European Short Observer May 2013

The first three months of 2013 turned out to be eventful for managers engaged in short selling in Europe. As the markets continued their rally from late 2012, many managers were caught in the rising tides, especially in their short positions in the Consumer sectors.

Some managers took the dip in February as an opportunity to close out a number of their losing short positions. Yet others hung on to their losing trades and compounded losses, waiting for their thesis to play out in the future. At the same time, dispersion was very high, and many managers made excellent short picks of companies that either filed for bankruptcy or restructured their business at great gains for short sellers. Other managers skillfully traded around well-followed situations to lock in gains as prices gyrated.

Even though NSP slightly underperformed a short position on the general market, the underperformance was skewed towards a small number of managers and their positions. In fact, if you take out the best-contributing and the worst-contributing manager from NSP, the portfolio would have outperformed the benchmark by 50 bps.