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.
International Financial Services London, a government-backed body, says London's share of the hedge fund market doubled between 2002 and 2008, to 18 percent of the global total. The industry says it pays 5.3 billion pounds in tax to the British government every year.
There have already been signs of flight since the British government announced it was increasing the tax rate on people earning more than 150,000 pounds ($250,000) a year to 50 percent from 40 percent effective next April. It also has imposed a 30,000 pound levy on "non-domiciled" overseas citizens who reside in Britain and had previously escaped British tax.
"It's bad, it's a brain drain. All the best brains in the market are leaving the U.K. because our financial institutions aren't welcome," said Andrew Bailey, 36, who works in sales in London's financial district.
Major London fund BlueCrest Capital Management is opening an office in Geneva, moving 50 staff to the Swiss city. Another fund, Brevan Howard, also plans to open a Swiss office _ although it denied British newspaper reports that it was shifting operations from London to Switzerland.
Anthony Bolton, one of London's most distinguished fund managers, this week announced he plans to move to Hong Kong to focus on the Chinese market. While not strictly a hedge fund manager, Bolton is renowned for running Fidelity's top-performing open ended Special Situations Fund and his actions are usually considered trend-setting in the industry.
David Butler, a founder of London-based hedge fund advisers Kinetic Partners, said his firm had "15 significant managers looking to leave the U.K. at the moment, all looking to move to Switzerland."
"I think up to 20 percent of hedge fund managers might leave London for somewhere else," he said.
"It's a complex mix of issues and the tax changes announced in April were the last straw."
Adelante's Adams agreed that the tax changes had done more to push hedge funds to leave Britain than any proposed regulation. He said Adelante was committed to London, but he and others were watching the other big hedge funds' moves with interest.
"Our starting position is that we have no desire to leave (but) when you see the bigger names start to move, then yes, that becomes an issue," he said.
He said hedge funds risked becoming the victims of a "politics of envy" by politicians eager to be seen to be clamping down on financial-sector excess.
"You are having a pop at a business that didn't require any bailing out," he said.
His colleague Edward Cowen, also at Adelante Asset Management Ltd., said that because hedge funds "have historically been quite private" they were less able to defend their interests at the political level.
The Alternative Investment Management Association, which represents hedge funds worldwide, says the industry operates very differently from other parts of the financial market and should not follow the same rules.
In particular, the association opposes leverage limits _ similar to capital requirements that oblige banks to put aside a minimum of capital to counter the risk of the loans they are making. Setting such caps is "overly simplistic," it said, and could worsen a tumbling market by forcing funds to sell off investments to replenish eroding capital.
Philip Whyte, an analyst at London-based think tank the Center for European Reform, said proposals to curb hedge funds were politically motivated and targeted an industry that can benefit the financial system by betting against the herd behavior of other players.
"A lot of hedge funds have failed and have cost taxpayers almost no money whatsoever," he said. "Arguably, if hedge funds were more powerful in the run-up to the crisis we would never have had some of the bubbles that we had."
White reported from Brussels. Associated Press Writers Raphael G. Satter, Jane Wardell and Rachel Leamon in London contributed to this report.