European equities are stepping into the spotlight as hedge funds rethink their global strategies amid an uncertain macroeconomic backdrop.
As hedge funds continue to navigate this volatile and uncertain backdrop, Europe has emerged as an attractive destination for capital allocation, most notably across equities. A Goldman Sachs note seen by Reuters that was sent to clients last month, outlined that hedge funds had piled into bets against US shares and emerging market stocks in Asia, as they wagered that European shares would rise.
The gradual shift of focus into Europe has accelerated in recent years. US equity gains remain heavily concentrated in the ‘Magnificent Seven’, leaving the market top-heavy and potentially vulnerable to external shocks. European equities offer broader sector representation compared to the US; there is a greater exposure in banks, industrials, and natural resources.
Thomas Horsey, equity portfolio manager and Thomas Kramer, investment director at Wellington Management noted in a research report last September that Europe’s ongoing structural evolution, underpinned by domestically focused companies across a diverse sector base, presents a compelling opportunity set.
One fund that has navigated the recent volatility well is Vigama Capital, led by Vincent Ijaouane. Its long/short focus on European equities has delivered a 3.5% return month-to-date and over 8.3% year-to-date. “During this month we reduced exposure where risks increased, such as airlines, and redeployed capital into areas like chemicals, where supply disruptions created opportunities. Importantly, our low net exposure allowed us to stay focused on idiosyncratic opportunities rather than market direction, as we reduced our position size in more crowded trades, anticipating potential liquidity pressures.”
A key driver of performance, according to Ijaouane, has been a deliberate avoidance of broad macro-driven positioning. This allows the fund to maintain a low net exposure and limit directional risk during periods of heightened macro uncertainty. Its sector-agnostic framework further enhances flexibility, allowing capital to be deployed across Europe’s diverse opportunity set.
The greater focus on European equities by hedge funds could itself become crowded, as higher levels of capital are allocated across the continent. Additionally, despite the broader sector offering, the dominance of the ‘Magnificent Seven’ will continue to pull global capital toward US equities. If AI driven growth is primarily in the US, Europe’s relative discount across equities may become structural rather than cyclical, limiting returns for global portfolios. Michael Field, chief equity market strategist EMEA at Morningstar, noted in a recent analysis piece that European equities are down 10% in March, with “interest rates now moving in the wrong direction” because of macro factors. Allocations across the continent by investors could be an opportunistic hedge rather than a move of diversification.
The equity landscape across Europe is likely to remain shaped by higher-for-longer interest rates, the Iran War has pushed inflation well above the ECB’s 2% target, which will drive greater dispersion between winners and losers. For active, fundamentally driven managers, this backdrop is conducive to alpha generation.
Long/short strategies are well positioned to capitalise on these dynamics, capturing opportunities while mitigating broader market risk. The FT reported that the number of short disclosures against European equities increased to nearly 12,000 in the first three months of year, with hedge funds including AQR Capital Management and Two Sigma Investments betting against the continent. As investors continue to reassess their exposure across markets, on the short side, European equities are increasingly viewed as not just a tactical play, but a compelling opportunity for active managers.
Our latest Alternative Views episode with Vincent Ijaouane from Vigama Capital, discussing European equities.
