Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Two big European companies pull their IPOs in a day, both blaming market conditions. In fact, market conditions could scarcely be more favorable. The better explanation is that investors -- hedge funds especially -- have lost money on recent sales of new stock and have understandably gone on strike.

Arqiva Ltd, a provider of communications infrastructure, and Bakkavor Group Plc, a food producer, trotted out the standard reasons of market "uncertainty" and "current volatility in the IPO market". True, the V2X index of European stock volatility spiked a bit last month, but this was from historic lows and as things stand volatility in the broader equity market is virtually non-existent. On Friday, the index was at 11.95, just off a year low of 11.05.

What Volatility?
Low volatility and a rising stock market make ideal conditions for IPOs
Source: Bloomberg

The absolute performance of stocks has been fine too: The FTSE 250 has risen 2.3 percent in the past month. The Bloomberg European 500 is up 1.5 percent. Secondary market deals, such as a long-expected placing in Renault SA overnight, have done well.

What's not been fine is the performance of some of Europe's largest IPOs. Austrian lender BAWAG Group AG fell 3 percent on its debut and is down 4.7 percent to date. Spain's Aedas Homes SAU fell 5 percent on day one and is still off 2 percent. Rovio Entertainment Oy, the software maker behind the Angry Birds franchise, has fallen 7 percent.

Win Some, Lose Some
Europe's big IPOs since September have been a mixed bag
Source: Bloomberg

For funds that bought a handful of these deals, the resulting losses will have taken a big bite out of their annual performance in a year when rallying stock markets already provide a tough benchmark. About one-third of European IPOs are bought by hedge funds typically, bankers reckon. Assuming these generally short-term buyers suffered losses in the recent crop of offerings, their tolerance for risking any more on another IPO has probably fallen to zero.

If this part of the market disappears, conventional long-only investors know they have greater pricing power and hold back too. IPO stock can get sold but demand scarcely exceeds supply. EN+ Group Plc,  a power, metals and mining company, sagged on its London debut on Friday.

Any investment bank pitching for an IPO will want to convince sellers it can get the deal done using a raft of institutional buyers without resorting to hedge funds. The reality is that the hot hedge money usually provides early IPO support and gives momentum.

Weakness in European IPO demand may be short-lived. The arrival of 2018 will reset the investor performance clock. But that alone won't be enough to spur demand. The inescapable conclusion is that many of this season's IPOs ended up overpriced as sellers exploited strong markets and probable momentum-driven demand. The reckoning has now come. It could take a period of IPO bargains to restore confidence.

With assistance from Karan Aswani (Bloomberg Global Data)

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(A previous version was updated to give full details of En+ Group's activities.)

To contact the author of this story:
Chris Hughes in London at

To contact the editor responsible for this story:
James Boxell at