The Timing Model: Buy and Hold vs. Long / Short

I was taking a look at an old post from about a year and a half ago that addressed the question of shorting instead of going to cash in the timing model. Normally, I recommend individual investors not short for a few reasons. 1 - most are not familiar with shorting. 2 - individuals do not get short rebates. 3 - the historical returns are lower than long/flat and buy and hold.

For the long short model the return is reduced with increases in volatility and drawdown vs. long/flat. Also not surprising - the correlation to buy and hold drops to 0 (or negative) for the L/S version.

However, if you include 2008, the disparity in performance is so wide between long/short and buy and hold (namely due to everything puking), that buy and hold and the long short version now have similar return numbers.

If I get around to it I will include a long short section in my 2009 update to the timing paper in January...