How do Unrealized Profit and Loss (UnPnL) affect Funding Rate Arbitrage strategy?

Funding Rate Arbitrage maintains a neutral mechanism and inherently does not depend on price direction; however, unrealized profits can disrupt this structure.

When you go Long on one exchange and Short on another to maintain theoretical neutrality (one side loses while the other gains, equity fluctuates slightly due to slippage at different moments, and fundamentally your equity does not change).

However, when the price moves in only one direction (up or down), profits accumulate entirely on one side (Unrealized Profit and Loss -> UnPnL), causing the other side to move closer to the exchange’s liquidation price.

At this point, what needs to be done is to transfer funds from the profitable exchange to the losing one to rebalance, helping the losing position maintain a safe distance from the liquidation price.

When the price moves far enough without showing signs of returning to your entry point, the available margin that can be transferred from the side with higher unrealized PnL may be depleted, making further transfers impossible.

At this point, the only solution is to partially close the position to realize the Unrealized PnL.

Some exchanges have mechanisms to periodically release unrealized PnL (such as CoinEx, etc.), but most do not have this feature.

Therefore, from the cases mentioned above, you can see how unrealized PnL can affect a Funding Rate Arbitrage strategy.

And the fact that the crypto market operates 24/7 makes automated fund transfers for rebalancing a critical factor in helping you keep positions alive as long as possible, thereby reducing trading costs and slippage.

The good news is that XAPY has implemented an automatic fund transfer mechanism to rebalance positions, along with a real-time dashboard to monitor the metrics of the exchanges you’ve connected.