Introducing the New Hedge Fund: The Family Office

For hundreds of years, family offices have been the financial equivalent of social registers—small, musty preserves of the rich that have little impact on the real world.

But now, due to a giant regulatory loophole, family offices are becoming major players in financial markets. A string of billionaire hedge funders—including George Soros, Carl Icahn, and Stanley Druckenmiller—have all transformed their hedge funds into family offices managing billions of dollars. SAC, the giant hedge fund run by Steve Cohen, could become next in line, as the fund grapples with redemptions and government investigations.

(Read More: Street Still Waiting on SAC Redemption Numbers)

People close to SAC say the company has no plans to become a family office.

Yet the lure of family offices for hedge funds has become very strong—especially under new regulations in Washington. Under Dodd-Frank, family offices were given a special exemption from regulation under the Advisers act, meaning the requirements for disclosure and investor protection are far less onerous than they are for hedge funds.

As Dodd-Frank was being formulated, a group of wealthy families and attorneys formed the Private Investor Coalition, which lobbied Congress to carve out an exemption for family offices. They argued that family offices don't solicit or invest money from outside investors and therefore shouldn't be subject to rules aimed at protecting everyday investors.

(Read More: Dodd-Frank? More Like Dud-Frank for Lots of Folks)

It remains to be seen how many more billionaire hedge funders will take advantage of the exemption.

"There aren't that many guys with that much wealth who can just move from a hedge fund to a family office," said Leor Landa, a partner at Davis Polk who represents hedge funds and other investment companies.

Still, there are now more than 1,000 family offices in the U.S., according to an estimate from the Wharton Family Office Alliance. Their financial might is growing fast. Soros' family office launched with more than $24 billion. If SAC becomes a family office, investing money from Cohen and key employees, it could still be a multi-billion-dollar investment company—and with far fewer regulations.

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Aside from the regulatory incentives, the financial incentives are also strong. Over time, many hedge fund managers have grown their fortunes and reinvested their profits to grow their shares of their funds. Many now have the majority of investments in the funds and can run the funds without the hassles and added costs of outside clients.

Some market experts say family offices are similar to what hedge funds were in the early 1990s—lightly regulated investment vehicles for the wealthy that can make big bets on markets, but remain out of the public spotlight.

Many families and large investors are also investing through family foundations, which are lightly regulated.

"The combination of family offices and family foundations is a growing force in capital markets," said Stephen Martiros, a Boston-based consultant to private investors and family offices.

—By CNBC's Robert Frank. Follow him on Twitter @robtfrank.