Strategy 06 · Perpetuals
How Funding Works
The mechanism that replaces expiry.
A dated future converges to spot because it must settle on a known day. A perpetual never settles, so it needs another mechanism to stop it drifting away from the asset it tracks. That mechanism is funding: a periodic payment between the contract’s longs and shorts, sized to the gap between the contract’s price and spot, that makes it costly to be on the crowded side.
Index and mark
Each venue computes an index price, a weighted average of spot prices from several exchanges, as its reference for what the asset is worth. It also computes a mark price for the perpetual, usually the index adjusted by a smoothed measure of the contract’s premium or discount, which is used for margining and liquidation so that a brief spike in the last traded price cannot liquidate positions on its own.
The funding rate
At each funding interval, every eight hours on many venues, hourly on some, the venue computes a rate from the average premium of the perpetual over the index during the interval, often plus a fixed interest component. If the rate is positive, longs pay shorts that fraction of their position’s notional; if negative, shorts pay longs. The payment passes directly between position holders. The venue takes no side and earns nothing from it.
Why it works, and when it does not
When the perpetual trades rich, longs pay to hold it, which attracts shorts and discourages longs until the premium closes. In normal conditions this keeps the contract within a narrow band of spot. In stress it can fail: a squeeze can push the premium far from spot faster than funding can correct it, and venues cap the rate per interval, so the correction is bounded. Funding is a tether, not a guarantee.
Practice
How Wesvel approaches it
- 01Every venue’s index composition, mark methodology, funding interval and rate cap are recorded as part of venue diligence and rechecked when the venue changes them.
- 02Funding is tracked continuously per asset per venue as a rate series, and strategy decisions are made from that series, not from the current print.
- 03Positions are margined and stress-tested against mark price behavior in past squeezes on that venue, not against index.
More in Perpetuals
- Funding CaptureThe core carry position: spot in custody against a short perpetual at the venue, collecting funding with near-zero price exposure.
- Cross-Venue Funding DifferentialsHolding a long perpetual where funding is low against a short where it is high, capturing the difference with no spot leg.
- Perpetual vs. Dated BasisTrading the perpetual’s realized funding against the interest rate implied by a dated future’s premium.
- Exposure with Managed RiskHow the desk uses perpetuals to add exposure to a view it wants more of, and the sizing, margin and cost discipline that keeps leverage a tool rather than the trade.
- Liquidation ManagementManaging the gap between a position and its liquidation price, margin, sizing, and what happens in the tail.
- Venue DiligenceHow derivatives venues are reviewed before the book trades on them, and what puts one off the list.