George Soros is turning his legendary hedge-fund firm into a $24.5 billion "family office," a move that allows it to avoid a new level of regulatory oversight facing many hedge funds.

Mr. Soros helped pioneer the modern hedge fund and became one of the world's best known investors. His firm, Soros Fund Management LLC, told clients it will no longer manage outside investors' money. It will return less than $1 billion to investors and manage the remaining approximately $24.5 billion—including funds owned by Mr. Soros, his family and their foundations—through a family office.

A letter to his investors dated Tuesday said the switch takes advantage of "an exception" in the Dodd-Frank financial legislation. Family offices, regardless of their size, won't face the same regulations being imposed on hedge funds and private-equity firms.

Mr. Soros's firm also said it was parting ways with its chief investment officer after three years. People familiar with the matter said the firm has underperformed the market this year and last, losing 6% so far this year and rising just 2.5% last year. The chief investment officer, Keith Anderson, couldn't be reached for comment.

The family-office move is an example of how financial firms of all stripes are adjusting and in some cases changing stripes in light of the new regulatory requirements of Dodd-Frank, passed a year ago. The legislation remains the source of considerable political pushback and intense industry lobbying.