Basis Trade Risks

Funding rate risk

We define funding risk as the event where the funding rate flips negative for a prolonged period, thus impacting the returns of the strategy.

Due to the demand for leverage, there has historically been a positive funding rate as displayed by the following charts.

1 year Aevo Basis Strategy backtest - Positive vs. Negative funding

Charting the distribution of funding rates for ETH, one can observe the positive bias, with the box indicating the middle 50% of datapoints.

1 year Aevo Basis Strategy backtest - box is in the positive region

Additionally, we can clearly see that the distribution of funding rates is shifted towards the positive region on the histogram.

1 year Aevo Basis Strategy backtest - funding rates histogram

Execution risk

We define execution risk as the risk of incurring losses due to poor trade execution. This can happen if the slippage is too high due to low liquidity or if the perpetual future and spot trades are not executed concurrently.

To address this risk, we continuously monitor the depth of the book, the slippage and the spot collateral needed to execute a swap.

Exchange failure risk

We define exchange failure risk as unexpected exchange downtime or any failures at the exchange level that would potentially result in a mismatch between spot and perpetual future positions. Additionally, it could negatively impact the execution of deposits or withdrawals.

To address this risk, we continuously monitor the state of the exchange, the latency between the exchange and strategy interactions, as well as the balance of spot and perpetual futures positions.