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Chanos up as many shorts stumble

In November, a small band of battered short sellers couldn't have been more excited about the opportunity to make money from what they saw as wildly overvalued stocks. One, John Fichthorn of Dialectic Capital Management, said it was the "best opportunity I will see in my life."

Sure enough, the S&P 500 Index fell 3.56 percent in January, providing the hedge funds a chance at redemption from years of bull market losses, or at least a start. Did the killing they promised begin?

Not really.

A handful of short-biased funds performed decently, including the strategy's most prominent firm, Jim Chanos' Kynikos Associates, and smaller Gracian Capital. But others, such as Gotham Asset Management and Kingsford Capital Management, lost money despite the market correction.

In all, the average short-biased fund gained just 0.88 percent in January, according to alternative fund tracker eVestment, barely starting to make up for falling 19.76 percent last year.

David Grogan | CNBC

"Short selling performance was definitely disappointing given the January market correction. I would have expected them to do better," said Michael Oliver Weinberg, a hedge fund expert who teaches at Columbia Business School. "That said, it's premature to question the viability of the strategy--it's only a one-month correction after a five-year bull market."

(Read more: Short sellers see once in a lifetime opportunity—if they can survive)

The most prominent winner was Kynikos, which rebounded after losing money in 2013. Ursus, a short only fund that bets on U.S. stocks, gained 3.85 percent net of fees in January, according to a person with knowledge of the returns. Ursus had lost 35.86 percent in 2013.

Kynikos' largest fund, Kriticos, also lost 23.49 percent in 2013. Kriticos is also short-only but invests in global stocks--notably gaining 59.38 percent in 2008, according to a marketing document. A third fund, Opportunity, includes more long positions and fell 13.6 percent last year. Performance for both funds in January was unavailable.

(Read more: Short-seller Chanos falls double digits in '13)

Kynikos manages about $4 billion overall, down from about $6 billion in 2012, but is still by far the largest short-oriented firm. Chanos, who declined to comment, has recently been public about his dislike of Caterpillar, CGI Group and banks in China. He has also said he likes Visa and MasterCard as long bets.

Not everyone did so well.

Kingsford Capital Management, one of the few short-focused firms alongside Kynikos left, fell about 1.2 percent in January, according to people with knowledge of the returns. The same flagship fund also fell 26 percent in 2013.

Kingsford, led by founder Mike Wilkins, managed $257 million as of May, according to a regulatory filing. That's down from $2 billion in 2008 per hedge fund news and data tracker Absolute Return.

Another loser was Joel Greenblatt's Gotham Short Strategies fund. It fell about 2 percent in January, according to an investor. Returns for 2013 were unavailable. Gotham as a firm isn't short focused and offers more traditional long/short hedge and mutual funds.

Kingsford and Gotham did not respond to requests for comment.

(Read more: Green Mountain roasts Einhorn's Greenlight)

A few smaller short-biased managers figured out ways to win.

Matt Kliber's Gracian gained more than 3 percent in January in its flagship fund, according to a person familiar with the firm. The fund was just 5 percent net short, meaning its short bets barely outweighed its longs (last year, Gracian lost about 25 percent running 85 percent net short).

Kliber declined to comment on his fund's performance. But he did say there was plenty more opportunity for shorting large companies—his specialty. Kliber is particularly interested in the luxury consumer goods industry where he said the expected earnings growth that have inflated stock prices is unlikely.

"The expected second-half economic and earnings recovery that investors had banked on, for the most part, failed to materialize," Kliber said in an email. "As a consequence, shares of companies issuing disappointing earnings reports or negative guidance revisions have been severely punished over the past three months—we think this dynamic will continue in 2014 as investors reset earnings expectations downward."

Another was $20 million SC Management. Dave Davidson's short-only Shoreline fund gained 2.1 percent in January after falling 29 percent in 2013, according to Davidson.

Despite those small victories, investors have soured on shorts for several years. According to data from eVestment, there were steady outflows from short-biased funds for most of 2012 and 2013, expect the third quarter of last year.

Short-biased hedge fund asset flows

Date
Total Assets ($B)
Net Investor Flows ($B)
Q1 12 $3.82 ($0.16)
Q2 12 $4.00 $0.04
Q3 12 $3.18 ($0.58)
Q4 12 $2.85 ($0.01)
Q1 13 $2.59 ($0.19)
Q2 13 $2.49 $0.00
Q3 13 $2.75 $0.29
Q4 13 $2.64 ($0.12)
Source: eVestment

Managers aren't giving up.

"Most of the sectors we thought were way overvalued late last year still are, like 3D-printing, software-as-service, social media and solar," said Fichthorn, co-founder of short-biased Dialectic, which managed $831 million at yearend 2012.

"In some ways, the short selling setup is even better now that earnings momentum is gone. We're getting ready right now for making money the rest of the year," he added.

Fichthorn declined to comment on January performance.

—By CNBC's Lawrence Delevingne. Follow him on Twitter @ldelevingne.

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