Hedging Spot and Perpetual Futures to Capture Funding Rates
Summary
This article outlines a market-neutral funding-rate strategy: hold spot while shorting a perpetual futures contract, aiming to collect funding when the rate is positive. It explains how funding payments are intended to keep perpetual prices near spot and reviews historical rate examples from a bull-market period. The document estimates that returns can vary substantially with market conditions, noting lower expected rates outside the cited bull market; these figures are historical context, not a forward return guarantee. The proposed process selects contracts by funding-rate thresholds, opens paired spot and futures positions, and closes positions when rates become unattractive or exposure grows too large. Risks include sharp negative funding, changes in the futures premium, margin closeout under leverage, fees, and weaker rates during prolonged bear markets. Diversification and conservative leverage are suggested as mitigations, but the article provides no systematic backtest or realized performance record. Actual returns depend on funding, execution costs, hedge quality, and exchange-specific margin rules.
Key ideas
- A spot long paired with a perpetual futures short can collect positive funding while hedging much of the underlying price exposure.
- Funding is variable and can turn negative, creating losses for the short futures leg.
- The proposed rules screen markets by funding thresholds and close positions when rates or exposure become unfavorable.
- Premium shifts, transaction costs, leverage, and margin closeout can materially affect results.
- Historical bull-market rates do not establish future returns, and the document provides no systematic backtest.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.