How to Launch a Crypto Arbitrage Fund: CEX and DEX Venues, Custody, Collateral and NAV Architecture

A crypto arbitrage fund is usually a Cayman vehicle registered with CIMA under section 4(3) of the Mutual Funds Act, standalone or as a segregated portfolio, whose NAV must follow CIMA's Rule on the Calculation of Asset Values. What makes it hard to launch is not the trade but the fact that its assets sit at many venues at once. Before the first subscription, the manager and board need written answers to four questions. Where does each balance sit, who can move it, how is it priced when venues disagree, and how is it reconciled to a source the manager does not control? Those answers drive venue onboarding, permissions, custody, stablecoin policy, the NAV cut-off and dealing terms, and they are what an allocator's operational due diligence team tests first.

Arbitrage traders who have run their own capital for years usually have excellent execution and very informal control. One person holds the exchange logins, moves collateral when a venue runs short and knows which balance is in transit. That works until there are outside investors, an administrator and an auditor who each need to see the same picture without asking the trader. We spend most of the launch work turning that knowledge into permissions, limits and records, because that is what an allocator is really underwriting.

David Lloyd, Chief Executive Officer at CV5 Capital

Executive Summary

An arbitrage strategy earns small spreads by holding offsetting positions at several venues. The fund's job is to make those distributed balances controllable, verifiable and valuable at a single point in time.

• Approve venues through a documented process, and open every account and sub-account in the fund's name, not the trader's.
• Give the trading team trade-only API keys, and keep withdrawal rights, whitelists and permission changes with the fund under dual approval.
• Choose a custody model per venue: exchange-held, off-exchange settlement, or self-custody for on-chain legs. Each produces different counterparty exposure and NAV evidence.
• Write a pricing rule for assets that trade at different prices on different venues, anchored to the CIMA Rule's principal or most advantageous market concept.
• Treat stablecoins, transfers in flight, gas and smart contract exposure as named risks with limits, not as cash.

From Trading Book to Fund: What Actually Changes

The mechanics of cross-venue, funding-rate and basis trades are covered in our explainer on arbitrage strategies in digital asset funds, and the margin side of carry trades in our analysis of crypto basis trades, funding rates and margin architecture.

Three things change when proprietary capital becomes a fund. Ownership moves from the trader to a legal entity with its own board. Valuation moves from the trader's dashboard to an administrator who must be able to calculate NAV independently. Control moves from personal judgement to written authority that survives the trader's absence. A broader overview of the structural options for market-neutral managers is in our guide to launching a market-neutral digital asset fund in Cayman.

For an arbitrage book, each of those shifts is multiplied by the number of venues. A fund trading five centralised exchanges and two on-chain venues has seven sets of accounts, seven permission systems and seven sources of balance data. The architecture has to work for every one of them.

Venue Selection and Onboarding

A trader chooses venues for liquidity, fees and spreads. A fund must also be able to justify each venue to its board, administrator and investors. The approved venue list should be a board-level document, with a written onboarding file for each venue before any capital is sent.

A venue file typically records the operating entity, its home jurisdiction and any licence it holds. It also covers its terms on asset segregation and insolvency, its sub-account and API permission model, its whitelist and time-lock options, and how the administrator will obtain balance data. It should also state the maximum share of NAV the fund will hold there and the conditions for exiting the venue.

Onboarding takes time because each venue runs its own institutional due diligence on the fund. Accounts should be opened in the name of the fund, or of the segregated portfolio where the venue can recognise it. Our analysis of why exchange account governance defines institutional digital asset funds explains why the administrator email and master credentials belong with the fund rather than the trader.

Permissions: Trade-Only Keys and Controlled Withdrawals

The single most important control in an arbitrage fund is separating the ability to trade from the ability to move assets off a venue. The strategy needs fast, automated execution. It does not need the trading system to be able to withdraw.

Arbitrage creates a genuine tension here. Rebalancing collateral between venues is part of the strategy, and a slow approval process costs money. The answer is pre-approval rather than speed of manual sign-off. The whitelist should contain only the fund's own accounts and wallets, so that funds can move quickly between them but never to an outside address. Rebalancing within that closed set can then run at trading speed, while any change to the set itself requires two approvers.

Weak controls at one venue undermine strong controls at all the others. Our article on the hidden control problem in multi-exchange crypto trading sets out why allocators assess authority as the union of every venue's settings.

Custody Model: Exchange-Held, Off-Exchange Settlement or Self-Custody

An arbitrage fund rarely uses one custody model. Its balances usually fall into three groups, and each needs its own treatment in the offering document, the valuation policy and the counterparty limits.

• Exchange-held balances. Margin and spot inventory held at a centralised venue. The fund's asset is a claim on the venue operator. Exposure is limited by size, by venue selection and by sweeping excess balances back to custody.
• Off-exchange settlement. Collateral held with a custodian or settlement network and mirrored to the venue as trading capacity. This converts part of the venue exposure into custodian and legal enforceability exposure. Our analysis of how off-venue collateral is priced at NAV covers the double-counting risk.
• Self-custody wallets. Required for DEX legs, where the fund interacts with smart contracts from its own addresses. The risk shifts to key management, signing authority and the contracts themselves.

The full location-by-location map of collateral, including verification routes and treatment of venue failure, is set out in our guide to holding collateral across five to eight trading venues.

The offering document should describe the custody arrangements accurately. CIMA's Rule on the Contents of Offering Documents for regulated mutual funds requires the name of the fund's custodian and any sub-custodian, its main business and its regulator, if any. Where a large share of assets sits at venues rather than with a custodian, the risk disclosure should say so plainly.

The Cash Leg, DEX Execution and Transfer Timing

Stablecoins are an exposure, not cash

Most arbitrage books hold a significant part of their capital in stablecoins, because that is how venues quote and settle. Each stablecoin is a claim on its issuer and its reserve arrangements, and it can trade below par. The fund should name the stablecoins it accepts, set a concentration limit for each, and write a depeg procedure. That procedure states the price source used when a stablecoin trades away from par, who decides whether to convert, and how a depeg affects the NAV and any pending redemptions. Valuing a stablecoin at par by assumption is a common audit finding.

DEX legs bring different costs and risks

On-chain execution adds network fees, failed transaction costs and adverse ordering by other participants, often described as MEV. These costs are real and should be recorded as trading costs, not absorbed silently into the spread. Each on-chain leg also carries smart contract risk. The approved protocol list, maximum exposure per contract and the response to an exploit belong in the risk policy, approved by the board.

Transfers between venues

Cross-venue arbitrage moves assets constantly. A transfer that has left one venue but not reached another is still the fund's asset, but it is held in neither account statement. The valuation policy should state where in-transit balances are recognised and how the administrator confirms them on-chain. Many funds also set a short blackout around the NAV cut-off so that large transfers do not straddle the valuation point.

NAV Cut-Off, Pricing Source and Reconciliation

The CIMA Rule on the Calculation of Asset Values requires each regulated mutual fund to maintain a written NAV Calculation Policy that is disclosed in the offering document and identifies the price source for each instrument type. It requires NAV to be calculated at least quarterly and gives priority to unadjusted market prices. The Rule defines market price by reference to the principal or most advantageous market that is accessible by the fund.

That definition matters to an arbitrage fund, because the strategy exists precisely because the same asset trades at different prices on different venues. The policy needs a rule for which price applies. Common approaches include marking each balance at the venue where it is held, or using a consolidated reference price across approved venues with a documented fallback. Either can be defensible. What is not defensible is choosing at each NAV date. The policy should also define the cut-off time, a staleness rule and a divergence threshold that triggers review.

The Rule requires NAV to be calculated by a service provider independent of the investment manager. Where the manager supplies prices, it must provide the supporting information, and the calculating service provider must take reasonable and proportionate steps to verify them. For a multi-venue book, that means the administrator needs its own data routes to every venue and wallet. The fund's operators must approve and review the policy at least annually.

Daily NAV is achievable for many arbitrage books, but it depends on that data infrastructure. Dealing frequency should follow what the administrator can verify, not what the trader can see.

Counterparty Limits, Venue Failure and Dealing Terms

Concentration limits per venue should be set as a share of NAV, monitored daily and approved by the board. Some limits belong in the offering document, where investors rely on them. Others belong in the risk policy, where the board can adjust them as venues change. Both should state what happens on a breach.

The fund also needs a rehearsed response to a venue halting withdrawals. That plan covers how the exposure is measured from independent data, how trading on the venue is stopped, how the board values the affected balance, and when investors are told. Where the affected balance is material, the board may need to consider a side pocket or a suspension, using powers that must already exist in the documents.

Dealing terms should match the realisable liquidity of the book under stress, not on an ordinary day. An arbitrage book can look highly liquid until a venue fails or a stablecoin depegs. Notice periods, gates and suspension powers should be drafted with those scenarios in mind. The Rule on the Contents of Offering Documents requires the circumstances in which redemptions may be suspended to be disclosed, together with the fund's material risks and the techniques, instruments and borrowing powers it may use.

The Cayman Regulatory Position

Three Cayman regimes need to be analysed on the actual operating model before the documents are finalised.

Figures current as at 11 October 2026.

On the VASP Act, the definition of virtual asset service is drafted around services provided to others. A fund buying and selling for itself is in a different position from a person exchanging or holding assets for clients. The analysis changes if the fund or manager starts providing transfer, custody or exchange services to third parties, or operating a platform where others trade.

On SIBA, spot holdings of a virtual asset that is not tied to a security fall outside paragraph 14. A book of perpetual swaps and dated futures, however, should be tested against paragraphs 6, 7 and 13, and the 2020 amendment inserted references to virtual asset trading platforms into paragraphs 7 and 11. Most arbitrage books contain derivatives, so the investment manager's SIBA position should be analysed on that basis rather than assumed away.

CIMA's Rule on Cybersecurity for Regulated Entities excludes regulated mutual funds from its scope, but key management and access control remain central to every allocator review.

What an Allocator's ODD Team Will Test

Operational due diligence on an arbitrage fund concentrates on evidence. Reviewers will usually ask for the approved venue list with onboarding files, the API key inventory with permission scopes, and the whitelist register with its change log. They will want the sub-account map, the custody model per venue, and the per-venue and per-stablecoin limits with breach history.

They will also test the NAV process. That means the written pricing rule for divergent venue prices, the treatment of funding accruals and in-transit balances, and the administrator's independent data routes. Expect a request to walk through a past month's reconciliation and a rehearsal of the venue failure plan. Answers that rely on the trader's description rather than records are treated as gaps.

Common Mistakes

• Opening venue accounts in the trader's or management company's name and planning to transfer them to the fund later.
• Issuing API keys with withdrawal rights because it was convenient during proprietary trading.
• Treating stablecoins as cash in the NAV and the liquidity analysis.
• Choosing between venue prices at each NAV date instead of applying a written rule.
• Leaving in-transit balances, funding accruals and gas costs to be resolved by the reconciliation team.
• Offering daily dealing before the administrator has independent data access to every venue and wallet.

The CV5 Implementation Perspective

CV5 Capital is the Cayman-headquartered institutional fund infrastructure platform for hedge fund and digital asset managers who need to launch quickly, operate properly and satisfy serious investors from day one. It operates CV5 SPC for traditional strategies and CV5 Digital SPC for digital asset strategies, both registered with CIMA under the Mutual Funds Act. Each manager receives a segregated portfolio with an independent board and coordinated fund administration, audit, banking, custody and compliance arrangements. CV5 Capital is not the investment manager of the strategies on its platforms.

For an arbitrage manager, the Cayman digital asset fund platform means the governance, account control and valuation framework already exists. The launch work therefore concentrates on the venue list, the permission model, the custody split, the stablecoin policy and the pricing rule. The manager retains the strategy and trading decisions.

Key Takeaways

• Approve each venue through a written onboarding file and open accounts in the fund's name.
• Restrict trading systems to trade-only keys, and confine whitelists to the fund's own accounts with dual approval for changes.
• Decide the custody model per venue and reflect it accurately in the offering document and counterparty limits.
• Write the NAV rules for divergent venue prices, stablecoins, funding accruals and transfers in flight before launch.
• Set dealing terms against venue failure and depeg scenarios, with suspension powers already in the documents.
• Analyse the VASP Act and SIBA positions on the actual operating model, and repeat the analysis when it changes.

Frequently Asked Questions

What structure does a crypto arbitrage fund use?

A crypto arbitrage fund is commonly a Cayman vehicle registered with CIMA under section 4(3) of the Mutual Funds Act, either standalone or as a segregated portfolio on a fund platform. Around that vehicle the fund needs accounts at each approved venue in its own name, a custody model for each venue, and a valuation policy that covers balances held across many locations.

Should the trading team hold withdrawal rights on exchange accounts?

Institutional practice is that the trading team holds trade and read permissions only. Withdrawal rights, whitelist changes and API key issuance sit with the fund under dual approval. Rebalancing between the fund's own venues can still run quickly if the whitelist is limited to the fund's own accounts and wallets.

How is an asset priced when it trades at different prices on different venues?

The fund's NAV Calculation Policy must identify the price source for each instrument type. CIMA's Rule defines market price by reference to the principal or most advantageous market accessible to the fund. Funds commonly mark each balance at its venue or use a consolidated reference price, but the choice must be written down and applied consistently.

Is a Cayman fund that trades crypto for its own account a VASP?

The Virtual Asset (Service Providers) Act defines virtual asset services as exchange, transfer, custody and related services provided for or on behalf of a natural or legal person or legal arrangement. Trading for the fund's own account is analysed against that wording. The position changes if the fund or its manager provides those services to others.

How are stablecoins treated in an arbitrage fund's NAV?

Stablecoins should be valued at a market price under the NAV Calculation Policy rather than assumed to be worth par. The fund should name the stablecoins it accepts, set concentration limits for each, and maintain a depeg procedure covering the price source, conversion decisions and the effect on pending redemptions.

Can a crypto arbitrage fund offer daily dealing?

Daily dealing is possible where the administrator has independent data access to every venue and wallet and can complete reconciliation within the dealing cycle. Dealing terms should also reflect stress scenarios such as a venue halting withdrawals or a stablecoin depeg, with gates and suspension powers disclosed in the offering document.