The proposal to restrict banks to a maximum investment in such vehicles of three per cent of their tier one capital was agreed last week by members of Congress.
But the rules will not take effect until around two years after the bill is passed into law, with banks in the US given another two years to comply after that, reports Bloomberg.
They will then have the opportunity to apply for 12-month extensions for the three years following that, as well as seeking another five for private equity or real estate funds.
Lawrence Kaplan, an attorney at Paul, Hastings, Janofsky & Walker LLP, said: "One of the big concerns for the banks was how to unwind these funds.
"This takes a lot of that argument away by giving them as much as 12 years to do so."
Last week, a Wall Street executive described the legislation as a "victory" as banks will not be completely banned from investing in hedge funds, reported the Financial Times.
By Gary Cooper