U.S., European Regulators Eye Hedge-Fund Borrowing

WASHINGTON –- The Federal Reserve Bank of New York, the U.S. Securities and Exchange Commission and the Financial Services Authority of London are taking a closer look at hedge-fund borrowing and conducting a joint probe into whether banks and securities firms set strict enough limits on loans to hedge funds.

According to Bloomberg.com, the U.S. and European regulators met last month with some of the biggest lenders to the hedge-fund industry to ascertain how much margin banks require hedge funds to provide up front to obtain loans and cover potential losses.

SEC Commissioner Annette Nazareth said the meeting was a "fact-finding effort" to discuss margin practices.

Hedge Fund Research Inc., Chicago, reports hedge funds worldwide manage a combined $1.3 trillion, more than double what they controlled five years ago. Returns last year averaged 13 percent, led by emerging-market funds.

Any move to raise margins as a result of the probe may crimp the $8 billion a year in fees that securities firms collect providing hedge funds with prime-brokerage services such as lending and clearing trades, stated Bloomberg.com.

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Since hedge funds use margin loans to add leverage and increase the size of their trading bets, Bloomberg.com offered that any increase in margins would mean it would be more difficult for hedge funds to make money.

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