A funding rate is the periodic payment exchanged between long and short holders of a perpetual future. It exists to keep the perpetual’s price close to spot, since there’s no expiry to force convergence.
How it’s set
Two parts. A small fixed interest component, reflecting the cost of capital. A premium component, reflecting how far the perp is trading from spot. Together they produce a rate applied to position notional at each funding interval — every eight hours on most venues, every hour on Hyperliquid.
Positive and negative
Positive funding: the perp trades above spot. Longs pay shorts. It means the market is leaning long and paying for the privilege.
Negative funding: the perp trades below spot. Shorts pay longs. The market is leaning short, or fear has pushed perps to a discount.
Funding is a positioning indicator as much as a cost. Extreme positive funding often precedes a correction — the crowd is long and paying dearly for it.
What it costs to hold
Small per interval, large over time. At 0.01% per hour — a modest rate — a position held a week pays about 1.7% of notional. At elevated rates, funding alone can exceed a strategy’s expected return.
Any strategy that holds perpetual positions across funding intervals has to model this cost, and a backtest that ignores it describes a different trade from the one you’d actually place.