Hedge funds have increased short positions against European equities to their highest level in more than ten years, reflecting growing concerns over the region’s economic outlook and corporate earnings prospects.
According to data cited by Morgan Stanley, reported by Crypto Briefing, bearish positioning on European stocks has climbed sharply in recent weeks as investors react to slowing growth, persistent geopolitical uncertainty and concerns over the trajectory of interest rates.
The report says hedge funds have been adding short exposure across cyclical sectors including industrials, consumer discretionary and financials, while reducing overall net exposure to the region. The positioning marks one of the most negative stances towards European equities since the eurozone debt crisis.
Investor sentiment has weakened amid expectations that economic growth across parts of Europe will continue to lag behind the US. Ongoing uncertainty surrounding energy prices, manufacturing activity and trade dynamics has also weighed on confidence.
The increase in short selling comes despite a relatively resilient performance from some European benchmark indices earlier in the year. Hedge funds are reportedly positioning for weaker earnings momentum and greater market volatility in the months ahead.
Morgan Stanley notes that macro hedge funds and equity long-short managers have been among the most active sellers, with many firms favouring defensive positioning while maintaining selective exposure to sectors linked to artificial intelligence (AI), defence and energy infrastructure.
The bank also highlights a divergence in regional allocations, with hedge funds continuing to favour US equities over Europe due to stronger earnings growth expectations and greater exposure to large-cap technology companies.
Market participants say elevated short interest could contribute to increased volatility should economic data or central bank policy surprise to the upside. However, many managers appear cautious on the near-term outlook for European assets as inflation and monetary policy uncertainty persist.
The latest positioning data underlines how hedge funds are increasingly using short strategies to hedge broader market exposure while seeking to capitalise on perceived structural weaknesses within the European economy.
