Feb. 22 (Bloomberg) -- Britain's market regulator will set rules opening hedge-fund investing to individuals by the end of the year, allowing the general public to participate in an industry previously reserved for the wealthy.

The Financial Services Authority plans to allow consumers to put money into funds that invest in hedge funds, which take bigger bets than mutual funds, the London-based regulator said today in an e-mailed statement.

The move will ``allow more choice and a better opportunity for risk diversification, while maintaining consumer protection,'' Dan Waters, the FSA's director of retail policy, said in the statement.

Investors poured a record $194.5 billion into hedge funds last year, pushing the industry's assets to $1.87 trillion, according to data compiled by Chicago-based Hedge Fund Research Inc. At the same time, investments into mutual funds are slowing. U.K. individuals withdrew a record 600 million pounds ($1.19 billion) from stock funds in December, the Investment Management Association said Jan. 28.

``This is part of the inexorable path of hedge funds and fund of funds becoming more mainstream,'' said Omar Kodmani, senior executive officer of Permal Group, which has about $37 billion of assets. ``Setting a legal and regulatory framework for individuals is another step.''

Bigger Bets

Hedge funds often borrow to increase their bets, creating the potential for bigger gains or losses than in traditional funds. The average hedge fund returned 10.2 percent in 2007, almost double the 5.5 percent gain by the Standard & Poor's 500 Index including dividends, according to Hedge Fund Research.

Managers of funds of hedge funds such as Permal invest in a number of single-manager hedge funds to diversify risk.

The FSA, which has been considering the changes for more than two years, said it will consult with companies further before finishing its plans. The new rules cover funds of hedge funds and won't allow individuals to invest in so-called single- strategy funds.

Hedge funds are mostly private and unregulated pools of capital where managers can buy or sell any assets, participating substantially in the profits of the money invested. The fees are higher than mutual funds, usually amounting to 2 percent of assets under management and 20 percent of any investment gains.

Money managers in Britain have already been capitalizing on demand from individuals by selling stock in closed-end funds that operate like hedge funds, a practice that circumvents existing regulations.

To contact the reporter on this story: Tom Cahill in London at tcahill@bloomberg.net.

Last Updated: February 22, 2008 08:03 EST