They're getting nervous in Mayfair and Belgravia, London's hedge fund heartlands.

Luxury car dealerships, designer boutiques and high-end restaurants have thrived on money from the unregulated investment funds whose discreet offices sit behind the solid wooden doors of those neighborhoods' elegant Georgian buildings.

But now some funds are considering swapping London for the less-regulated alpine air of Switzerland or the emerging markets of Asia as the European Union tightens oversight of high-flying hedge funds. Recent British tax hikes have also spurred funds to consider leaving the city that has long been Europe's undisputed financial capital.

"The mood music has gone very bad here," said Julian Adams, chief executive of London-based Adelante Asset Management Ltd. "It's quite negative for business and for U.K. PLC."

The hedge fund industry is worth $250 billion ($377 billion) in Europe, and has boomed in recent years largely free of government regulation.

The sector didn't cause the global financial crisis, but it has caught the eye of European governments and regulators looking to clamp down on the excessive risk-taking that brought many Western banks to the verge of collapse last year.

European union proposals would require hedge funds and private equity funds to register in Europe and to inform regulators about their trades and strategy.

EU lawmakers and governments also are suggesting that hedge fund managers be subject to the same kind of restrictions and bonuses currently being imposed on regular banks to limit rewards for short-term success.

The proposals have been condemned by the industry as too heavy-handed.

Hedge funds are investment funds for a small number of wealthy or large investors _ minimum investment levels are usually around $1 million _ that invest in a broad range of assets, including shares and commodities.

They were initially called hedge funds because they hedged some of the risks inherent in their investments by methods such as short selling and derivatives. But the term is also now applied to funds that use those methods to increase, rather than reduce, risk as they seek a greater reward.

Because hedge funds are highly mobile, the prospect of tighter EU regulation has raised fears of a capital drain toward safe havens like Switzerland, which is not part of the 27-nation bloc.

For London, long New York's rival as the world's premier financial center, the consequences would be enormous. The hedge fund industry says nearly half of the 40,000 people it employs in Europe are based in the British capital, along with 80 percent of the continent's hedge fund assets.