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The firm was co-founded in 1994 by Mike Vranos and Laurence Penn with funding from Ziff brothers investments. By the end of 1995 the firm had become a three-fund operation with a variety of assets.Ellington was affected by the Long-Term Capital Management debacle in 1998. For a few days in mid-October, the firm sold mortgage securities to lower its funds' leverage. The firm issued a public statement describing its borrowings to quell public fears, which was considered unusual for hedge funds at the time. It clarified that although it was meeting margin calls by unloading hundreds of millions of dollars in assets over a two-day period, losses were limited. One report suggests some of Ellington's hedge funds may have temporarily lost around 25% of their value as they liquidated $2 billion in assets after allegedly missing a margin call from UBS. However, from its December 1994 inception through April 2004, the firm delivered a composite annualized return of 15.4%, after fees.
