How Overlooked European Defense Stocks Became a Hedge-Fund Home Run
Drastic shifts in the global security environment have sparked a sector rally
Hedge-fund honchos entered this year betting big on America, expecting President Trump’s promised tax cuts and deregulation would lift everything from U.S. stocks to the dollar.
Turns out, an old-school industry in Europe was really the place to be.
European defense has emerged as one of the biggest winners in global markets this year, outpacing buzzier bets like artificial intelligence. Companies including Germany’s Rheinmetall, Italy’s Leonardo and France’s Thales have gained 67% or more, far ahead of any S&P 500 stock.
The rally is enriching a clutch of hedge-fund managers who bet on these stocks before the Trump administration started remaking the global security landscape. That includes such firms as New York-based Sachem Head Capital Management and Chris Hohn’s London-based TCI Fund Management, one of the largest hedge-fund firms in the world.
Deem Global, a London-based firm that oversees nearly $600 million, also made money on the sector, owing to its “longstanding thesis of geopolitical reordering” and a “structural megatrend” of increased defense spending, the firm wrote in an investor letter seen by The Wall Street Journal.
Its main fund returned 9.6% in February, the letter said, helped by options tied to European defense stocks. A more concentrated version of the fund gained 40%.
That reordering is unfolding rapidly. Since taking office in January, Trump has pushed for a swift end of the war in Ukraine, embracing Russia in the process and clashing publicly with Ukrainian President Volodymyr Zelensky. This past week he ordered pauses to all military aid and intelligence sharing with the embattled country, denying Kyiv the resources it needs to fight Russian forces.
At the same time, Trump has pressed for Europe’s rearmament, suggesting that the U.S. might not defend North Atlantic Treaty Organization allies if they don’t increase outlays on arms, troops and equipment.
The issue took on new urgency following Trump and Zelensky’s Feb. 28 Oval Office blowup, which triggered a scramble by the U.K. and France to broker a compromise. Germany upped the ante days later, exempting military spending from its strict fiscal rules, and European Union leaders convened in Brussels to discuss a defense plan for the continent. Europe faces a “clear and present danger,” said European Commission President Ursula von der Leyen.
“The defense paradigm has shifted materially,” said Andrzej Szczepaniak, senior European economist at Nomura. “Obviously, if you want to become security-independent, you have to rely more on your own production. And from that perspective, that underscores why we’ve seen such a rally in European defense stocks.”
Until recently, European defense stocks were unloved for a simple reason: The continent wasn’t spending heavily on security. When the Cold War ended, governments slashed military budgets in favor of social programs.
While Europe’s defense spending has risen in recent years, it remains lower than that of the U.S. It equated to 1.9% of the EU’s economic output last year, according to the European Defense Agency, while defense spending equaled 2.3% of U.K. GDP. The U.S. outlay was equivalent to nearly 3.4% of its GDP, NATO estimates show.
The sector was also dented by the environmental, social and corporate-governance investing movement, which spurred some investors to dump shares of companies tied to war and weaponry, and other industries considered not socially responsible. Sentiment toward the sector began to change in 2022, when Russia launched its full-scale invasion of Ukraine.
In general, betting on European defense hasn’t historically been popular with hedge funds, according to bankers and others familiar with firms’ positioning. But that has started to change. Hedge-fund clients of JPMorgan Chase bought a higher-than-average amount of European defense stocks on a net basis this past week, said Eloise Goulder, head of the data assets and alpha group at the bank.
Deem, the firm whose main fund surged last month, was founded in 2022 by 32-year-old Asfy Nadeem, an alum of the macroeconomic trading giant Brevan Howard. His firm’s bread and butter is trading on major thematic shifts through interest rates, stocks and other assets classes.
Last year, the firm began accumulating options positions in European defense stocks, said a person familiar with the matter, reasoning that the longstanding alliance between Europe and America could shift if Trump were to win the November election.
Other hedge-fund firms have held positions in European defense stocks for even longer. Hohn’s TCI has been a major investor for more than a decade in Safran, a French aerospace-industry supplier, and Airbus.
TCI unveiled a stake in Safran in 2012. Five years later, the hedge-fund firm ran a fierce campaign against Safran’s purchase of another aerospace company, arguing that Safran was overpaying significantly. Eventually, Safran lowered its offer, and the deal went through. TCI remains a major shareholder, owning over 5% of the company.
Sachem Head, the New York activist hedge-fund firm, was also early to the sector. In early 2023, it scooped up shares in Leonardo, the Italian aerospace and defense manufacturer, betting that the company and the broader industry was poised for growth, according to a person familiar with the firm’s thinking.
Back then, Sachem Head believed Leonardo’s true value was obscured by a loss-making segment of the business that manufactures aircraft components. It also thought broader defense spending would need to increase in Europe after decades of underinvestment.
Leonardo’s shares traded around €10 when Sachem Head bought in. They closed Friday above €43. It remains one of the firm’s largest positions, the person said.