From Prop Trading to a Fund: When to Switch, and How to Turn an LLC into a Private US Fund
When a prop trader should launch a fund, how a Delaware LLC private fund works (Reg D, 3(c)(1), the manager LLC), and when BVI or Cayman fits better. 2026 update.
Prop trading is the best seat in the house until you want more capital than you have. At that point the question is not "should I raise money?" It is "which structure lets me take other people's money without putting my own house at risk, or my investors at risk?"
This guide covers when to switch, how a private US fund built on a Delaware LLC works, and when an offshore fund is the better answer.
Already decided to launch a fund and want the offshore route? Read How to Set Up and Run Your Own Crypto Hedge Fund in 2026 for Cayman and BVI. This page focuses on the decision to switch and on the US private fund route.
Should I switch?
Five signals that it is time to move from prop to fund. See section 2.
US private fund
Delaware LLC, manager LLC, Reg D and the documents you need. See section 4.
BVI or Cayman
The offshore route for international investors.
1. Prop trading vs fund: what really changes
| Prop trading | Fund | |
|---|---|---|
| Whose capital | Yours only | Yours plus investors' |
| Upside | You keep every dollar of profit | You earn fees plus returns on your own stake |
| Downside | Losses come from your own pocket | Losses are shared, but you answer to investors |
| People | You, maybe a few collaborators | Fund administrator, custodian, auditor, directors, compliance, legal counsel, depending on structure |
| Entities | Often none. Funds may sit on an exchange or in a bank account | A fund vehicle that owns the assets, a manager entity, and sometimes a feeder entity |
| Time | Mostly trading | Trading, reporting, investor relations, compliance |
Setting up a fund trades some freedom for scale, protection and credibility. It is also a different job: you become a fiduciary for other people's money.
2. Five signs it is time
- Risk. You are tired of every trade being a bet on your own savings.
- Size. You want to run larger positions than your own capital allows.
- Demand. Friends, family or contacts are asking you to manage money for them.
- Longer horizons. You want to back longer-term projects. A closed-ended structure gives you and your investors certainty that capital cannot be pulled out mid-investment.
- International investors. Money sent directly from other countries can create tax and regulatory trouble for you and for them. A fund in a fund-friendly jurisdiction contains the problem.
Two honest conditions apply, whichever sign applies to you: you need a verifiable track record (even an exchange account in your own name counts), and you must be ready to treat managing other people's money as a job, not a hobby.
3. What it costs you
A fund adds fees and admin. That is the price of scale. Costs sit in three buckets: formation and legal documents, ongoing service providers (administrator, custodian, auditor), and your own time.
Current live Otonomos fixed-fee legal packages, per our crypto hedge fund guide (checked August 2026, prices move, confirm on the order page):
| Structure | Legal documentation cap | Notes |
|---|---|---|
| BVI Incubator or Approved Fund | US$20,000 total, with a US$10,000 initial retainer | Incubator: up to 20 investors and US$20 million AUM. Approved: up to US$100 million with the same investor cap |
| BVI Private Investment Fund | US$26,000 total, with a US$13,000 initial retainer | |
| Cayman fund | Initial retainer of US$17,000 | Mandatory CIMA registration |
The Delaware LLC route below is usually lighter on formation cost, because it relies on a private placement with template-style documents. Ask us for a current quote for your specific case.
4. How a private US fund works
A private US fund built on an LLC needs two entities, not one.
The fund LLC is the investment vehicle. It is best formed in Delaware because Delaware's courts have already decided most corporate law questions, so investors are comfortable with the predictability. Its operating agreement is the "legal software" for everything: purpose, capital accounts, fees, withdrawals and governance.
The manager LLC is the investment adviser entity. It is formed first, usually in the state where the people making investment decisions live, and then becomes the first and typically only member of the fund LLC. It collects the management and performance fees and pays the overheads.
Do not invest or manage in your personal name. Managing a pool of other people's money carries risk, and a limited liability entity belongs between you and it. If you later need an adviser registration, it is far better held by the manager entity than by you personally.
- Operating agreement. Sets purpose and investment strategy, how profits and losses are allocated, how capital accounts and net asset value work, and the manager's powers and duties.
- Subscription agreement. What each investor signs to buy a membership interest. It includes their representations and warranties, which protect you as manager.
- Private placement memorandum. Describes the offering and risks, and supports the sale of interests under securities law.
Deviating from standard wording usually increases legal cost and can raise flags with investors who expect familiar terms. Start from a template and change only the variables that matter.
A private fund sells interests without registering them with the SEC by using a private placement exemption. A few rules to know.
Regulation D, Rule 506(b). No general solicitation. You approach pre-existing contacts. Investors can self-certify as accredited by confirming they qualify, and you can rely on a reasonable belief.
Regulation D, Rule 506(c). You may advertise publicly, but you must take reasonable steps to verify that every buyer is accredited. In March 2025 SEC staff said an issuer can reasonably conclude it has verified status if the investor commits a minimum of US$200,000 (natural persons) or US$1 million (entities), backed by written representations that the money is not financed by a third party. In July 2026 the SEC's Corporation Finance staff also confirmed that investors in certain tokenised 506(c) offerings can satisfy verification through digital attestations. Staff letters are not law and can change.
Investment Company Act exclusions. Most small funds rely on Section 3(c)(1): no more than 100 beneficial owners and no public offering. Larger or institutional funds use Section 3(c)(7): all owners are qualified purchasers, generally individuals with at least US$5 million of investments.
Adviser registration. Whether the manager must register depends on assets and location. A private fund adviser with under US$150 million of US assets may qualify as an exempt reporting adviser, which still files reports with the SEC. State rules can add requirements, and if the fund trades futures or other derivatives, other regimes may apply. Take specialist US advice before you launch, because advising on investments is a regulated activity.
5. The five terms that decide whether your fund survives
The figures below are example terms and common market practice, not a fixed Otonomos standard. Every fund agrees its own numbers with its investors and counsel.
1. Fees
A common baseline is a 2 percent management fee on net assets plus a performance fee. In crypto, the standard 2-and-20 keeps compressing, and a short or unaudited track record means expect to negotiate. If you pay yourself through the manager LLC, fees pass through to its ultimate owners and are taxed accordingly. US-based owners report them on their personal return.
2. High-water mark or hurdle rate
A high-water mark means you earn a performance fee only after beating the previous peak net asset value, which can leave a manager without fees for a long stretch after a drawdown in a volatile market. A hurdle rate sets a benchmark (for instance holding bitcoin or a basket of majors) that you must beat first. Many managers prefer the hurdle as the fairer middle ground.
3. Lock-up and notice period
A longer lock-up gives you a stable capital base. Investors want it short. As an example, a template might use a 90-day lock-up on new capital, 30 days' notice to withdraw and monthly withdrawal windows. Some managers negotiate six months or a year, and crypto funds tend to favour monthly over quarterly redemptions.
4. Gates
A gate lets the manager cap withdrawals in special circumstances, such as frozen markets or unvaluable assets. Managers like them. Investors see them as a necessary evil at best, and they cause protest when liquidity matters most.
5. Capital contributions and crypto
Investors can contribute by wire or in crypto. If the fund is denominated in US dollars, limit crypto subscriptions to stablecoins, or use a payment solution that converts at a fixed rate so that your investors do not calculate the exchange rate themselves. Pasting a wallet address into the subscription agreement invites discrepancies.
Skin in the game. Investors expect you to invest alongside them, and they will ask. You can also run a fund with only your own capital, in which case you are the single member and all profits and losses are allocated to your own capital account.
Organisational costs. The sponsor normally bears formation costs, and the fund can reimburse them over time (commonly amortised over about 12 months), as long as the amounts are reasonable and disclosed.
6. Which route fits you?
| If this is you | Consider |
|---|---|
| US-based manager, mostly US investors, seed capital in the low millions or less | Delaware LLC private fund with a manager LLC |
| International investors, or you want to start light and scale | BVI Incubator or Approved Fund |
| Institutional investors who expect a Cayman vehicle | Cayman fund with CIMA registration |
| US-facing raise plus offshore master fund | Delaware feeder alongside a BVI or Cayman fund |
| Long-term venture-style investing | Closed-ended structure, offshore or onshore |
Fund units can also be tokenised, but most managers who think it through decide against it, because secondary-market pricing can drift from NAV and create a perception problem on top of a portfolio. Our views are in the crypto hedge fund guide, and our BUIDL tokenisation guide covers the other side.
7. How Otonomos helps
Otonomos forms the entities, acts as registered agent and files and maintains them in the Dashboard. You choose the strategy, bring your counsel for adviser questions, complete KYC and pay. We do the rest.
Delaware LLC
The fund vehicle or the manager entity, with Otonomos as your Delaware registered agent. Also listed as suitable for an investment fund or feeder.
BVI Limited Company
Includes Incubator and Approved Fund legal work packages, KYC/AML kit and exchange account opening.
Cayman Islands ELC
Includes an administered fund package with CIMA registration.
❓ Frequently asked questions
How much capital do I need to launch a fund?
There is no single number. It depends on jurisdiction, fund type and service providers. For offshore funds, see the BVI fund limits above and the BVI Funds Updated 2026 guide. For a US private fund, the main cost is legal documents and the manager entity. Book a call for a current quote.
Do I need a licence to manage other people's money?
Often, yes, or an exemption. In the US, a small private fund adviser may qualify for an exemption but must still file reports and may face state rules. In the offshore context, the BVI Incubator Fund does not require a licensed investment manager, while other jurisdictions do. Get specialist advice for your facts.
Can I accept crypto from investors?
Yes, commonly in stablecoins for dollar-denominated funds, or through a service that converts at a fixed rate. Your administrator and custodian will need to support it.
Can I run a fund with only my own money?
Yes. A fund vehicle with a single member works, and it can be the first step in building a track record before you raise from others.
Why use a manager LLC instead of my own name?
It places a limited liability shield between you and the risks of managing a pool, it receives the fee income, and it is the right entity to hold any adviser registration later.
Where do the bank and exchange accounts come from?
Bank and exchange account opening is available through Otonomos alongside the entity packages. See Bank Account Opening in 2026 for how it works.
Keep going
How to Set Up and Run Your Own Crypto Hedge Fund in 2026
The offshore route for Cayman and BVI.
BVI Funds Updated 2026
Fund types, limits and rules in the British Virgin Islands.
How to Tokenize a Fund
What tokenising fund units involves, and the trade-offs.
This guide is general information, not legal, tax or investment advice. You will need to retain qualified counsel in the relevant jurisdiction to sign off your fund documents.
Updated about 3 hours ago