Time-Weighted Return

When a family adds or withdraws money from a portfolio, those cash flows can inflate or deflate a simple return calculation even if the manager made no meaningful decisions. Time-weighted return solves this by breaking the measurement period into sub-periods — each bounded by a cash flow event — calculating the return for each sub-period, and then linking those sub-periods together geometrically. The result reflects only what the market and the manager's decisions produced, not the timing of the family's own deposits.

This makes TWR the standard for comparing managers against each other or against a benchmark. A family evaluating a candidate manager through manager selection would typically ask for TWR figures precisely because it levels the playing field — a manager whose clients happened to add large sums at opportune moments doesn't look artificially better than one whose clients didn't.

TWR contrasts with money-weighted return (MWR), also called the internal rate of return or IRR. MWR does incorporate cash-flow timing and reflects the actual experience of a specific investor. A hypothetical family that happened to invest a large sum just before a strong market rally would show a higher MWR than another investor in the same fund who didn't. Neither measure is "wrong" — they answer different questions. TWR asks "how skilled is the manager?" MWR asks "how did this particular investor do?" Families tracking private fund performance often see IRR reported there, while public market managers typically report TWR.

For family office investment teams building performance reporting, understanding which return method is being used — and why — is foundational. Mixing TWR and MWR figures in a single report without labeling them clearly can produce misleading comparisons. Qualified investment consultants and CPAs can help families establish consistent reporting standards.