Money-weighted return

Before you rely on it

What to check

Use it for your experience and a time-weighted figure for the manager's.

The common error

Where people go wrong with money-weighted return

Holding a manager to a money-weighted number. They rarely control deposit timing. So it credits or blames them for decisions that were yours.

Worked through

Money-weighted return in plain numbers

An investor puts in $10,000. In year one it gains 20% and is worth $12,000. They add $10,000 to make $22,000, and in year two it loses 10%, ending at $19,800. Time-weighted return ignores the timing of the deposit: 1.20 × 0.90 = 1.08, an 8% total, about 3.9% a year. Money-weighted return asks what happened to the investor's dollars. They put in $20,000 and got back $19,800, and the larger sum was invested during the losing year; the annual money-weighted rate comes to about −0.7%. Same fund, two honest numbers, because one measures the fund and the other measures the investor's experience.

Easily confused

Money-weighted return and its neighbours

Money-weighted return is not time-weighted return. Time-weighted return removes the effect of cash flows, so it measures the manager's skill. Money-weighted return, essentially the internal rate of return of the investor's flows, includes their effect, so it measures the investor's actual result; both differ from simple return, which ignores timing, and from annualized return. When someone adds money before a decline, the two figures diverge. Funds report time-weighted returns, and personal account statements often show money-weighted ones.

In real decisions

Where money-weighted return turns up

Investors use it to see how well their own decisions worked, including when they added or withdrew money; advisors use it to explain differences between fund performance and client returns. Institutions use it for accounts where the client controls flows, such as private equity, where timing of capital calls is part of the result. Comparing the two measures shows whether timing helped or hurt; it is also the right measure for a rental property or business with irregular contributions.

Know the edges

Where money-weighted return stops being reliable

Because it depends on the timing and size of flows, it is not suitable for comparing managers; a large deposit right before a rally can make a mediocre fund look good. It requires accurate dates and amounts. Solving for it needs iteration, and multiple solutions can exist with unusual patterns, and use both measures and state which one you are reporting.

Quick answers

What people ask about money-weighted return

Which return should I use to judge my own results? The money-weighted return shows what your dollars earned, including your timing. The time-weighted return shows the investments' performance. Look at both.

Is money-weighted return the same as IRR? Essentially yes. It is the rate that sets the present value of your deposits and withdrawals, plus ending value, to zero.

Why does my return differ from the fund's? Because you added or withdrew money at different times. If you added before a decline, your own result will lag the fund.