Funding Rates: The Hidden Cost of Holding Perps

A dated future reaches a defined settlement. Many perps instead use periodic payments to encourage their price toward an underlying reference. Under a common convention, positive funding transfers a payment from longs to shorts; negative funding transfers it from shorts to longs. Exact formulas can include premium and interest components.

Funding does not mechanically lock two prices together. A market can remain above or below its reference during stress. Nor does the rate tell you with certainty that price must reverse. Treat it as a contract cost and market condition, not a stand-alone trading signal.

A percent must be converted to a fraction before multiplication. 0.01% is 0.0001. For a simple notional-times-rate example, $10,000 × 0.0001 = $1 for one event. Writing 0.01 instead would overstate the amount by one hundred times.

Check how the venue values notional at settlement and whether its displayed number is the next forecast, a fixed upcoming rate, an annualized display or a historical settled rate. Those labels are not interchangeable. Also check whether only positions open at a defined timestamp pay, or whether the product accrues payments another way.

VEST’s documentation describes hourly funding. Other products can use different intervals, caps or settlement rules. Never apply an eight-hour example to an hourly contract without changing the count. Your computer’s local clock is not necessarily the venue’s settlement clock.

For a multi-day hold, write down a base-case estimate and a less favorable case. The rate may change while you hold the trade, and exposure may change with price or size. A forecast at entry cannot tell you the entire cost of the next week. Trying to capture or avoid one payment can also incur spread, fees and execution uncertainty.

Assume a constant $20,000 long pays 0.01% every eight hours for three days. That is nine assumed payments of $2, totaling $18. Assume entry and exit executions both have $20,000 value and a 0.05% fee. Each side costs $10, so trading fees total $20.

Under those fixed assumptions, funding plus trading fees is $38. A $30 gross price gain becomes an $8 net loss. A $100 gross gain becomes $62 net. Real entry and exit notional can differ, and actual rates can vary, so the worksheet is an illustration rather than a quote for any platform.

If the $20,000 position uses $2,000 margin, the $18 funding payment is 0.9% of that margin. If it uses $500 margin, the same $18 is 3.6%. The dollar funding payment stayed the same because exposure stayed the same, but it consumes a larger share of smaller collateral.

Do not infer the liquidation line from funding alone. Payments can reduce equity while maintenance requirements and mark-price changes also affect the account. Cross-margin positions can share eligible collateral, so several costs and losses can combine. A small payment can be important when the remaining buffer is small.

A short that receives funding can still lose more when price rises. A hedge intended to collect funding adds its own execution, borrowing, collateral and counterparty risks. Two positions that look offset may not have matching payoff formulas, settlement times or liquidation rules.

Annualizing one observed rate is especially misleading. Constant 0.01% every eight hours would total about 10.95% of constant notional over 365 days by simple addition. Real rates are not fixed for a year, and that arithmetic is neither a promised yield nor a return calculated on a particular deposit.

Before opening, compare planned price reward with trading fees, a plausible funding estimate and an adverse-cost scenario. If the idea depends on paying almost nothing for a long holding period, the cost uncertainty may make it a poor fit. A larger target does not fix a weak or untested trade idea.

After closing, use actual fills and settled records. If gross profit already uses actual fill prices, avoid subtracting the same slippage a second time. Record trading fees and funding separately so you can see whether frequent entries or long holding periods are consuming results.