Carry Strategies
Funding rate strategies
Economic intuition
Perpetual funding rates compensate longs/shorts for holding positions. When funding is strongly positive (longs pay shorts), shorts earn yield. When negative, longs earn yield.
Why does funding exist
- Perpetual contracts have no expiry (unlike futures)
- To keep perpetual price anchored to spot, exchanges implement funding mechanism
- When perp > spot: longs pay shorts (positive funding)
- When perp < spot: shorts pay longs (negative funding)
- Payment happens every 8 hours on most exchanges
Funding rate signal
\[{Carry}(t) = \frac{\text{AnnualizedFunding}_t \cdot P_t}{\sigma_t \cdot \sqrt{365}}\]Where:
- \[\text{AnnualizedFunding}_t = \text{8\_hr\_rate} \times 3 \times 365\]
- \(P_t\) is current price.
- \(\sigma_t\) is realized volatility at time t
Historical Funding Analysis (ETH/USDT Binance perps during ~2022.01 - 2025.10):
| Funding Range | Frequency | Avg. Duration | Next 1d Return | Next 3d Return | Next 5d Return | Next 10d Return | Next 30d Return |
|---|---|---|---|---|---|---|---|
| < -5% | 0.5% | 1.5 | -0.61% | -0.18% | -1.52% | -0.60% | -14.63% |
| -5% to 0% | 5.0% | 1.3 | +0.64% | +1.86% | +2.84% | +3.66% | +12.98% |
| 0% to +5% | 18.4% | 2.1 | +0.08% | +0.24% | +0.50% | +0.76% | +7.29% |
| +5% to +10% | 28.0% | 2.7 | +0.06% | +0.49% | +0.95% | +2.76% | +6.31% |
| +10% to +15% | 33.1% | 5.0 | +0.34% | +0.73% | +1.27% | +1.25% | +7.96% |
| +15% to +20% | 3.9% | 1.2 | +0.07% | -0.09% | -1.36% | -1.74% | -4.25% |
| > +20% APR | 11.0% | 4.4 | -0.01% | +0.22% | +0.40% | +2.77% | -2.13% |
Some observations from the table above:
- Strong positive funding, signals about possible market overheat and future price reversal (mean reversion signal) - check out the last line of the table.
- Negative funding is very seldom, but if not extreme, leads to consecutive price outperformance for the next 30 days - possible trend continuation or retrace after a short squeeze.
Carry strategy risks
- Funding rate reversals: Funding can flip quickly (hours to days)
- Basis risk: Spot and perp may decouple temporarily
- Liquidation risk: If using leverage, extreme moves can liquidate positions
- Opportunity cost: Delta-neutral carry forgoes directional gains
Given the above risks, here are the rules we identify for our internal carry strategy handling:
- Max allocation: 30% of portfolio to delta-neutral carry
- Exit if funding drops below 8% APR (not worth the complexity)
- Stop-loss: If spot/perp basis exceeds 2%, unwind position
Staking yield signal
We use this signal to asses the attractiveness of different on-chain Liquid Staking and Restaking tokens which provide additional yield:
\[{Carry}_{\text{stake}}(t) = \frac{(\text{StakingYield}\% - \text{FundingCost}\%) \cdot P_t}{\sigma_t \cdot \sqrt{365}}\]For example, for wstETH (Lido’s Liquid staking token on ETH) at 3.5% staking yield:
- If funding cost (borrow rate) is 1.5% then the net carry is 2% which means modest long bias
- If funding is negative it stacks with staking yield and favours longs!