New CMBS hedge fund takes short bias amid secular real estate changes

The US-based firm sees significant mispricings that present opportunities to take short positions.

Polpo Capital, a newly formed commercial real estate-focused hedge fund, based in New York, is currently biased short to tap into what it sees as some significant mispricings as secular changes unfold across the commercial real estate market, affiliate title Real Estate Capital USA reported.

“Given the shifts within different sectors within commercial real estate, whether it be retail, hospitality, or office, I think we’re seeing a huge change,” Dan McNamara, founder of the company, said. “We’re not just looking at a cyclical downswing in the market from the covid-19 pandemic, we’re actually looking at fundamental changes within each sector that are going to provide a ton of opportunities for someone like ourselves.”

The firm launched on 1 November with a strategy of combining McNamara’s extensive knowledge of the CMBS market with proprietary research to take long and short positions. Prior to launching Polpo, McNamara was a CMBS portfolio manager at MP Securitized Credit Partners and held senior positions at firms that include Societe Generale, Braver Securities and UBS.

“The market is very unbalanced,” McNamara said, citing his observation that there are some significant mispricings that present opportunities to short securities. “That doesn’t mean that we’re super bearish on the market today or that one year down the road, we’re going to be levered-long. We just think that it’s now a credit pickers game as opposed to a macro call on real estate.”

The firm hopes that it will be able to add alpha digging deep on specific securities and assets.

“The important thing to bear in mind from the investor perspective is that in 2022, CMBS investors will need to be more selective and hedged in case we get a second systemic downdraft in the market,” McNamara added.

“[However] we have the capability to be nimble enough given our size and the fact that our market is a relatively small niche asset class to move and seize opportunities quickly. That’s something that’s really differentiated from the investor point of view, investing with a manager that has the flexibility to go long and short while taking advantage of tactical trading opportunities.”

One of Polpo’s advantages will be the ability to fly below the radar of larger investors.

“Because the CMBS credit market is so small, we spent a lot of time on $1 million or $2 million bonds that trade at 50 cents [on the dollar], whereas these may not move the needle for larger firms, so they don’t bother looking at. So, we have the right mix of sophistication to dig into the collateral, understand it, and source the assets, which is extremely important, coupled with the nimbleness to operate effectively in this market,” McNamara said.

High hopes for hotels

By sector, Polpo sees opportunity in the hotel market.

“The market is very bifurcated. Using the hotel sector as an example, there are a tremendous number of interesting longs in the market today due to the bounce back in vacation travel. But I also think that there’s a lot of assets in the hospitality sector that rely on business travel that are mispriced, and we will be able to use for hedging purposes,” McNamara said.

As a hedge, the firm uses CMBX 6, a synthetic CMBS index administered by IHS Markit that has a 40 percent concentration to retail, 27 percent to office and 12 percent to hospitality.

“The majority of the loans in the index mature this year and some will have problems refinancing. We view CMBX 6 as an asymmetric hedge as we build out our CMBS long credit book,” McNamara added. “We are very excited about the changing landscapes and whether that be interest rates or just credit fundamentals within CMBS. I think it’s going to provide a lot of opportunities for investors such as us who are nimble and thoughtful about credit.”