Explanations Of Performance Numbers: TWR vs IRR

Time-Weighted Return (TWR) ignores the impact of cash flows during performance calculations. What this means is the performance period is broken up into multiple sub-periods based on each inflow or outflow in an account or portfolio. The performance is calculated for each sub-period and then combined to get a total TWR. This calculation is agnostic to the quantity of the inflow or outflow across sub-periods but approaches each one separately prior to linking for the total TWR result.

TWR is most suitable for fund managers who have no control over the end client’s flows.

On the other hand, Internal Rate of Return (IRR) accounts for the timing and quantity of each flow assigning a weight to each when calculating the final result. If you add $100 to your account on Day 1 and another $10,000 later on Day 20, the performance on the $10,000 will carry a greater weight than the performance on the original $100.

IRR is most suitable for clients because they have control over the inflows and outflows. In some cases, TWR can provide a skewed look at the performance of your account or portfolio because it ignores the flow quantity. If there are no cash flows over the performance period, the two values should be equal.

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