Ellington Capital Management may be just the first of several hedge funds forced to sell mortgage-backed securities holdings to raise cash, traders and Wall Street analysts said.

Mortgage securities have lost value in the last week, and the Wall Street pros expect other hedge funds to follow suit. Ellington of Old Greenwich, Conn., auctioned $1.5 billion of mortgage securities over the Columbus Day weekend to meet margin calls.

"I have a great degree of concern that the mortgage-backed securities situation is unraveling somewhat," said George P. Van, chairman of Van Hedge Fund Advisors International in Nashville, "and it's exactly the kind of thing that the New York Fed was trying to avoid in the Long Term Capital bailout."

The returns on hedge funds investing in mortgage-backed securities have fallen since 1996, Mr. Van said. The Van MBS Hedge Fund Index showed a 35.20% return for the first nine months of 1996, an 18.1% return for all of 1997, and a 1.55% decline so far this year. Because some hedge funds acquire assets with borrowed money, they must put up more cash when their holdings fall in value.

Other hedge funds that might sell mortgage-backed securities are smaller than Long Term Capital and Ellington, but the big brokerages on Wall Street could be affected if the liquidations depress the value of their investments in mortgage-backed securities, Mr. Van said. William J. Denton, vice president of secondary markets for PNC Mortgage in Vernon Hills, Ill., predicted "supply and demand will equalize over the next few weeks."

Though Mr. Denton said he anticipates further volatility, investors will return to mortgage-backeds because the credit risk is less than with other bonds and because the risk of prepayment has fallen thanks to an uptick in interest rates last week.

"Agencies might become big buyers right now, especially if the origination market slows down," Mr. Denton said, referring to Fannie Mae and Freddie Mac, the largest buyers of mortgages on the secondary market. Ellington sent out three bid lists, calling some Wall Street traders at home in an effort to market bonds on Columbus Day, a holiday for the bond market, Wall Street sources said.

Amid rumors that the fund was liquidating, Michael Vranos, the founder of Ellington and a former senior managing director at Kidder, Peabody & Co. said he was "in the middle of a very busy auction" but that he was "not selling everything."

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