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When expressing returns for short positions, the most helpful WSO content suggests the following considerations:

1. IRR (Internal Rate of Return):
   IRR can be used to measure the return on short positions, but it requires careful handling of cash flows. The upfront cash received from the short sale can be treated as an inflow, and subsequent cash outflows (e.g., covering the short position) are included. However, as you noted, the cost basis is variable and depends on the future price of the security, which complicates the calculation. IRR is particularly useful if you want to account for the time value of money and compare returns across different time horizons.

2. MOIC (Multiple on Invested Capital):
   MOIC is less commonly used for short positions because it doesn't account for the time value of money. However, it can still provide a straightforward measure of the return by comparing the total profit or loss to the initial cash inflow from the short sale. This is simpler but less precise than IRR.

3. Combining Shorts with Longs (Arbitrage):
   When combining a short position with a long investment (e.g., in arbitrage strategies), the return metrics should ideally reflect the combined cash flows of both positions. IRR is often the preferred metric in such cases because it can handle the complexity of multiple cash flow streams and their timing. However, you must carefully model the cash flows for both the long and short positions to ensure accuracy.

4. Cash Flow Treatment:

   • The cash received upfront from the short sale is typically considered an inflow, but it may be restricted or subject to margin requirements, which could affect how you model it.
   • Future cash outflows to cover the short position are treated as negative cash flows. The variability of the cost basis (due to changes in the security's price) adds complexity, making IRR a more dynamic and accurate measure compared to MOIC.

In summary, IRR is generally the best way to express returns for short positions, especially when combined with long investments, as it accounts for the time value of money and the variability of cash flows. However, the complexity of modeling these cash flows accurately should not be underestimated.

Sources: Shorting Stocks: My Research Process & 7 Rules I Follow, What is the Shorting "Research" Process, Relationship among Cap Rate, IRR, Discount rate and NPV, Real Estate Private Equity Technical Qs, How do you compute IRR without any negative cash flows?