Are commercial mortgages the next big thing for hedge funds?

Hedge funds see opportunity in commercial real estate

Gleaming office towers, corporate office parks and big box retail stores could be the next big thing for Wall Street traders.

Some of the smart money certainly thinks so. Hedge funds focused on buying and selling securities backed by assets like home loans and credit card payments—known as structured credit or asset backed funds—are increasingly betting on commercial mortgages.

A small but growing group of money managers believe that they can earn returns between 10 percent and 20 percent annually by trading commercial mortgage backed securities, which are essentially office and retail loans bundled by bankers like the $3.5 billion one JPMorgan Chase and Deutsche Bank just did for Hilton Worldwide.

Those profit expectations are lower than what many hedge funds made betting on residential mortgages after the financial crisis, but the returns are still healthy compared to other types of bonds, like Treasury or high-yield corporate credit which usually yield single-digit percentage returns.