Capacity, Drift and a Key Person at a Trend Follower

Evaluate the three changes separately - bundling them is itself a red flag, because it forces a yes/no on items with very different merits.

• Capacity ($2.1bn to $5bn). Trend following is capacity-constrained by market liquidity and by the correlation of signals across markets. Going to 2.4x AUM in one step, with no slippage analysis by market tier, will erode returns first in the smaller, more diversifying markets - which is where the strategy's diversification comes from. Ask for market-level capacity estimates and the AUM at which the manager will hard-close.
• The carry/short-vol sleeve. This is a genuine style change, not a product extension. Short volatility is short convexity - it pays steadily and loses violently, which is the opposite of the crisis-alpha property the foundation is buying. Permitting it inside a trend mandate removes the diversification rationale for the allocation.
• Pass-through. A 1% expense pass-through on top of 2/20 is a material fee increase and removes the manager's incentive to control costs.

Decision: do not approve the bundled package. Approve nothing until the capacity and sleeve questions are separated, and if the mandate must be preserved, require the sleeve outside the trend program (or not at all).

These are the issues that end allocations, not the return series.

• Key person. The head of research was likely the second-largest contributor to signal design in a model-driven shop. The founder being sole CIO and sole signatory on risk limits means there is no independent check on model changes, risk scaling, or override. For a systematic manager, that is the control that matters most.
• What to verify: who can change the models, who signs off on risk, whether the risk function reports to the CIO, and what happens to the firm if the founder is incapacitated. Ask for the risk committee's terms of reference and recent minutes.
• Liquidity mismatch with the mandate. The IPS says daily NAV. Quarterly dealing with 45 days' notice and a 25% gate is a materially weaker liquidity profile, and a gate converts a 25% redemption into a queue for everyone. That alone is an IPS exception requiring formal approval - get it documented or decline.
• Sequencing. A common error is to approve an allocation because the track record is good while flagging ODD items for 'monitoring'. Unresolved key-person and governance issues should be gating items.

Recommendation: decline the current structure. Offer a managed account (assets held at the foundation's custodian, daily liquidity, control over the sleeve) or a reduced allocation once independent risk sign-off and a named successor are in place.

One good year is being asked to do too much work.

• A single observation is not a correlation estimate. Trend following's crisis behaviour is regime-dependent: it worked in 2022 because a sustained directional move in rates and commodities made long-volatility-like payoffs available. In 2023-2024 the same program returned roughly nothing while equities rallied - that is the normal cost of the strategy, not evidence of failure, but it is also not free insurance.
• The right test is the payoff shape, not the average. Trend following is long volatility with negative carry: small, persistent losses punctuated by large gains. Any sizing decision should be based on how that payoff interacts with the rest of the portfolio's equity and credit beta, not on a trailing Sharpe ratio.
• Raising to the 10% cap concentrates a single manager. The cap exists to limit manager-specific and operational risk. The capacity increase, key-person gap and style drift described above all argue for sizing at or below the current 8%, or splitting it across two managers.
• The denominator matters. At 8% of $600m, the foundation already has $48m of exposure; moving to the cap adds $12m of exposure to a manager whose control environment is unresolved.

If the goal is crisis convexity, buy it deliberately - via a smaller, managed-account trend allocation - and size it on the payoff, not on last year's return.