Funding capture as cash-and-carry: legs, margin, and where the spread leaks

A cash-and-carry trade buys an asset in the spot market and sells it forward at a higher price, locking in the difference. In traditional futures the forward price is set by the cost of carrying the asset to expiry, and the trade converges to that difference on the settlement date. Perpetual futures have no settlement date, so the forward premium is paid out continuously instead, as funding. Funding capture is the cash-and-carry trade with the convergence replaced by a stream of payments.

The structure has two legs. The spot leg holds the asset, on an exchange or in custody. The perpetual leg is a short position of the same notional on a derivatives venue. Price moves cancel between the two: what the spot leg gains, the short loses, and the reverse. What remains is the funding that the short receives while the perpetual trades above its index. That is the whole trade. Everything else is about keeping the two legs alive and paying for them.

What the funding payment actually is

Every venue computes funding from the gap between the perpetual’s mark price and a spot index. Binance, for example, combines a fixed interest component with a premium index measured over the funding interval and settles the result between position holders every eight hours by default, with the rate capped by a function of the contract’s margin ratios. Hyperliquid computes a similar premium but pays it hourly and caps it per hour. Deribit measures the premium continuously, applies a small dead band around zero in which no funding is paid, and accrues the payment every millisecond. The exchange takes no side of the payment on any of these venues. It moves directly from the crowded side of the contract to the other.

That last point is what makes funding a positioning signal rather than an interest rate. The Bank for International Settlements’ study of crypto carry found that the futures premium in bitcoin and ether can become very large and varies strongly over time, and attributes it to swings in the demand for leveraged long exposure against a limited pool of capital willing to take the other side. When the crowd is long, the short is paid to absorb the imbalance. When the crowd flips, the payment reverses.

The margin problem

The two legs live in two places, and only one of them is visible to the derivatives venue. If the asset rallies sharply, the short perpetual loses money on the venue and its margin shrinks. The spot leg has gained an equal amount, but that gain sits in a custody account or on another exchange, where the derivatives venue’s liquidation engine cannot see it. A position that is economically flat can be liquidated on one leg because its collateral is on the other.

Managing this is a transfer problem more than a market problem. The desk holds a margin buffer on the venue well above the maintenance requirement, moves collateral toward the short leg as the asset rallies, and keeps some of the spot leg in a form the venue accepts as collateral where its rules allow it. Kraken’s primer on funding rate arbitrage lists exactly this exposure, alongside a funding flip and execution costs, as the three ways the trade goes wrong.

Where the spread leaks

The rate on a screen is a gross number. The position pays taker or maker fees on both legs at entry and exit, pays the bid-ask spread twice, and pays for the time and fees involved in moving collateral between venues. A perpetual that trades rich enough to attract carry capital is also one whose funding will compress as that capital arrives, so the rate at entry is rarely the rate over the holding period. And funding is settled at intervals: a position opened just after a settlement on one venue and closed just before the next receives nothing for the time in between.

• Entry and exit fees on both legs, and the spread crossed on each
• Collateral transfer costs and the time capital spends in transit
• Funding compression as other capital enters the same trade
• Settlement timing, which can leave a short holding period unpaid
• The basis between spot and the perpetual’s index, which may not be the price the desk paid

When the sign flips

After a sharp drawdown, leveraged demand often turns short, the perpetual trades below its index, and the short leg begins paying. A carry desk has three choices at that point: hold and pay, close both legs, or reverse into a short spot and long perpetual structure, which requires borrowing the asset and carries its own cost. The right answer depends on how long the inversion is expected to last and what the exit costs, and it has to be decided in advance, because the moments when funding inverts are the moments when both legs are hardest to trade.

Funding capture is often described as passive income. It is a carry trade with two legs, two venues and a margin desk in between, and its return is what survives after the costs of keeping all three in line. The mechanism is simple. The operation is not.