It would be interesting what the results of these tests would be instead of going short the market just holding the funds in a money market find or T-bills instead. If you were more adventurous you could hold them in a mix of T-bills/TLT/TIPS/Gold/Managed Futures to have a low beta place to stash your money.
Shorting is expensive and having the small but still notable SPY div yield adds to the carry cost and increases the likelihood that you lose money if your timing is slightly off, no matter how right your reasoning.
That wouldn’t be the best way to illustrate the point though:
1. ANY alpha would show up in this approach. Both assets operate at the exact same vol through time. The only difference is in direction. Adding other asset just hides the lack of alpha in diversification. That’s indeed a good thing for proper portfolio construction— but this is a first principles evaluation of edge.
2. You still have to magically know 100% of the future :)
It would be interesting what the results of these tests would be instead of going short the market just holding the funds in a money market find or T-bills instead. If you were more adventurous you could hold them in a mix of T-bills/TLT/TIPS/Gold/Managed Futures to have a low beta place to stash your money.
Shorting is expensive and having the small but still notable SPY div yield adds to the carry cost and increases the likelihood that you lose money if your timing is slightly off, no matter how right your reasoning.
That wouldn’t be the best way to illustrate the point though:
1. ANY alpha would show up in this approach. Both assets operate at the exact same vol through time. The only difference is in direction. Adding other asset just hides the lack of alpha in diversification. That’s indeed a good thing for proper portfolio construction— but this is a first principles evaluation of edge.
2. You still have to magically know 100% of the future :)