Your analysis is way to clever for its own good, Jeanette--especially when you say, incorrectly, that "One challenge traditional long-only portfolios face is their inability to take advantage of volatility in their respective financial markets."
Traditional long-only portfolios capture the volatility premium--higher returns that investors in (all) relatively volatile assets earn because other investors want to avoid volatility. In fact, investors can make use of the volatility premium in one of three ways: (1) try actively to time the market to take advantage of volatility, as you suggest, but fail miserably and end up with worse returns; (2) try actively to time the market to take advantage of volatility, as you suggest, and succeed on a gross-of-fees basis but pay out all of the incremental performance in the form of high active management fees; or (3) ride out the volatility and simply collect the premium.