Hydrophobically modified chitosan (hmC) is a self-assembling polymer that has attracted recent attention for many applications, including as a hemostatic agent. One limitation with chitosan and its derivatives like hmC is that these polymers are soluble in water only under acidic conditions (because the pKa of chitosan is about 6.5), which could be undesirable for biomedical applications. To circumvent this limitation, we have synthesized a derivative of a C12-tailed hmC that is soluble in water at neutral pH. This water-soluble hmC (ws-hmC) is obtained by grafting O-carboxymethyl groups onto some of the primary hydroxyls on hmC. The solubility of ws-hmC at neutral pH is shown to be the result of a net anionic character for the polymer due to ionization of the carboxymethyl groups (in comparison, hmC is cationic). We also demonstrate that ws-hmC retains the self-assembling properties of hmC. Specifically, ws-hmC is able to induce gelation at neutral pH in dispersions of anionic surfactant vesicles as well as polymethylmethacrylate latex nanoparticles. Gelation is attributed to hydrophobic interactions between the hydrophobes on ws-hmC with vesicle bilayers and nanoparticle surfaces. In each case, gelation can be reversed by the addition of α-cyclodextrin, a supramolecule with a hydrophobic cavity that sequesters the hydrophobes on the polymer.