Hedge funds have amassed a record number of short positions against European stocks, betting the region will suffer severely from the economic fallout of the Iran war. Data from Breakout Point shows short disclosures against European-listed stocks surged to nearly 12,000 in the first quarter, the highest level since disclosure rules began in 2012. While these disclosures don't equate to 12,000 individual shorts due to position adjustments, they signal significant bearish sentiment. Bank of America strategist Andreas Bruckner notes Europe, previously a "key beneficiary" of global growth, is now "most exposed to the energy crisis brewing." This shift reflects fears that the war will drive energy prices higher, crippling growth as Europe imports most of its energy. Brent crude has jumped 50% to $110/barrel, and European natural gas benchmarks surged similarly, fueling inflation concerns.

The Stoxx Europe 600 index has fallen over 5% since the war began, erasing yearly gains. Wizz Air, a London-listed budget airline, became Europe's most shorted stock after warning the war would wipe out profits due to flight disruptions and fuel costs. Short interest in the airline nearly doubled to 15%, while its shares tumbled over 25%. Rival easyJet also faces short-selling pressure.

Hedge funds like AQR Capital Management and Two Sigma Investments have significantly increased their European shorts, with AQR's disclosed shorts rising from 54 to 128. While not all funds are bearish on Europe overall, the surge underscores vulnerability, particularly in sectors like airlines and UK housebuilders like Ibstock, where Citadel and DE Shaw have increased short bets. Emmanuel Cau of Barclays states the UK is an "easy target" for shorts, revived by energy and rate volatility concerns.