Financial regulators around the world are stepping up their scrutiny of hedge funds amid rising concerns that the sector's recent dramatic growth could pose a risk to financial stability.

The European Commission, which is responsible for drafting pan-European financial legislation, plans a review of the hedge fund industry to determine whether a new regulatory framework is needed. The industry will be examined as part of a broader review of Europe's asset management industry ordered by Charlie McCreevy, the European Union internal market commissioner, due to be published this summer.