Short sellers enjoy revival as European stocks lose steam

Sun Jun 15, 2014 5:23am EDT
 
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By Francesco Canepa and Blaise Robinson

LONDON/PARIS (Reuters) - Hedge fund bets against selected European stocks are making a comeback, as investors pick apart a multi-year stock rally and question the market's scope to gain from the ECB's campaign to prevent deflation.

Short sellers - who borrow a security and sell it, betting they will be able to buy it back at a lower price before returning it to the lender - have in recent years burnt their fingers on the upward trajectory of European markets, helped by the ECB's pledge to keep the euro zone together.

But the bears are now wading back in, with some success: short bets on specific companies like French telecom company Alcatel Lucent or German printing machine maker Heidelberger Druckmaschinen have paid off, as markets pause for breath after hitting multi-year highs.

Overall, in April and May, Europe's most heavily shorted stocks - those with the highest proportion of shares out on loan relative to their total share count - underperformed the overall market by about 8 percent on average, according to Markit data, for the first time since the European Central Bank pledged to save the euro in 2012.

"The relief rally that lifted stocks across the board in Europe is behind us now, and stock picking is set to play a much bigger role in performance," said Bertrand Lamielle, head of asset management at B*Capital, a Paris-based brokerage and wealth management firm.

"The focus is back on relative performances, which makes fertile ground for short selling and long/short plays."

Long/short strategies allow investors to bet on the performance gap between two investments, offering an alternative to simply betting on a straight fall.

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The curve of the German share price index DAX board, is pictured at the Frankfurt stock exchange June 13, 2014.    REUTERS/Remote/Stringer