Lesson 6 of 8 · 14 min
Time-weighted vs money-weighted return
The time-weighted return strips out client cash flows, so it measures the manager; the money-weighted return measures the investor.
In short
- Time-weighted return (TWR): the compound growth of 1 unit invested at the start, unaffected by the size or timing of deposits and withdrawals.
- Steps: value the portfolio just before each external cash flow, compute each sub-period's HPR, then link (multiply) them.
- Over several years, the annualised TWR is the geometric mean of the annual returns.
- TWR is the preferred measure for evaluating managers, because clients, not managers, control the cash flows.
- MWR < TWR when more money was invested in the weaker periods; MWR > TWR when more was invested in the stronger ones.
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