How can the counterparty to the (bullish) Levered Basis Trade lose money?

General
1

To answer this question, let’s say there was a hypothetical vault, which was the exact counterparty to the bullish levered basis trade. This vault would:

  1. Lend the collateral
  2. Be long (e.g. ETH) perps
  3. Short the same notional of perps on another exchange like Hyperliquid

In a contango (futures mark price > spot price), where the counterparty is entirely LBT traders:
0) Let’s assume this scenario is >8 hours. If it’s less, it doesn’t matter, there’s no gain or loss.

  1. Vault would be long perps if the only counterparty on the whole exchange is LBT traders.
  2. It should be short an equivalent notional on HL, so no market exposure
  3. Let’s also assume the vault can’t get out of the positions due to eg liquidity.
  4. Where it would likely lose money in this scenario is in the difference in how the funding rates are calculated on World vs e.g. Hyperliquid. World rates get more extreme “at the edges” than HL. So, if this contango was very large, the World shorts would get paid a hefty premium every 8 hours, maybe something like 50% annualized. Whereas Hyperliquid rates would probably only be 10-20% in this scenario. So, the vault would lose the delta, e.g. 30% annualized, for the duration of this scenario.
  5. That’s a 2.7bp loss per 8 hour interval. So, however long you would expect this to last, just multiply the hours by 2.7 bps.
  6. Note, this doesn’t apply to your scenario 1.1 in either the lend-only or the lend-plus-perps trades cause it would not be long enough for a funding payment.
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Trading vault risks in edge cases