The problem: a futures contract without expiry
A classic futures contract converges to the price of the underlying asset at expiry. A perpetual has no such date — so a different mechanism is needed to prevent the contract price from drifting away from spot. That mechanism is funding: a periodic payment between holders of long and short positions.
When the perp trades above spot, the funding rate is positive: longs pay shorts, holding a long position becomes expensive, and the price is pushed down towards spot. When it trades below — the reverse applies.
How much does it cost
A typical rate is hundredths of a percent per 8 hours, but in market euphoria it reaches 0.1–0.3%: on an annualised basis, that is tens or even hundreds of percent in hidden cost of holding a position. This is why "buy and hold" in perpetuals is an expensive mistake: a position may be correct in direction yet unprofitable due to funding.
How algorithms profit from funding
A fundamental market-neutral structure: buy an asset on spot and open an equal short in a perpetual. Directional risk collapses while positive funding accrues to the account. The Quant strategy automates this mechanic: it monitors funding rates across multiple venues, rotates to where funding is higher, and closes the pair when it reverses.
This is not free money: execution risks, occasional rate reversals, and cost of capital erode a portion of returns. But as a source of income that is weakly correlated with market direction, funding is one of the most reliable tools in the algorithmic arsenal.
Investor guidance note
If you trade perpetuals manually — check the current funding rate before opening a position and calculate its cost over your time horizon. If you rely on algorithms — look at the strategy card for the share of income attributable to funding strategies: this is a marker of result sustainability.
- Funding is a periodic payment between long and short positions that keeps the perpetual anchored to spot.
- In a market euphoria, holding a long can cost tens of percent per annum.
- Spot long + perpetual short = market-neutral income on positive funding.
This material is for informational purposes only and does not constitute individual investment advice. Investing involves risk.