As European stocks have rocketed higher over the past four months an odd anomaly is occurring: key European short positions held by hedge funds are outperforming the longs.

European Hedge Fund Novus

2014 very different market environment for short sellers than 2013

After a “frustrating” 2013, when “bad stocks were lifted in a good market,” said Stanley Altshuller Co-Founder and Chief Research Officer at Novus, a research firm that monitors hedge fund short positions in Europe. The difference now is that “the market is behaving like a stock pickers market in contrast to 2013 which was a general melt-up. Now bad companies are under performing so managers are using stock selection to generate alpha.” In May alone hedge fund managers generated 200 basis points of alpha on short positions, highlighting the changing market environment.

The European short portfolio Novus tracks in its short adviser program is a market value-weighted portfolio of every publicly disclosed hedge fund position in Europe, tracking the aggregate shorts in Europe on a daily basis. This model representing hedge fund shorts has recently outperformed “precisely due to stock selection,” noted Altshuller.

Hedge fund alpha up in stock picking environment

In other words, hedge funds may be finding their inner alpha all while the beta of the stock market marches higher. Consider the German Dax index. It started the year at 9400 and today, on the back of a negative interest rate announcement from the ECB, peaked its head above 10,000. This is a bull run, yet underneath it hedge fund short positions nonetheless are outperforming, according to Novus.

Energy market and Fugro drive market lower

European Hedge Fund Novus Fugro


Altschuller notes that the only sector to deliver positive returns in the short portfolio was Energy, driven by Fugro and CGG benefiting ten and seven managers, respectively.

The short case against Fugro N.V (AMS:FUR) was nuanced and is based on financial reporting. CFRA had published research last year questioning the firm’s revenue growth and accounting, and Altschuller said the first funds to join on the short end of the trade were likely CFRA clients. Some of the major shorts include AKO Capital, with an $85 million short exposure, followed by quantitative manger AQR Capital with $75 million in short exposure, likely indicating a momentum algorithm was triggered. Other shorts include UBS O’Connor, Citadel and among some of the hedge funds with some of the largest short exposures, Lansdowne Partners and Marshall Wace.

When Fugro N.V (AMS:FUR) recently published their first quarter results it did nothing but confirm margin compression that long investors had feared. Novus data on the topic shows a steady growth in short interest from the start of the year to current, where short interest in the stock stands over 30 percent higher.