Set to be announced on Thursday, the new market is to called the Specialist Fund Market (SFM) and will accepting new admissions from November.
The fund is to target institutional investors and in so doing occupy a middle ground between the bourse's main trading market and the Alternative Investment Market, which is subject to less regulation.
Martin Graham, LSE director of markets, said: "Hedge funds and private equity are an increasingly important asset class that pension funds and other institutional investors want access to in order to diversify their overall portfolios and improve their returns.
"We already offer investors and issuers a choice of routes to market according to the types of investors that issuers wish to target and the risk premiums sought by investors. The introduction of the SFM enhances that choice by creating a separate, clearly labelled market for alternative assets."
News of the LSE's plans comes after it yesterday announced it remains on course to finalize its takeover of Borsa Italiana for $2.2 billion, despite Nasdaq opposing the deal when it was first announced.