Earn 80%+ APR using a Market-Neutral Strategy on HMX
Dear Dragons,
Carry trade is a popular market-neutral strategy that allows you to earn yields in all market environments. In this article, we will go over the basics of carry trade strategy. We will also share a step-by-step guide on how to execute the strategy on HMX and show you an example trade with real data that yielded 80%+ APR!
If you are already familiar with carry trade, skip ahead directly to the “How to Execute Carry Trade on HMX” and the “HMX Advantages” sections below.
Let’s get into it.
TL;DR
- HMX’s multi-collateral feature allow you to execute carry trade simply and efficiently all on HMX. No more cross exchange and margin management complexity. E.g., deposit ETH as collateral and open an ETH short position and start earning!
- Our velocity-based funding fee model (skew determines the velocity of the funding rate) allows you to earn funding even when the OI skew is reduced to zero.
- Our sample trade executed on the ETHUSD market showed a result with 80%+ APR.
What is a market-neutral strategy? 🤔
Let’s start with the basics. Market-neutral strategy refers to a yield farming strategy that aims to maintain a neutral position (i.e., no change in the principal value) regardless of the market direction. These strategies typically involve pairing long and short positions in different securities or asset classes to reduce exposure to the market direction.
In the context of HMX, this strategy involves holding a spot position of crypto asset (LONG) and open a short position (SHORT) on the same asset of equal amount to the spot holdings.
In this way, your net exposure on the asset will be zero and your principal value will remain constant regardless of the change in asset price. At the same time, you are earning yields from the funding fee of your short position.
Why does the opportunity exist?⚡
Funding rate is a required mechanics for a Perp exchange, such as HMX, in order to keep the open interests (OIs) skew close to zero. In another word, we want the amount of short and long OI to be roughly equal to minimize the one-sided exposures for liquidity providers.
For crypto assets, there is generally more demand on the long side. This means that, most of the time, shorts will be compensated to have their positions opened. Longs, on the other hand, will have to pay for the privilege to have their positions opened.
How to identify carry trade opportunity? 💡
Identifying carry trade strategy is very straight forward. Simply look for markets with a positive funding rate. At HMX, the funding rate for each market can be easily found in the info bar section. For these markets, it means LONG are paying SHORTS. In another word, you are getting paid to have short positions opened.
How to execute the carry trade 🧺
1️⃣Identify The Market
Identify the market with a positive funding rate. For HMX, the number is easily found in the info bar section as mentioned above.
2️⃣Deposit Collateral
Deposit Collateral so you can start trading.
- Deposit Collateral here: https://hmx.org/arbitrum/portfolio
- Read how to deposit collateral in our Docs here.
Note: HMX currently only accepts BTC and ETH and stable coins as collateral. So to execute a carry trade on other assets, you are required to deposit one of the supported assets. In the future, we plan to add additional crypto assets as collateral.
3️⃣Open a Short Position
Now you can open a short position with the size equal to your spot long (i.e., deposted collateral.)
- Open a short position here: https://hmx.org/arbitrum/trade/eth-usd
- Read how to trade on HMX here.
🎊🎊Congratulations. You have successfully executed a carry trade strategy! Now you can sit back, relax, and enjoy collecting yields!
The HMX advantages ⏫
While HMX is not the only platform where you can execute a carry trade, we list some key advantages on using HMX here.
No risk of liquidation & Easy Maintenance💧
Because of our multi-collateral structure, you can deposit your spot holdings as collateral for your trades (e.g., BTC, ETH). The value of your collateral is always offset by the PnL of your short position, so your positions have no risk of being liquidated. There is no need for constant monitoring and managing margins between exchanges.
Capital Efficient ⚙️
Also with the support of BTC and ETH as collateral, you don’t need a additional stablecoins as margin for your shorts, making the execution capital efficient.
Funding Rate model 🏃
Unlike some other protocol where funding fee goes to zero once the long/short skew is eliminated, our velocity-based funding model has “memory” of previous state and the skew determines the velocity of the funding rate (instead of the rate itself). This slight adjustment means you can still earn funding fee even when the skew is zero.
Sample Live Trade 📈
In this section, we show an example of a real trade executed on HMX with the following setup:
Trade Setup
- Market: ETHUSD
- Funding Rate: ~0.010% / hr = ~87% APR (please note that the funding rate would fluctuate overtime based on OIs)
- Size: 10 ETH (~$19,535)
- Holding Duration: ~22.5 hr
As seen from the screenshot above, we have
- The funding earned was $44.0765
- Total trading fee was $15.62
- Borrowing fee was $0.2876
Note that the realized PnL is irrelevant in this case. Any gain from the short position is offset by the loss in the ETH spot holdings. After all, this is a market neutral strategy 😁.
Net earning can be calculated: $44.0765 — $16 — $0.2876 = $27.71
Gross Return = $44.0765 / $19,535 = 0.23%
Net Return = $27.71 / $19,535 = 0.14%
Gross APR% = ~87%
Net APR% = ~56%
The net APR is quite a bit lower than Gross APR because the sample trade is only run for less than 1 day, so the the trading fee makes up for a relatively large percentage of the earning.
