—		113,425,291
Total investments and financial derivatives-assets	$	359,355,297		$	3,155,804	$	8,795,232		$	(8,480,738	)	$	99,192,077	$	(103,073,764	)	$	—	$	358,943,908
Liabilities:
Financial derivatives- liabilities
Credit default swaps on asset backed securities	$	(6,944,815	)	$	—	$	(1,086,884	)	$	2,689,816		$	5,341,883	$	—		$	—	$	—
Total financial derivatives- liabilities	$	(6,944,815	)	$	—	$	(1,086,884	)	$	2,689,816		$	5,341,883	$	—		$	—	$	—

In January 2010, the FASB issued ASU No. 2010-6 Fair Value Measurements and Disclosures—(Topic 820), Improving Disclosures about Fair Value Measurements, which became effective for fiscal years beginning after December 15, 2010. As a result certain classifications in the above table have been conformed to the current period presentation.

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at June 30, 2010, as well as Level 3 financial instruments disposed of by the Company during the three month-period ended June 30, 2010. For Level 3 financial instruments held by the Company at June 30, 2010, change in net unrealized gain (loss) of $(0.2) million, $(5.7) million and $2.7 million for the three month period ended June 30, 2010 relate to investments, financial derivative-assets and financial derivative-liabilities, respectively.

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Six Month Period Ended June 30, 2011

	Beginning Balance as of December 31, 2010		Accreted Discounts / Amortized Premiums			Realized Gain/(Loss)		Change in Net Unrealized Gain/(Loss)			Purchases		Sales			Transfers In and/or Out of Level 3		Ending Balance as of June 30, 2011
Assets:
Investments at value-
U.S. Treasury and Agency residential mortgage-backed securities	$	—	$	(419,807	)	$	97,393	$	(150,203	)	$	6,854,766	$	(1,155,117	)	$	—	$	5,227,032
Private label residential mortgage-backed securities		338,839,441		7,320,793			14,556,334		(22,637,757	)		186,259,638		(166,444,386	)		—		357,894,063
Private label commercial mortgage-backed securities		1,850,000		230,972			897,963		(1,478,534	)		16,750,783		(7,308,694	)		—		10,942,490
Commercial Mortgage Loans		—		60,981			—		(85,981	)		4,675,000		—			—		4,650,000
Total investments at value		340,689,441		7,192,939			15,551,690		(24,352,475	)		214,540,187		(174,908,197	)		—		378,713,585
Financial derivatives- assets
Credit default swaps on asset backed securities		102,851,109		—			5,308,298		(4,740,333	)		403,551		(33,993,689	)		—		69,828,936
Total financial derivatives- assets		102,851,109		—			5,308,298		(4,740,333	)		403,551		(33,993,689	)		—		69,828,936
Total investments and financial derivatives-assets	$	443,540,550	$	7,192,939		$	20,859,988	$	(29,092,808	)	$	214,943,738	$	(208,901,886	)	$	—	$	448,542,521

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at June 30, 2011, as well as Level 3 financial instruments disposed of by the Company during the six month period ended June 30, 2011. For Level 3 financial instruments held by the Company at June 30, 2011, change in net unrealized gain (loss) of $(17.5) million and $(9.9) million for the six month period ended June 30, 2011 relate to investments and financial derivative-assets, respectively.

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Six Month Period Ended June 30, 2010

	Beginning Balance as of December 31, 2009			Accreted Discounts / Amortized Premiums		Realized Gain/(Loss)			Change in Net Unrealized Gain/(Loss)			Purchases		Sales			Transfers In and/or  Out of Level 3		Ending Balance as of June 30, 2010
Assets:
Investments at value-
Private label residential mortgage-backed securities	$	210,363,731		$	5,938,803	$	11,899,982		$	4,344,547		$	158,225,948	$	(145,254,394	)	$	—	$	245,518,617
Total investments at value		210,363,731			5,938,803		11,899,982			4,344,547			158,225,948		(145,254,394	)		—		245,518,617
Financial derivatives- assets
Credit default swaps on corporate bonds		8,475,895			—		(2,281,392	)		(2,650,145	)		1,713,374		(5,257,732	)		—		—
Credit default swaps on asset backed securities		95,199,131			—		11,470,519			(15,155,697	)		38,112,949		(16,201,611	)		—		113,425,291
Other swaps		257,212			—		335,312			(257,212	)		—		(335,312	)		—		—
Total financial derivatives- assets		103,932,238			—		9,524,439			(18,063,054	)		39,826,323		(21,794,655	)		—		113,425,291
Total investments and financial derivatives-assets	$	314,295,969		$	5,938,803	$	21,424,421		$	(13,718,507	)	$	198,052,271	$	(167,049,049	)	$	—	$	358,943,908
Liabilities:
Financial derivatives- liabilities
Credit default swaps on asset backed securities	$	(10,547,540	)	$	—	$	(1,657,578	)	$	3,881,292		$	8,339,356	$	(15,530	)	$	—	$	—
Total financial derivatives- liabilities	$	(10,547,540	)	$	—	$	(1,657,578	)	$	3,881,292		$	8,339,356	$	(15,530	)	$	—	$	—

In January 2010, the FASB issued ASU No. 2010-6 Fair Value Measurements and Disclosures—(Topic 820), Improving Disclosures about Fair Value Measurements, which became effective for fiscal years beginning after December 15, 2010. As a result certain classifications in the above table have been conformed to the current period presentation.

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at June 30, 2010, as well as Level 3 financial instruments disposed of by the Company during the six month-period ended June 30, 2010. For Level 3 financial instruments held by the Company at June 30, 2010, change in net unrealized gain (loss) of $3.4 million and $(16.0) million for the six month period ended June 30, 2010 relate to investments and financial derivative-assets, respectively.