Risks associated with Funding Rate Arbitrage strategies

 While achieving a delta-neutral state (Delta ≈ 0) mitigates price volatility, funding rate arbitrage still involves risks such as slippage, adverse funding rate shifts, and auto-deleveraging (ADL)....We will now analyze and categorize these risks: 

1/ Controllable risks

a. Reverse interest rate 

Uncertainty about whether funding rates between two exchanges will be negative or positive on any given day. Review historical stats to adjust strategies and maximize profits.

b. Slippage ( Gap, Spread...)

The difference between bid and ask prices, common in financial markets, especially across two exchanges with varying liquidity, volume, and mechanisms, leading to differing slippage levels.

c. Transaction fees

Fees charged by crypto exchanges per trade, based on your VIP tier (higher trading volume reduces fees). Even transfer fees erode your profits.

d. Position liquidation

In funding rate arbitrage trading, hold positions as long as possible to minimize fees, but rapid market moves without support tools risk liquidation, spiking fees and causing unexpected losses.

e. Exchange ADL mechanism

Some exchanges enforce auto-deleveraging (ADL), forcibly closing user positions during harsh market conditions or sudden liquidity drops. A downside is profitable positions may close before unprofitable ones, with slower hedge closures increasing unpredictable loss risk.

f. Excessive PnL Holding

Fast market shifts make delta neutral ≈ 0 strategy safe, but unrealized PnL (unPnL) may skew one side, complicating new positions. Early position closures to free PnL may not offset funding rate profit against open/close costs.

2/ Uncontrollable risks (force majeure)

a. Lock Account

Accounts may be flagged and locked for violating exchange terms, e.g., money laundering, illegal activity, or fraudulent KYC use.

b. Deposit/withdrawal suspension (maintenance)

This rarely harms your account significantly, since you can’t deposit or withdraw to balance Long and Short positions, so prolonged delays can disrupt delta neutral mechanisms.

c. Rug Pull

An uncontrollable yet common risk in the crypto market, where project backers suddenly deposit and dump tokens. Choosing the right token for funding rate arbitrage strategy is crucial.

d. Token Delisting

Exchange delisting of a token held in your position.

e. Crypto exchange closure

No guarantee against a second FTX-like collapse

3/ Other risks

Personal computer hacked, using pirated software, logging in publicly, or worse, not enabling security for accounts on Exchange.

Note: Financial trading always carries unpredictable risks, equip yourself with basic knowledge to protect yourself online.