Individuals in the UK would be able to buy into regulated hedge funds for the first time as part of reforms under discussion at the chief City regulator.

The Financial Services Authority will this month publish a discussion paper, prompting a debate on whether the £275bn retail fund management industry should be able to engage in the sort of risky investment strategies used by hedge funds. This includes shorting - selling stocks they do not own in the expectation of buying them back more cheaply - investing in derivatives and taking on more debt.

Hedge funds, once seen as dangerous, high-risk and exotic investments on the fringe of the investment community, are becoming mainstream with more than £1,000bn in assets and 8,000 funds worldwide.

However, most private investors in the UK are prevented by regulators from investing directly in hedge funds. Fund managers report pent-up investor demand for the products, which can offer double-digit returns but can also be high-risk.

The FSA will publish two discussion papers - expected within two weeks - to launch a debate about the range of investments open to individuals. Regulators worldwide are looking at the same issue.

The UK asset management industry is pressing for change amid fears that it is losing out to financial centres such as Germany and Ireland that have relaxed the rules on retail investment into hedge funds.

Keith Jones, chief executive of Morley Fund Management, a subsidiary of Aviva, said: "Most asset management firms would welcome the opportunity to look at distributing hedge funds in the retail market. There is no logical reason for not allowing retail investors to buy hedge funds."

Industry chiefs who have had meetings with the FSA on this issue claim that the regulator appeared "supportive" of change. One said: "They seem open to change." The FSA's discussion papers will cover retail investment and the wholesale market.

The Investment Management Association said: "The FSA is looking at extending the range of products available to investors, including hedge fund strategies."

Timothy Spangler, a partner in the investment funds group at Berwin Leighton Paisner, said: "Is the UK regime too prescriptive? Is it this that has led to the proliferation of hedge funds offshore?"