Hedge Funds’ Leveraged Bond Trades Draw Regulatory Scrutiny (1)

The government-bond trades of the world’s largest hedge funds are facing increased regulatory scrutiny, as officials mull policies that would cap the leverage — and profitability — of popular strategies.

In separate reports Tuesday, the Bank of England and the Basel-based Bank for International Settlements delved into the leverage such funds are accumulating through repurchase agreements, where investors borrow cash by pledging bonds as collateral. Both said borrowing by a small number of large hedge funds poses potential risks to financial stability.

The warnings are the latest salvo in a policy debate that could limit the ...