Europe's 'long the short' trade cools down

European shares caught up in last week's squeeze on hedge funds' short positions have mostly fallen back from their highs, in a sign local retail investors lack the clout of their counterparts in the United States.

Shares of US videogame retailer GameStop skyrocketed last week as social media-driven investors piled into the stock and forced hedge funds to buy back shares they had borrowed to bet on the stock's decline.

That so-called "long the short" trade - or buying shares that hedge funds had shorted - was copied in other stocks across the world.

But while several of the affected US stocks have continued to rally, many in Europe have fallen back.

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Germany's Evotec, for example, has seen its shares fall about 25 per cent from last Wednesday's high, while battery maker Varta and videogame firm CD Projekt are also down more than 20 per cent from their peaks last week.

Traders said the declines were partly because small investors in Europe do not have the easy access to options that give their US counterparts a bigger sway over market moves.

"And ant and moth investors never really emerged as buyers (in Evotec and Varta)," said Stefan de Schutter, portfolio manager at Alpha Trading, referring to small investors.

In Europe, retail investors have a smaller share of the market and operate mainly through mutual funds. That could mean extreme moves become less likely once hedge funds have closed out their short positions.

Trading remains volatile, however.

At 1317 GMT, Evotec shares were up 4.3 per cent after falling as much as 1.3 per cent earlier in the session, while CD Projekt, which fell 4.6 per cent at one point, was up 0.6 per cent. Varta was down 5.2 per cent.

Over the past week, US hedge fund Melvin Capital Management, which has been hit hard by losses on its GameStop bet, has reduced its short bets in these three European companies.