People should be allowed to invest indirectly in hedge funds, says the Financial Services Authority (FSA).
The FSA will consult with City firms
At present, people can only invest in hedge funds based overseas, meaning less investor protection.
By allowing investment in hedge funds through UK-based unit trusts or OEICS, consumers would benefit from full FSA regulation.
The FSA will consult with financial firms on how hedge funds should be safely marketed to the public.
The consultation will begin at the start of 2007 and last for approximately three months.
Hedge funds rely in large part on investment in derivatives to make money.
Put simply, derivatives allow investors to speculate on the future price of shares and commodities without actually owning the item being speculated on.
Hedge funds can turn big profits but are high risk.
Up until now, only pension funds and wealthy private investors have had the wherewithal to invest in hedge funds.
The FSA proposals could see the sale of collective investments, such as unit and investment trusts, which own a stake in hedge funds.
"Given the reality of the contemporary retail market, it seems sensible to permit the marketing of hedge funds through an authorised, onshore vehicle," said Clive Briault, the FSA's managing director.