How Does the Funding Rate of a Perpetual Futures Contract Impact the Cost and Effectiveness of an Impermanent Loss Hedge?

The funding rate is a crucial cost factor in an IL hedge using perpetual futures. If you are shorting an asset to hedge your LP position, and the funding rate is positive (longs pay shorts), you earn a small income, which enhances the hedge.

However, if the funding rate becomes negative (shorts pay longs), you must pay a recurring fee to maintain your short position. This fee can become very expensive, eroding any gains from the hedge and potentially making the strategy unprofitable over time.