European Short Observer Q2 2013

The roller coaster ride for managers shorting in Europe continued this quarter as stocks in the Novus Short Portfolio (NSP) outperformed the markets during the rally, but significantly underperformed during the subsequent retracement giving up the alpha and slipping behind the benchmark.

Positive sentiment in the Consumer sector continued to be strong, as the economic cycle in Europe started to bottom out. The Materials sector began to contribute meaningfully as emerging markets growth slowed and the decade-long commodity bull market seems to have come to an end.

Some managers took profits in the June sell-off, sensing the opportunity to close out a number of their losing short positions. As the markets sold off late in the quarter, managers covered their short positions in aggregate bringing total short exposure in Europe markedly lower. At the same time, some managers hung on to their losing trades and compounded losses, waiting for their thesis to play out in the future.

Managers’ return dispersion was very high, as some managers made excellent unique short picks of companies faced with unfavorable industry cycles or those that restructured their business at great gains for the short sellers. Other managers skillfully traded around a major acquisition to lock in gains as the deal eventually closed.

Even though NSP moderately underperformed a short position on the general market, a few managers stood out making excellent short picks, including a fraudulent situation, distinguishing their short selection abilities.