Maybe I’m thinking about it wrong, and feel to correct me if I am, but the way I understand this strategy is that if he really has a source of alpha and he’s picking good stocks, then these stocks should outperform a market index during down times, and should also outperform when the market is rising. He shouldn’t be giving up anything versus the index, regardless of whether or the index is going up or down. We keep referring to the RWM position as a hedge, and we talk about hedges we think of it as a cost - I think a better way to describe this strategy is that it’s a spread-trading system between his stock picks and the index, not a hedge…the idea is his picks outperform under all conditions against the outright index, and the outperformance compounds over time.
The way he’s represented the 60% annual return is with 2x leverage, but with no leverage, which is how I would think most people would want to look at it, it’s 30% return. S&P has returned something like 14% annually more or less over the past 10 years. So, he’s claiming a 15-16% outperformance, or 2x the annual performance of being passively long the S&P. That sounds a lot more reasonable than when it’s presented as 60% CAGR.