Describe how the conditional linear factor model can be used to address Shaindy’s concern.

During a monthly board meeting, Shaindy discusses her updated market forecast for equity markets. Due to a recent large increase in interest rates and geopolitical tensions, her forecast has changed from one of modestly rising equities to several periods of non-trending markets. Given this new market view, Shaindy concludes that a long/short strategy will not be optimal at this time and seeks another equity-related strategy. The Fund has the capacity to use a substantial amount of leverage.

Jane Shaindy is the chief investment officer of a large pension fund. The pension fund is based in the United States and currently has minimal exposure to hedge funds. The pension fund’s board has recently approved an additional investment in a long/short equity strategy.
As part of Shaindy’s due diligence on a hedge fund that implements a long/short equity strategy, she uses a conditional linear factor model to uncover and analyze the hedge fund’s risk exposures. She is interested in analyzing several risk factors, but she is specifically concerned about whether the hedge fund’s long (positive) exposure to equities increases during turbulent market periods.