European short sellers were down -$56 billion in year-to-date mark-to-market losses. This was a -27.32% mark-to-market return versus the Vanguard FTSE Europe ETF +31.73% & IShares MSCI Europe ETF +35.61%.

Most short positions were unprofitable, with 81% of every dollar shorted being losers.

Every sector was unprofitable for short sellers in 2025.

Only nine out of seventy-five industries were profitable on the short side. The most profitable industries, on a percentage basis, were Diversified Consumer Services; Interactive Media & Services; and Containers & Packaging. The least profitable industries were Banks; Aerospace & Defense; and Hotel & Resort REITS.

There was more short selling in larger cap names than smaller cap names, 70% of every dollar shorted was in mega and large cap names. Larger hedge funds cannot trade in smaller cap names due to their large AUM and limitation on the number of securities they can effectively manage in their portfolios.

But even though most of the short exposure was in the larger cap stocks, short sellers were more profitable or less unprofitable in smaller cap stocks.

There were no profitable European sectors on the short side. In dollar terms, Financials, Industrials and Materials were the most unprofitable European sectors.

Looking into the industries within these sectors we see that Diversified Consumer Services (Auction technology Group ATG LN & Pearson PLC PSON LN), Interactive Media & Services (Hemnet Group AB HEM SS & Trustpilot Group PLC TRST LN) and Containers & Packaging (Smurfit Westrock PLC SWR LN & Sig Group AG SIGN SW) were the most profitable Industries. While Banks (Commerzbank AG CBK GR & Banco Bilbao Vizcaya Argentaria SA BBVA SM), Aerospace & Defense (Rheinmetall AG RHM GR & Saab AB B SAABB SS) and Hotel & Resort REITs (Covivio Hotels SACA COVH FP) were the least profitable.

Interestingly, short-side profitability skewed toward the smaller cap names. Mega and Large cap shorts were down -28% and -29% respectively, while Mid cap names were only down -16%. Small cap names were slightly unprofitable with a -5% YTD return. But Micro and Nano cap shorts were up +10% and +52% respectively. Short sellers had to be in the larger cap names due to the size of their short book and as hedges to long positions and took losses. But they were less unprofitable in their Small cap names and were profitable in their Micro and Nano cap “stock-picker shorts.”

Individually, in dollar terms the most profitable shorts in the market were:

Individually, in dollar terms the least profitable shorts in the market were:

In a rising market it is inevitable that the short side is a drag on a portfolio’s profitability. But it is unavoidable since a leveraged hedge fund portfolio requires both long-side and short-side bets. The more leverage a hedge fund requires, the larger the short book they need to build. The majority of these short positions are in larger cap names which act as a hedge to offset the general market risk of a portfolio, or its Beta, while a smaller portion of their short portfolio are their Alpha bets, those positions which hopefully add profitability to the bottom line.

With hedge fund leverage rising (short exposure increased from $165 billion to $243 billion in 2025) we are seeing more names being shorted in smaller caps which are potentially out-sized Alpha generators. Using additional factors in short-side stock selection can differentiate a portfolio from the herd and make a fund more attractive (less risk – more return). Using S3’s short-side analytics adds new factors and data points to create a less risky higher return portfolio.

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The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks, and merits, as well as the legal, tax, accounting, and investment consequences, of such decisions.