Carry, basis and funding rates

What carry is

Carry is the return you earn if prices don’t move. Holding a high-yielding currency funded by a low-yielding one earns the interest differential. Holding a bond earns its yield. Buying a futures contract below spot and holding it to expiry earns the convergence. Carry strategies systematically own high-carry assets and short low-carry ones.

Basis

For a future with price $F$ on an asset with spot $S$ and time to expiry $T$ , the basis is $F - S$ . With a cost of carry $c$ (financing minus any yield),

F \approx S\,e^{cT}

When futures trade above spot (contango), a long-spot, short-future position locks in the difference, provided you can hold to expiry. Crypto dated futures have historically traded at a meaningful annualised premium in bull markets, which made this “cash-and-carry” trade popular.

Perpetual futures and funding

A perpetual swap has no expiry. To keep it tethered to spot, longs and shorts exchange a funding payment at regular intervals (often every 8 hours), roughly proportional to how far the perp trades above or below an index:

Perp above spot → funding positive → longs pay shorts.
Perp below spot → funding negative → shorts pay longs.

The funding-rate carry trade

When funding is persistently positive, hold long spot and short the perp in equal size. Price moves cancel; you collect funding.

\text{annualised yield} \approx \text{funding per interval} \times \text{intervals per year}

A funding rate of 0.01% per 8 hours is about 11% a year (0.01% × 3 × 365). In speculative frenzies funding has run many times higher, and in bear markets it often goes negative.

Where the risk hides

Funding flips. The yield is not fixed. When sentiment turns, funding can go negative for weeks.
Liquidation of the short leg. The perp is margined; a sharp rally can liquidate it while the spot leg sits on another venue. Over-collateralise and monitor liquidation distance.
Venue and counterparty risk. Exchange failures have wiped out “risk-free” carry positions. Diversify venues and size accordingly.
Basis blowouts. In a crash, perps can trade at large discounts to spot, creating mark-to-market losses before convergence.

Carry’s payoff shape

Across asset classes, carry strategies tend to earn small, steady returns punctuated by sharp losses when risk appetite collapses and everyone unwinds at once — FX carry in 2008 is the classic case. Like mean reversion, it is negatively skewed. Combining it with positively skewed trend following is one of the oldest diversification ideas in systematic trading.

See the arbitrage and funding specs in the vault, including multi-exchange funding monitors written in JavaScript.