Funding Rate Arbitrage with Spot and Perpetual Futures
Summary
The document explains a market-neutral approach to perpetual futures funding. When funding is positive, it proposes buying spot and shorting an equal amount of the perpetual contract; when funding is negative, it proposes borrowing and selling spot while going long the contract. The intended return combines funding payments with changes in the spot-perpetual price spread as the spread narrows.
It describes funding as a mechanism meant to bring perpetual prices closer to spot, with an interest component and a premium component. The text gives an example of a low-risk cash yield and cites an approximate funding schedule and rate, but it provides no backtest, realized trade results, or detailed sizing rules. It identifies key risks: funding may disappear, spreads may widen, fees may outweigh returns, hedge timing may leave directional exposure, liquidation may occur, and the stablecoin or counterparty may fail. These risks mean the strategy is not risk-free, and its returns depend on market conditions and execution.
Key ideas
- Perpetual funding is intended to reduce divergence between contract and spot prices.
- With positive funding, the proposed hedge is long spot and short an equal amount of perpetual futures.
- With negative funding, the proposed hedge is short borrowed spot and long an equal amount of perpetual futures.
- Potential returns come from funding payments and changes in the spot-perpetual spread.
- Spread widening, fees, missed hedges, liquidation, and stablecoin risks can undermine the trade.
Tags
Cited by
- Strategies ADA Hedged Funding Carry at Binance's Interest-Rate Floor: Long ADAUSDT Spot + Short ADAUSDT USD-M Perp While the Trailing 3-Day Mean Funding Is >= 0.01%/8h, Flat When It Turns Negative (1H bars, delta-neutral, ~50% time-in-market)
- Hypotheses ADA Hedged Funding Carry at Binance's Interest-Rate Floor: Long ADAUSDT Spot + Short ADAUSDT USD-M Perp While the Trailing 3-Day Mean Funding Is >= 0.01%/8h, Flat When It Turns Negative (1H bars, delta-neutral, ~50% time-in-market)
From a private course collection; the original is not published.