No matter what type of hedge you use there is going to be some kind of cost associated. The best tracker of the market is obviously going to be the market itself, but if you were to go short a basket of stocks which replicate a market portfolio it would cost you commissions and share borrowing costs (interest). At this point you'll most likely find futures the least costly method as their pricing really only factors in interest rates (and dividends) which are relatively low at this point.
I would suggest spread betting. I know that sounds like it has little thought behind it, but here’s my rationale.
If you’re short on the index, you’ll receive interest for it (although at the present time, whilst interest rates are low, you’ll pay a little financing). It’s also very simple to do and keep track of.
For me, the leverage might be a problem when hedging. Typically, you’ll be able to ‘trade’ on margins of 1%. I put in the whole exposure (this can be adjusted so that you put in an amount that you think will support your position up to a level you think it won’t reach). This ensures that you won’t receive margin calls and be closed out prematurely.
Here’s the clincher for me: you won’t pay any CGT if you inadvertently make money on the hedge. This, along with the flexibility it gives me, means it’s my choice for hedging.