Perpetual futures are missing one thing
A traditional futures contract has an expiry date. On that day its price has to converge to spot, or somebody collects free money — and that constraint is what stops futures from drifting away from spot for long.
Perpetual futures removed the expiry. Convenient, but the constraint left with it. Nothing mechanical prevents the contract from trading above spot indefinitely, with longs winning and shorts bleeding forever.
The funding rate is what exchanges put in its place.
It is a transfer between traders, not a fee
Funding settles every eight hours, at 00:00, 08:00 and 16:00 UTC:
- When the rate is positive, longs pay shorts
- When the rate is negative, shorts pay longs
The part people miss: the money never reaches the exchange. It moves from one side of the contract to the other. How much moves depends on how far the contract has drifted from spot — the richer the contract, the more longs pay, the more expensive it gets to stay long, and the harder the price is pulled back toward spot.
Most venues compute the rate from two pieces: an interest-rate component, and a premium index measuring the gap between the contract and the underlying spot price. The result is clamped to a cap, so a single violent hour cannot produce an unbounded payment. The exact formula and cap differ by exchange, which is why the same nominal position earns different amounts in different places.
In a bull market almost everyone wants leverage on the long side, so the contract usually trades above spot and positive funding is the normal state rather than the exception. In 2021 that condition held for months at a stretch, which is why the annualised figures from that year look the way they do.
Where the arbitrageur sits
Holding a short perpetual on its own does collect funding while the rate is positive. It also loses far more than it collects the moment price rallies, so on its own it is a directional bet with extra steps.
The position only makes sense once you buy the same notional in spot at the same time:
| Price move | Spot long | Perp short | Net |
|---|---|---|---|
| Up 10% | +10% | −10% | 0 |
| Down 10% | −10% | +10% | 0 |
The two legs cancel each other out. That is what delta-neutral means in practice: the direction of the market stops mattering, and the only cash flow left in the position is the funding collected every eight hours.
That is the entire idea. It does not forecast the market and does not need to — it collects a payment that the contract rules oblige somebody to make.
What is left once price risk is gone
Hedging removes price risk. It leaves these:
Funding turns negative. In a bear market the contract trades below spot and the shorts start paying. The correct response is to step out of the position, not to hold it and hope. A strategy that only knows how to be in the trade is not a strategy.
Both legs have to fill together. A single filled leg is a naked position — precisely the directional exposure the structure exists to avoid. This has to be atomic at the system level: if the second leg fails, the first is unwound immediately, not queued for a human to notice.
Margin has to survive the drawdown. A sharp rally puts the short leg underwater. Thin margin gets liquidated, and while the spot leg is up by the same amount, the liquidation happens inside the futures account — spot cannot reach across to save it.
The first two are engineering problems. The third is position sizing. Once these three are clear, it is obvious why building this is considerably harder than describing it, and why most of the work sits in execution rather than in the idea.
Reading the historical record
Funding is not a constant, and any account of this strategy that quotes a single annual number is hiding something. Rates track sentiment: frequent and rich through bull markets, thin or negative when the market goes flat.
The year-by-year record for this platform, including the worst year rather than a selection of the good ones, is published in full on the performance page — the table there is currently in Chinese, but the figures are the same ones the strategy is settled against, verifiable settlement by settlement.