> I think you will find in just this example the market beats your portfolio by more than 1% here. This is just a simple example and I am being generous. When you look at real data you will not only find a similar pattern, but your portfolio gets absolutely crushed by the market.
Here's a python script that generates random numbers to simulate the stock market. Each time you run it, you'll get a different result: http://pastebin.com/UNtDPjxd This is basically your "simple example" run many times side by side. Sometimes a hedged strategy works better; sometimes not.
The place I got this idea in the first place was a book I read in college about the history of hedging as a strategy. It noted one of the earlier demonstrations of why it's a good strategy was when a fund showed that participating in 70% of the gains/70% of the losses of the S&P beat the S&P. But which years? This matters. Unfortunately, I can't find the book anywhere. IIRC, I think we'd be talking about a stretch covering the 40s, 50s, 60s.
This is similar to how Milken pitched the junk bond -- it was originally based on a paper that showed a balanced portfolio of low rated bonds performs better than a balanced portfolio of high rated bonds (this is explained in Den Of Thieves). This was true back then because low credit ratings were so heavily discounted by market conditions (mainly, nobody wanted to buy them).
> why isn't this a huge thing and everyone sells/changes their regular full market S&P 500 ETFs to do that?
For the same reason that no one is pushing a diversified portfolio of junk bonds anymore; what worked in the past doesn't necessarily work in the future.