Retail investors will be free to plough their cash into funds of hedge funds from early 2008, after the City watchdog said yesterday that “mom and pop” savers should have wider access to alternative assets.

The Financial Services Authority (FSA) opened consultation on how it planned to regulate the sale of funds of hedge funds to retail investors.

Funds of hedge funds have previously been the preserve of high-networth investors, who gained access to them through family trusts or private banks. Company pension funds and other institutional investors have poured money into the funds in recent years.

Providers of the funds were happy with the FSA’s consultation, but said that they were awaiting clarification of important issues, such as how quickly investors could withdraw their money from the funds.

Jamie Murray, head of business development at HSBC Alternative Investments, said: “We’ve seen similar documents come out of other European countries and the first draft isn’t usually great, but at first sight this seems workable and sensible.”

Retail investors across the rest of Europe can already get access to the funds, which promise higher returns than traditional long-only investments.

The funds of hedge funds will be based in Britain and regulated by the FSA under its existing regulatory regime for UK-only retail investments. The underlying hedge funds will not be regulated by the FSA or, for the most part, domiciled in Britain.

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