Check out Europe and Asia’s top shorts

Bloomberg | Getty Images

As markets across Europe and Asia rallied this year, short-sellers have been caught out, with the most shorted stocks outperforming stock markets.

Europe's Vestas Wind Systems and online supermarket Ocado, for instance, were both heavily shorted, according to economics firm Markit, but have posted returns of over 350 percent in the year to December.

Short-selling allows an investor to make money on a falling stock price. The short-seller borrows stock from an investor with the promise of returning them at a given date at the price they borrowed them at.

He or she sells them in the market, pocketing the proceeds. At the agreed time, the short-seller buys back the stock at the new price and returns the shares to the original investor. If the new price is lower than the one at which they sold the stock, a profit is made. If the price is higher, they will incur a loss. This pursuit of profit from falling shares has been blamed for wild market swings and, during the financial crisis, some governments banned short-selling.

Some traders, however, did better than others, and Markit has compiled a list of the best performing shorts across Europe and Asia over the year.

(Read more: Short sellers see once in a lifetime opportunity)

To create its ranking, Markit looked at stocks which have tumbled in value by more than 30 percent from fresh annual highs in demand from short sellers over the year.

Europe: Mining slump

Materials companies dominated the list in Europe, after being hit by fluctuating metal prices and concerns about the health of the global economy.

Seven of the top 15 shorts were materials stocks, with gold miner Petropavlosk coming in at number three. The company's battle with falling gold prices saw shares fall 61 percent after short-sellers started to target the company, according to Markit.

Potash miner K&S, natural resource company Kazakhmys, miner Nyrstar, and steel company Outokumpu also made the list -- all slipping by around 40 percent.

(Read more: Stock shorting: CNBC explains)

In joint first place was engineering firm Royal Imtech and Bankia -- the troubled Spanish bank that became emblematic of the country's financial crisis – which both saw their stock fall 75 percent from annuals highs in demand to borrow.

Markit analyst Simon Colvin, however, was keen to stress that Bankia was something of an anomaly, as its share value was slashed to 0.01 euros in April as part of a massive recapitalization program, and because the Spanish government had banned short-selling until the end of January 2013.

Engineer Royal Imtech and biopharmaceutical firm Thrombogenics were also ranked on Markit's list of top European shorts, with their stock falling 75 percent and 60 percent respectively from annuals highs in demand to borrow.

Asia: Tech surprise

In Asia, Australian pharmaceuticals company Pharmaxis was the best performing short, according to Markit. Its share price slumped 91 percent from highs in short interest, after the U.S. Food and Drug Administration (FDA) rejected its cystic fibrosis treatment.

(Read more: What you can learn from naysaying short sellers)

Materials companies took the second, third and fourth places in the list of Asia's top shorts, with shares in miners Liongold, Mirabela Nickel and Perseus all falling around 88 percent after short sellers started to target the companies.

But although eight materials stocks made Markit's list of most successful shorts in Asia, the region's tech companies also proved profitable for short sellers. Indeed, Markit found that Asia was only region where materials stocks did not dominate its top shorts ranking.

Short-sellers profited most from Tawian tech stocks, which accounted for 10 of the 11 top tech shorts in Asia across 2013. Touch panel manufacturer TPK Holding was the top tech short, after its stock fell by 71 percent since it was targeted by short sellers, according to Markit.

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop and Google

Related Tags