Regulators concerned about the huge flows of pension fund assets into hedge funds may be troubled by the availability of cheap credit, which makes it easier for hedge funds to increase their leverage.

A new study by financial services consulting firm Greenwich Associates reveals 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.

Greenwich says that 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 require hedge funds to register with the agency.

“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,” said 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.”

Greenwich surveyed hedge funds located in the Americas, the U.K., and Europe and asked them about their investment strategies, capital raising, prime brokerage relationships, credit, leverage levels, and views on industry regulation. Its research identifies several trends that could affect future hedge fund performance and increase the likelihood of regulatory intervention in the industry.

By far the biggest contributor to the current hedge fund boom is the widespread participation of pension funds, whose investments in the sector have raised serious concerns among regulators.

“There’s a growing perception that the money flowing into hedge funds today is not just coming from wealthy individuals and endowments who can absorb a hit if things go awry,” D’Amario said. “Regulators and the media have become keenly interested in the fact that the pension funds of corporate and public workers are now coming into play.”

Greenwich believes that hedge funds will come under greater regulatory scrutiny in coming months, and it is likely that this review will culminate in new regulations in the both U.S. and the U.K.. Hedge fund investors should attempt to stay ahead of any new regulation by taking careful measure of the risk-management procedures, disclosure policies, leverage levels, and capital introduction practices of funds under consideration for investment, it says.