Time-weighted returns and money-weighted returns are methods of performance measurement. They both measure the rate of return on investment portfolios, and each method bases the performance on different criteria.
A time-weighted return measures the compound rate of return for one investment over a specified period of time. It is also called a manager return and is the preferred industry standard method as of 2010. A money-weighted return measures the compound growth rate for a specified period of all funds within an account. A MWR is also called a client return and uses the same concept as an internal rate of return.
A TWR is not affected by contributions and withdrawals and measures the compounded growth rate of $1 over a specified period of time. A MWR measures performance on the present value of inflows being equal to the present value of outflows. It takes all contributions and withdrawals into consideration.
A TWR is a measure used for evaluating managers who have no control over timing of cash flows. This includes mutual fund managers who cannot control when investors purchase or sell funds throughout the day. Mutual fund managers must be measured through TWR. A MWR is a good measure for a private-equity manager. Because the size and timing of these cash flows are controlled, a MWR is an ideal measurement.
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