Hi Justinian,
Thanks for the warning. Yes I am aware of this. On Seeking Alpha someone recently posted synthetic backtest results of these leveraged ETFs during the 1990’s and there was compounding like you wrote; not decay.
Still I think that there are a couple of advantages in being long the decay (by shorting the leveraged ETF). Firstly, during decaying periods the decay drags it down faster than compounding pulls it up during compounding periods. That means that the upside to shorting this is greater than the downside.
Furthermore, as a hedge I would be willing to give up a percent or two during trending markets for the added hedging benefits in a volatile market. Besides, to the extent that my timer is correct then I expect that my hedged periods will be volatile more than they are trending on average.