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These bets on underperformance are paying off

It might be a rough year for hedge funds, with markets seemingly wandering ever higher into uncharted territory, but some eagle-eyed short sellers are still making money.

Short selling refers to borrowing a financial instrument to sell it, in the hope of buying it back later at a lower price. Europe has proved fairly infertile soil for short sellers, according to data provider Markit. Instead the company says the U.S. has been the place for some success, detailing the top 20 North American shorts so far this year.

"Materials, energy and software &services companies account for half of the top 20," Simon Colvin, the author of the report, said in a press release this week.

Colvin - concentrating on data in the first half of 2014 - has looked at the performance of companies since they recorded a fresh annual high in short interest. He believes that short sellers have been able to uncover plenty of underperforming shares over the last six months with the 20 best performing shorts falling by over 38.67 percent after their short interest hit an annual high.

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Nii Holdings, a mobile communication services company that's listed on the Nasdaq, topped Colvin's list as the best performing short so far this year. It's been easy pickings for shorts after a 50 percent price drop in February as it released disappointing earnings and mounting losses in user subscriptions.

Simon Smith | E+ | Getty Images

U.S. miner Molycorp is another that found a prominent position in Markit's list. The company is trying to boost output at its plants in California where it produces the metals used in smart phones,cars and missiles. A fall in prices for these rare earth metals has hit the company's share price, which is now down 57 percent year-to-date.

Microblogging site Twitter is another notable addition to the list, with shares in the tech firm now down 35 percent since the start of the year. Edmund Shing, global equity portfolio manager at BCS Financial Group, believes that the inclusion of some of the stocks on the list, like Twitter, is not surprising as they were part of a recent momentum-led selloff and are still "very expensive on valuation."

He added that the shorting of the materials sector was also not surprising, as there has been a lot of pessimism. "We have seen worries over demand from emerging markets like China for commodities like copper and iron ore," he told CNBC via email.

The skill involved with stock picking was underlined in May with a Goldman Sachs report showing that many hedge funds were underperforming index benchmarks or even losing money. The investment bank analyzed the 50 stocks most commonly held in large quantities by 777 hedge funds and found the group suffered its worst monthly return outside the "crisis periods" of 2002, 2008 and 2011.

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