Cross-Venue Perpetual Funding Arbitrage
The problem & idea
Perpetual futures are interesting instruments. A traditional dated future expires on a predetermined date, and so converges to the spot price on that same date. Perpetual futures don’t expire. To remain tethered to the spot price, incentives are paid to those who balance the price: when the perpetual trades above spot, funding is positive and longs pay shorts; when it trades below, shorts pay longs. There is also a small adjustment for interest, to balance the holding cost against spot, but we won’t get into that here.
Funding rates are set per exchange, so when the gap between two exchanges is wide enough, you can hedge the price move and collect the funding gap. That is what this strategy does, and it yields a market-neutral book that can generate consistent returns. The main risk is a strong move in the perpetual liquidating one leg and leaving the position unhedged, so disciplined margin control is required.