Network policies can be used to optimize the flow of network traffic between virtual machines (VMs) in a hybrid cloud environment. In an example embodiment, one or more policies can drive a virtual switch controller, a hybrid cloud manager, a hypervisor manager, a virtual switch, or other orchestrator to create one or more direct tunnels that can be utilized by a respective pair of VMs to bypass the virtual switch and enable direct communication between the VMs. The virtual switch can send the VMs network and security policies to ensure that these policies are enforced. The VMs can exchange security credentials in order to establish the direct tunnel. The direct tunnel can be used by the VMs to bypass the virtual switch and allow the VMs to communicate with each other directly.