Market-Neutral Funding Harvesting - Research Article #63
Making 5% return in 18 days using this market-neutral trading strategy.
Hey there, Pedma here! Welcome to this ✨ free edition ✨ of the Trading Research Hub’s Newsletter. Each week, I'll share with you a blend of market research, personal trading experiences, and practical strategies, all aimed at making the world of systematic trading more relatable and accessible.
If you’re not a subscriber, here’s what you missed this past month so far:
If you’re not yet a part of our community, subscribe to stay updated with these more of these posts, and to access all our content.
I made 5% return on capital, in the past 18 days, using the strategy I will be outlining below. If we annualize it, that is a total of 169%.
It made me money every day, completely delta-neutral, and once I had put it on, all I had to do was check margin requirements once every day.
What do I mean by delta-neutral?
A fancy word for “hedged”. This is one position I have on right now.
I am short FARTCOIN at extended and collecting funding.
I am long FARTCOIN spot and hedging the short
So my exposure to FARTCOIN is effectively 0.
Sharing this publicly will probably dilute my returns on it, but the reality is that this is very capacity constrained, and I won’t be able to scale it any further in a single venue.
I run this type of strategy across many venues, but I will use extended as an example of looking for edges in newer ones, as a source of additional premium.
It is not an “easy” type of strategy, but it is one that a small trader can do, start collecting some money on it, and experimenting with sensible things in the market.
The strategy is Market-Neutral Funding Harvesting.
We will be diving into the concepts in this article, explain line by line what it is, and how we can harvest these returns.
This will be a highly practical article, as I will be using real examples, from my own portfolio.
I do these REAL strategy breakdowns, so you don’t have to. I make many mistakes when I am experimenting with different ideas, and by documenting them, I consolidate these lessons, so that next time, I am more efficient at extracting returns from them.
If you want to continue receiving these kind of articles, with real strategies, consider subscribing as it helps me know what you like to read:
Funding Rates in Crypto
Let’s begin at the very start and provide a brief explanation of what are funding rates in crypto, their purpose, and how we can profit from them.
In traditional futures contracts, price tends to naturally align with the spot price when the contracts expire. If prices diverges too much, arbitragers will step in to close the difference, causing this natural convergence to happen.
However, in crypto we have this thing called perpetual futures contracts. These futures, by their name, are perpetual, meaning they have no expiry.
So what’s the mechanism to ensure that the perpetual contract, is aligned with the spot price, and things are “forced” to converge?
Funding rates!
Funding rates are periodic payments, usually hourly or every 8 hours, that are paid between long and short traders.
If the funding is negative, shorts pay longs.
If the finding is positive, longs pay shorts.
This incentivizes the needed flows to keep perpetual contract prices close to their underlying spot price.
If the perpetual contract is above the spot (expensive), longs will pay shorts, to disincentivize longs from pushing price higher (as they are paying this funding) and to incentivize shorts to step in and put price back into its place.
If the perpetual contract is below the spot (cheap) , shorts will pay longs, to incentivize longs to put price back into place, and disincentivize shorts to push prices even further down.
It’s a smart mechanism, that ensures balance between things that should be trading at equal prices.
However, as it is markets nature, sometimes thing get out of whack.
Let’s plot an example.
The red line is the perpetual contract price for RARE
The blue line is the spot price for RARE
These divergences, like the one we see above, can happen for many reasons, but I won’t bore you with that, as that is not the purpose for today.
However, for whatever reason, the market is not willing to trade the perpetual contract at the price of its underlying spot price, making it relatively cheap.
Now, if we go to Binance, we can see that at times, it was paying -2% every 4-hours to longs (funding negative), which translates to ~4,400% annualized!
This funding is negative, which means that shorts are paying longs, to incentivize longs to push the perpetual contract price back to equilibrium.
But now you may be wondering, how do we find these opportunities when they are yielding the most?
Scanning Funding Harvesting Opportunities
One important aspect of trading these opportunities, is to know where to find them.
I will list below a few options that I know, and that other traders, including myself, regularly use.
CoinGlass
Coinglass offers you a view of the top exchange’s funding, in a clean dashboard.
You can track your venue of choice, and check if there’s a funding opportunity that interests you, and quickly put on a trade.
Hyperliquid
Hyperliquid has a nice dashboard where you can compare their funding, with other platforms, making it easy to find some funding arbitrage opportunities between these venues.
Extended
Extended also has their own dashboard, to help users compare funding cross venues, to find decent arbitrage opportunities.
Custom Dashboards
Another way of doing it is going to exchanges that you like, that might not be as popular, and making your own dashboard like I did below.
Obviously these take more work and development, but they can be a form of edge, as other traders don’t have access to your own models, and you can be faster then them.
Whichever method you choose, think about it like any other normal market scanner.
You want to find an opportunity that is attractive to you, in a fast and reliable way, to be able to take it.
We will discuss what is an attractive opportunity next.
Harvesting Funding
Now, the question is, how can we make money from it?
The first assumption I like to make is that we are paid to take on risk and do useful things right?
Here, we are doing something useful for these exchanges, which is to keep prices in line where they should trade at, making these markets more efficient, and that’s what you get paid for.
But like a normal directional trade, we need to know how much we can expect from this trade, so that we can make some return on the risk we have on the table.
Like it is mentioned above, these funding rates tend to be “sticky”.
I actually built my own dashboard to demonstrate this.
We can see that there’s a positive relationship with the funding rate of today, and the funding rate 5-days into the future.
This is important because this trade is a bit tricky:
We have to pay fees and slippage when we enter positions.
We will have to keep enough margin in our accounts in order to not get liquidated.
When one “leg” of the trade gets too large, we need to properly rebalance them so we’re not holding directional exposure.
We can’t just go in, collect the funding for that period, and exit.
That’s what EVERYONE would try to do if trading didn’t cost money. So we need to stay in the position for a while longer, and collect enough funding that the costs won’t dilute our entire returns.
There’s another interesting thing…
I entered a new position on March 14th, at 7pm UTC.
As you can see below, right after I entered it, the funding began paying less and less. This is because some of these assets, in this newer projects, trade low volumes still, and your market impact, despite small in other places, is a real thing!
So you need to be careful and not put all of your funds into one opportunity, to the point you close it.
Especially when dealing with new projects that are not yet as mature as others, but that have really decent opportunities.
Now, how does this look practically?
Putting on the Trade
I have a other positions on as I am writing this, but let’s talk about one of them.
I am always looking for new exchanges and protocols across the board, as there’s a lot of opportunity out there, if you’re willing to dig into the weeds of the market and take on early risk.
I noticed that HYPE funding rate was quite sticky, and positive, in late February/early March at Extended.
If you want to test it out, here’s my referral link: https://app.extended.exchange/join/PEDMA
(Remember that I’m simply sharing my personal experience with a specific decentralized platform. This is not financial or investment advice. I am not affiliated with the platform, though I may benefit from referral links. Decentralized protocols are new and come with their own risks—always do your own research and proceed with caution.)
So I did the next logical thing, went into the market, and shorted it. Remember that when funding is positive, it means that longs pay shorts, so I had to be short to receive it.
However, I didn’t want to have a “naked” exposure to hype, and I wanted to be delta-neutral.
So I went directly to Hyperliquid, and bought spot HYPE for the same value.
I could have bought the perps contract, as it would mean that I’d need less money to put on the trade and be more efficient with capital. But markets are slow, and I have a lot laying around, so I decided to buy the spot and not pay the funding that I would if I was long the perp.
This meant that I was now delta-neutral, with no market exposure, and just collecting funding.
However, as you can see, the price I bought it on the second exchange was $15.776 and the average short on the first exchange was $15.83. This was actually a good one, because we’re shorting higher and longing lower, but this spread rarely works in our favor.
We also paid a total fee of $4.60 on the first exchange and a total of $4.02 on the second one. This brings our effective cost to a total of $8.62 which is around 0.08% of our trade.
At the current funding rates, it would take us between 6h-10h of hourly funding to cover this costs.
Now you can see why the costs play a major role in this strategy right? So we need to know that we can stay with this trade for at least a few days, to cover the costs of this trade.
You can significantly reduce the fees by going into the orderbook, and waiting for fills as a maker, but I did not do it this time.
Maintaining the Position
Now once the trade is on, the only thing we need to worry about, is keeping the balances and margin in check.
You want to keep a delta-neutral position for the remaining of the time. In crypto, things can at times get crazy, and just because funding is there to “force” these two markets to converge, it doesn’t mean that it always will immediately.
Especially if you’re working with lower tier exchanges, that can be easily manipulated by massive uses of leverage.
Here’s a good example on perps market manipulation:
Also you must consider your margin requirements to not get liquidated.
If you run too low on margin in the exchange you have a leveraged position, the exchange might liquidate your position, and the other leg of your trade will be completely unhedged until you put another position on.
So there’s a few things to consider here, when running such a trade…
But hey, that’s what you get paid for! If a trading opportunity was easy, everyone would pile into it, and arbitrage it away.
Conclusion
This is a good example of a trading strategy that can be used to collect money today, that is useful, and the source of returns is quite well understood.
There’s a few wrinkles about it, that we mentioned above, but that’s part of the game.
You have to think yourself like a plumber of the markets.
You are here to do a service, that is hard to do, but that the market is willing to pay you for it.
If the service is easy to do, and collecting cash on it is also easy, then why would it be sitting there for you to just extract money from it? Doesn’t make sense. There’s no free money laying around!!
The same with any directional strategy.
For example, I run trend models in crypto. There’s a bunch of things that make it hard:
3rd party risk: Every now and then a crypto exchange goes bust and all the user funds are lost, or even if they are paid back, it’s usually multiple years after.
Variance: The returns are not consistent. I don’t expect a check in a bank every month from it. Sometimes, we can go years without making significant money or money at all.
All of these things have their own inherent risk profiles and we must understand them and be specialized in those sorts of risks.
Welcome to the real game of being a trader!
See you next time!
Ps… Looking to Work With Me?
After testing 100’s of trading strategies and spending 1,000’s of hours studying trading and building my own models, I had a few clients reach out to work with me and the outcomes have been quite good so far!
I’ve helped multiple clients now:
Develop their first systematic model
Help reviewing their current trading processes
Build solid frameworks on trading system development
Stop wasting money and time on bad ideas
Develop better risk management models
And much more…
If you want my custom help on your trading business, or would like to work with me, book a free 15-minute consultation call:
And finally, I’d love your input on how I can make Trading Research Hub even more useful for you!
Disclaimer: The content and information provided by the Trading Research Hub, including all other materials, are for educational and informational purposes only and should not be considered financial advice or a recommendation to buy or sell any type of security or investment. Always conduct your own research and consult with a licensed financial professional before making any investment decisions. Trading and investing can involve significant risk of loss, and you should understand these risks before making any financial decisions.
That’s interesting. Are you using Python to automate your crypto strategies or doing it manually?