Overall Profits, Yet Still Liquidated: The Cross-Platform Margin Predicament of Crypto Hedge Funds

CME's short profits cannot save Hyperliquid's long losses; how did perfect hedging turn into a one-sided gamble?

Written by: Andjela Radmilac

Compiled by: Saoirse, Foresight News

Imagine a scenario where a hedge fund shows an overall profit on paper but still faces forced liquidation by an exchange. Bitcoin prices drop, and the fund profits from its short position on CME, but incurs massive losses on its long position on Hyperliquid. These two trades were originally set up to hedge against risk, but Hyperliquid cannot withdraw the profits from the CME account to cover its own position losses. The fund must replenish its collateral before the exchange initiates forced liquidation.

Cross-platform transfers have time delays; during market crashes, withdrawals may be delayed or even blocked. Even if the fund's total assets are sufficient to cover all positions, the locked profits in other accounts could still lead to the loss of half of the hedged positions.

Once this situation arises, a strategy originally designed to mitigate the risks of Bitcoin's one-sided price movements can instantly turn into a high-risk gamble on price direction.

In the high-risk institutional Bitcoin trading space, even if the fund's overall portfolio is profitable, it still faces forced liquidation; because the exchange with losses has no way of knowing and will not consider the profits made on other platforms.

Moreover, the higher the capital efficiency of the fund, the less idle capital it has available to resolve crises.

A 20% Drop in Bitcoin Can Destroy a Perfect Hedging Strategy

Let’s look at another hypothetical case: the fund holds two sets of inverse Bitcoin positions, going long on Bitcoin on Hyperliquid and shorting Bitcoin futures on CME, with both positions valued at $4.5 million.

If Bitcoin drops 20%, assuming the underlying price of both contracts remains the same, the short position will profit about $900,000, while the long position will incur an equal loss. From an overall accounting perspective, the price fluctuation would hardly cause a loss to the fund, as the short profits hedge the long losses, which is precisely the design intention of this strategy.

However, exchanges will only examine their own platform's positions individually and will not assess from the perspective of the fund's overall investment portfolio.

When Hyperliquid detects a loss in positions, it will require sufficient collateral to maintain the position. On the other hand, while the CME short has already profited, the profits are stored in a separate account, executing another set of margin and settlement rules. The fund must either transfer profits from elsewhere to cover the margin or close both positions before Hyperliquid liquidates. If there are delays in withdrawals or transfer restrictions, the profitable position may not be disposed of in time, and even if overall assets are sufficient, a single account may still face a liquidity crisis.

Once Hyperliquid forcibly liquidates the long position, the fund will be left with only the short position, which has lost its hedging protection. If Bitcoin rebounds afterward, the fund will incur losses, whereas the original intention of this strategy was to avoid directional price risk.

Ian Weisberger, CEO of trading technology service provider CoinRoutes, cites the chaotic liquidation of exchanges during the crypto market crash in October 2025 as an example of the destructive power of this risk. Many traders believed they had fully hedged, only to find that the exchange unilaterally liquidated one side of their positions, exposing the risk completely.

The problem often lies not in misjudging the trading direction; but in the margin required to maintain positions being stored in other accounts that are currently inaccessible to the exchange.

$1 Million in Capital Can Leverage an Astonishing Trading Position

When funds use borrowing and derivatives to build large positions with a small amount of capital, the risks are further amplified. Weisberger explains to CryptoSlate: a hedge fund that deposits $1 million USDC can theoretically hold a total exposure of $9 million in Bitcoin.

With $1 million of its own capital, the fund borrows $2 million, giving it a total of $3 million in available funds. It allocates $1.5 million to both CME and Hyperliquid, then uses derivatives to establish $4.5 million positions on both platforms: a $4.5 million long position in Bitcoin on Hyperliquid, while simultaneously shorting $4.5 million on CME through futures. The total exposure reaches $9 million, with a capital structure of $1 million of its own funds + $2 million of external borrowing, plus leverage from derivatives.

These types of funds are not betting on Bitcoin's price movements. If Bitcoin rises by 10%, the long position would profit about $450,000, while the short would incur a roughly equivalent loss (assuming the contract's underlying prices match). The fund's true source of profit comes from futures basis, perpetual contract funding rates, and various small market price differences, relying on bilateral hedging to isolate most of the one-sided market risk.

However, in reality, hedging strategies do not always operate as intended.

Potential risks are diverse: futures and perpetual contract prices may diverge, funding rates may suddenly spike; if the two $4.5 million positions experience a 1% price difference, the profit and loss difference could reach $45,000. Even if prices later converge, during this period, the fund must hold sufficient collateral to withstand the volatility. Even if positions are designed to offset each other, each exchange still independently executes its own margin system.

CME will not relax margin requirements just because you have profits on Hyperliquid; Hyperliquid will also not automatically credit profits that have not yet been transferred from CME. While keeping high margins across exchanges is certainly safe, the profit margins of spread strategies are thin, and a large amount of capital being tied up can quickly erode profits.

Another option is to improve capital efficiency, but this brings new risks: the larger the exposure leveraged by unit capital, the higher the dependence on whether funds can be timely available during a crisis.

Exchanges Will Not Consider Your Profits Elsewhere

For decades, traditional prime brokers have continuously handled cross-market financing, collateral, and trading operations for hedge funds. However, the crypto market is highly fragmented and disjointed.

Funds trading Bitcoin futures on CME, perpetual contracts on Hyperliquid, and spot on other platforms must prepare separate collateral pools for each exchange, even if all belong to the same trading strategy, as the margin and settlement systems of each platform are completely independent.

Swiss institutional prime broker CRX Trade, leveraging CoinRoutes' technology, is working to address this pain point. Professional traders can use Bitcoin, stablecoins, and tokenized assets as cross-platform collateral covering crypto and traditional trading markets like Hyperliquid and CME. Funds do not need to deposit funds separately to each exchange; all positions and financing are managed in a single account.

Weisberger states that the system will simultaneously calculate the overall position size of the fund and the remaining one-sided risks in the portfolio. This is also why lenders are willing to provide financing to the fund, allowing it to leverage a 9x capital exposure; clients actually only borrow $2 million, not $9 million, as the long and short positions can theoretically hedge each other.

CRX's risk engine monitors all portfolio positions and can proactively reduce exposure before an exchange triggers forced liquidation. One mode is called Delta-Neutral Liquidation, which attempts to close paired hedged positions. For example, if a fund shorts Tesla perpetual contracts while going long an equivalent amount of tokenized Tesla stock, the system will close both positions simultaneously, preventing the client from passively holding unwanted one-sided risks. Another mode directly reduces the position causing the maximum one-sided risk.

The core purpose of both operations is to prevent the exchange from only liquidating the losing side of the position, exposing the fund to market fluctuations it intended to avoid.

However, this collaborative risk control system has its limits. The software cannot enforce orders during exchange outages, nor can it guarantee that the market will always have counterparties to transact at reasonable prices. During severe market fluctuations and liquidity crises, liquidation operations can still incur losses. Moreover, exchanges still have the right to liquidate positions that do not meet margin requirements.

CRX can identify paired hedged positions, attempting to avoid both being separately liquidated.

Even if Platforms Do Not Support Bitcoin as Collateral, Financing Trades Can Still Be Conducted with Bitcoin

This model also supports funds using Bitcoin holdings to trade in markets that do not accept Bitcoin as collateral.

Weisberger gives an example: a client holds $1 million worth of Bitcoin and wants to trade CME futures. The client transfers Bitcoin to a crypto exchange, sells $500,000 worth of Bitcoin, and then rebuilds a $500,000 Bitcoin risk exposure through futures or perpetual contracts. At this point, the client still holds $500,000 in spot Bitcoin, plus $500,000 in derivative exposure, keeping the sensitivity to Bitcoin price risk essentially unchanged. Selling the spot releases $500,000 in cash, which can be allocated to CME as trading margin through CRX's USDC system.

There is no double use of funds here. It is simply selling half of the spot Bitcoin and then using contracts to offset the corresponding risk exposure. This derivative position itself has margin and financing costs, and if collateral is insufficient, it will also face liquidation.

Weisberger estimates that directly using Bitcoin as collateral to obtain cash usually incurs a financing cost of about 8%; whereas using derivatives to replace part of the spot exposure only needs to bear the futures basis or perpetual contract funding rate. The costs are expected to be lower, but funding rates can fluctuate, and transaction fees and slippage losses must also be added.

The company has not provided a complete actual cost comparison of the two options. Regardless of which one is chosen, the fund has activated its existing capital, but at the same time, it has added positions that require financing and margin; during market turmoil, it still relies on counterparties to take on orders.

Transferring Collateral Out of the Exchange Custody Does Not Mean Risk is Completely Eliminated

One way to reduce the risk of exchange failure is not to keep all collateral stored within the exchange. When conditions permit, CRX adopts a third-party settlement model, where collateral is held by an independent custodian rather than directly stored on the trading platform. The exchange is only responsible for matching orders, while the assets remain with the custodian, and profits and losses are settled periodically.

Weisberger states that the settlement cycle is 8-24 hours. In this way, only the unsettled profit and loss portion will face the risk of withdrawal freeze from the exchange, rather than all of the client's collateral assets. However, the protective effect depends on the agreements and settlement terms, and it cannot avoid the issue of exchange outages interfering with liquidation execution.

At the same time, this model introduces new participating institutions, and their performance capabilities are crucial during a crisis. CRX Trade is operated by RAS Capital and is a Swiss financial intermediary under the regulated self-regulatory organization VQF. It is neither a bank nor a broker and does not directly issue loans; financing comes from external lenders connected to the platform. Weisberger states that assets stored in isolated dedicated wallets or exchange sub-accounts legally belong to the client.

However, once the client initiates borrowing, according to the independent agreement, the lender will obtain a lien on the portfolio collateral. The ownership of Bitcoin still belongs to the client, but once the client defaults, the lender has the legal right to dispose of the pledged collateral. The borrowing agreement will stipulate the borrowing limit, asset valuation methods, and the conditions under which the lender can exercise disposal rights.

Exchanges have their own margin rules and trading agreements, and custodians also have a set of asset custody and access rights contracts.

Consolidating all assets into a single account does not eliminate the various contractual constraints mentioned above; it merely makes collaboration between multiple parties more convenient.

CRX has not publicly disclosed the complete agreements for custody and lending, so it is impossible to confirm the asset disposal details after the platform, custodian, or lending partner goes bankrupt. Weisberger states that assets are stored in isolated wallets, but whether they can be smoothly retrieved in a bankruptcy scenario depends on the contract terms and applicable legal jurisdiction.

Additionally, the company has not clarified whether collateral can be re-pledged. Moving assets out of the exchange does indeed mitigate one type of risk, but this does not mean that your assets can be withdrawn and utilized at any time when other institutions assert claims.

A Crisis Moment When Everyone Wants to Reclaim Funds

Building large positions by borrowing funds also carries another hidden danger: lenders will inevitably want to reclaim the principal upon maturity.

Weisberger explains that the loan terms facilitated by CRX are mostly 30-90 days, with leverage limits, collateral conversion rates, and pledge rates agreed upon at the beginning of the loan. Upon loan maturity, lenders have the right to refuse to renew the loan; regardless of whether the fund's trading strategy is profitable, it must repay the funds or seek alternative financing channels.

During the loan period, the margin standards of exchanges and the funding rates of derivatives may change, not bound by the initial borrowing terms. The fund will find itself in a dilemma: on one hand, the exchange requires additional collateral, while on the other, it must repay or refinance the same batch of assets. Shared collateral improves capital efficiency but cannot override lender contracts and exchange rules. During severe market turmoil, multiple exchanges may simultaneously demand funds, while the costs of transfers and liquidations may surge at that time.

This is the price that institutional Bitcoin trading pays for pursuing high capital efficiency. If positions and collateral can be efficiently coordinated, there is no need to have large amounts of capital tied up across various exchanges. This mechanism can reduce unnecessary forced liquidations, free up available capital, and lower the operational costs of hedging strategies.

However, it also allows funds to establish larger positions without adding their own capital. The higher the position, the more it relies on lenders, exchanges, and custodians to operate normally during a crisis.

When every bit of the fund's capital is fully utilized, the backup funds available to respond to sudden situations will decrease. Shared collateral can alleviate issues like 'overall profits, yet facing liquidation due to funds being trapped in other accounts,' but it cannot fundamentally eliminate dependence on financing, market liquidity, and the stability of exchange services.

The evaluation of capital efficiency is not based on the stable market phase, where $1 million in capital can leverage how much exposure; rather, it is in a crisis environment where everyone wants to withdraw funds, how much effective position the fund can safely retain.