In an environment marked by heightened geopolitical tension and macroeconomic uncertainty, hedge funds executed a notable repositioning in European equity markets over March and April. According to internal analysis, the volume of European equity sold by hedge funds during this two-month period reached levels not seen in over a decade.
Two primary catalysts drove this significant withdrawal: the specter of trade tariffs proposed by former U.S. President Donald Trump and the persistent strength of the euro. The latter, in particular, has been a headwind for the eurozone’s export-heavy economies. A strong euro erodes international competitiveness, dampening earnings prospects for multinational firms based in the bloc. Hedge funds, sensitive to both policy signals and currency shifts, responded by trimming long exposure and substantially expanding short positions across the region.
Despite this broad-based sell-off, it is noteworthy that hedge funds remained net long on German equities. Germany’s industrial depth, relative fiscal strength, and reputation for manufacturing resilience likely underpinned this selective optimism. Investors are betting that German companies, particularly those in engineering, chemicals, and high-end manufacturing, will continue to weather global uncertainty better than peers in other EU member states.
The landscape shifted again following the temporary suspension of U.S.-proposed tariffs on April 9. This policy pivot catalyzed a reversal in strategy among some hedge funds. Defensive trades — those designed to benefit from declining indices — were unwound. In their place, investors began rotating into cyclical sectors, most notably banking and financial services, where valuations remained relatively depressed and the interest rate outlook was improving.
Additionally, a marked increase in hedge fund activity around defense and aerospace companies has emerged. With defense budgets across Europe trending upward in response to growing security challenges, firms operating in this space are drawing sustained investor interest. Hedge funds appear to be positioning for structural growth in defense spending, viewing it as a longer-term thematic play with policy tailwinds.
As the second quarter unfolds, market participants will remain attuned to shifts in trade policy, currency fluctuations, and central bank signals. Hedge funds, agile by nature, will continue to adjust exposures dynamically in response to these evolving risk factors.
Samira Farzad –HF Quarters
