Angelo, Gordon & Co., Cerberus Capital Management and Claros Fund Management have earned double-digit returns on their CMBS investments this year. Other firms, such as Pine River Capital Management, CQS and Ellington Management Group have all seen gains in their credit focused funds as they increased bets on the sector over 2013.
"We see a great opportunity set for CMBS as valuations and issuances have come back in a meaningful way. It's a good-sized opportunity," said Leo Huang, a portfolio manager at Ellington who specializes in CMBS.
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Lots for traders to love
Investors like CMBS for several reasons.
First, prices are all over the place: Old securities with the highest rating, AAA, have recovered from their post-financial crisis lows in 2008 and 2009.
But lower-rated securities—A and BBB- for example—are still near their nadir after falling steeply in 2007 and 2008. About two thirds of the approximately $810 billion U.S. CMBS market is rated AAA, according to JPMorgan and Bloomberg data. The riskier tranches of CMBS are also volatile, which sometimes scares off more conservative institutional investors.
Second, new securities are finally being packaged and sold again, creating new places to bet. CMBS issuance is about $90 billion this year—nearly double 2012—but still well off from the record high of $288 billion in 2007, according to Dealogic. But some hedge funds believe the credit quality in new CMBS is deteriorating given low interest rates, creating the opportunity to short certain deals.
Third, the commercial market's recovery hasn't been as even as the housing market. American jobs have been slow to come back, for example, and certain domestic real estate markets are still in trouble. In Europe, the economic and employment situation is even worse, creating greater opportunities to find under-valued properties.
And many of the underlying mortgages in CMBS are set to come due in the next three years, meaning many will have to refinance. That will be more difficult if interest rates rise and would create more price volatility and dispersion—just what traders love.
"We love the opportunity—we think there's value in plain sight," said Warren Ashenmil, who recently founded CMBS-focused hedge fund firm Jerica Capital.
Ashenmil, who previously was a portfolio manager at Tricadia Capital, plans to begin trading for his new hedge fund in the first quarter and believes he can generate returns of about 15 percent net of fees for investors.
(Read more: How DC mess could curb commercial real estate)
Another new entrant is Stephen Feinberg's Cerberus.
The firm has traded CMBS since April 2008 and earned double-digit gains every year besides 2008, including 28.7 percent gross in 2013 through October, according to investor materials obtained by CNBC.com. Given those returns and investor demand, Cerberus launched a dedicated vehicle, the Cerberus CMBS Opportunities Fund, on Oct. 7. Led by Scott Stelzer, it had $66.4 million in assets at the end of October.
Cerberus declined to comment through a spokesman.
Other firms that increased their exposure to CMBS have performed well overall.
Ellington roughly doubled its exposure over the year to as much as 10 percent of the strategy currently, according to Huang. The Ellington Credit Opportunities Fund, which trades CMBS among other types of debt, is up 14.46 percent net of fees this year through October, according to a report by HSBC's Alternative Investment Group.
Huang said he targets returns of between 6 percent and 17 percent gross return, depending on the risk of the CMBS tranche. "CMBS offers good relative yield," he said.
Philip Weingord's Seer Capital Management is up 10.48 percent through November with about 26 percent of its portfolio in CMBS as of October. It was 24 percent in January, according to a person familiar with the fund. A spokeswoman for Seer declined to comment.
CMBS has been about 14 percent of the book at Chris Hentemann's $833 million 400 Capital all year. The 400 Capital Credit Opportunities Fund is up 12.64 percent net of fees through October, according to an investor update. A spokesman for 400 did not respond to a request for comment.
Others believe the greatest value is in Europe, where CMBS prices are even lower than in the US.
"European CMBS is attractive both relative to the U.S. and other asset classes in general," said Jason Walker, portfolio manager for the $2.4 billion CQS ABS Fund. "Fundamentals in the sectors are turning. It's an attractive outlook as the underlying real estate environment improves in Europe, especially in the U.K. and Germany."
CQS increased its European CMBS exposure from about 15 percent earlier in the year to roughly 25 percent now. Walker believes the investments can earn between "high single-digit" and "mid-teen" returns. The ABS fund is up 9.32 percent this year through November, according to performance information obtained by CNBC.com.