More to the point, they were hit swiftly, directly and monetarily by the investment bank's collapse. The collapse was the fourth largest in the world, at the time of its demise Lehman held $639 billion of assets and boasted $613 billion in bank debt and $155 billion in bond debt.

"When Lehman happened, all these funds got redemption notices and they shut the gate and stopped investing," Tobin explains. He says that in 2009 Mission started to see more of these funds come back, albeit very slowly.

Real Capital Analytics chief economist Dr. Sam Chandan sees the market as still too tight for hedge funds to make a giant splash. As the economy gets better, naturally so will some of the investment opportunities. "There's still a controlled outflow from lender balance sheets," he notes, but that outflow is expected to increase as the market gains health.

But hedge funds won't necessarily be looking at many hard asset purchases, though. "There's a lot more interest in debt, because frankly there are a lot more distressed debt funds than there are real estate equity funds," Tobin explains. "And they have the added benefit of allowing you to restructure debt."

Often the hedge funds look to buy loans, do a workout with the borrower and slice the workout loan into an A and a B structure, he explains. Then they sell the A loan off and have a nice, high-returning B note, mezzanine piece or the like. Holding a property isn't in the purview of most hedge funds, since debt is more liquid.

Or, the funds can team up with an operator, Tobin explains. This way the fund is arm-in-arm with a group that has a unique knowledge of the property or how to operate a distressed asset. A source from JP Morgan, who requested anonymity, says, "with so many hedge funds burned by real estate's last cycle, the high-profile funds seem most focused on mispriced CMBS, whole loans and mezz loan opportunities, with the largest groups completing outright purchases of special servicers,"

But the distressed market is crowded. There are a lot of REITs, funds and investors waiting at the bottom of the special servicers' chute for a property worth the time and trouble, creating a scarcity premium. "There is a short supply of distressed assets available particularly in the major markets," Chandan explains.

"If you're looking in the New York City, San Francisco, or Washington, DC areas, for example, the imbalance between available assets and potential investors has bolstered pricing in a way that limits the upside yield."

There is hope, however, if looking at secondary markets, he notes. If you move beyond the gateway cities and peer into those cities that have received less bullish attention, there

is opportunity with some risk. "The recovery rates are lower, and the sale prices on distressed assets have deeper discounts than those nice, quality assets in the largest markets," says Chandan. And hedge funds, if nothing else, make plays in search of yield.

A good investment recently was the quick turnaround of Boston's iconic Hancock Tower, which Normandy Real Estate Partners and Five Mile Capital Partners sold 18 months after placing the winning $660.6-million bid for the trophy office property. Boston Properties jumped in to grab it at $930 million.

Successful investment in the debt of that distressed property was a matter of getting in at the right spot at the right time, but Chandan notes those deals are rare. "Those kind of price points will be few and far between, but there will be many distressed investors looking to see those price differentials." The problem is simply competition, he explains. "You're seeing more supply, but you're not seeing a retrenchment of investors that would like to purchase those assets," so prices are not going down. Tobin notes that the time may already have passed for large gains by hedge funds and, for that matter, everyone else. "A lot of them bought into CMBS last year," he explains. "Any of the funds that did that made an extraordinary amount of money. That's gone away. Now you've got to work a little bit harder. It's a challenge to invest in distressed debt because there is a lot of competition for it."

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