The growing availability of cheap credit is making it easier for hedge funds to increase their leverage, a trend that could boost the likelihood of intervention by regulators already concerned about the huge flows of pension fund assets into hedge funds. The warning comes in a report by Greenwich Associates which revealed that almost one-third of hedge funds have increased their use of leverage over the past 12 months. A quarter of the 36 hedge funds participating in the study reported that their prime brokers are extending more credit now than they were six months ago and 20% said that their prime brokers had decreased their haircut requirements during the same period. These trends could play an important role in a widely expected regulatory review that could begin as early as this summer with a U.S. Securities and Exchange Commission plan to commit hedge funds to register with the agency, said Greenwich Associates. ‘None of these developments — a flood of pension capital, increasing leverage, declining haircut requirements or easier credit — would, on its own, be a cause for immediate concern,’ explained Greenwich Associates consultant, Peter D’Amario. ‘In aggregate however, these trends bear serious consideration on the part of hedge fund investors, not only as possible indicators of an ‘overheated’ market, but also as potential harbingers of intervention by regulators in the United States and Europe.’
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