When does GIPS require time-weighted vs money-weighted returns, and how do you calculate each?

GIPS has specific rules about return calculation methods, and the distinction between time-weighted return (TWR) and money-weighted return (MWR, also called internal rate of return or IRR) is a key exam topic.

Time-Weighted Return (TWR) — The Default:

GIPS requires TWR for most liquid asset classes because it eliminates the impact of client-driven cash flows. This makes returns comparable across portfolios with different cash flow timing.

Calculation Method:

For each sub-period between external cash flows:

Sub-period return = (Ending Value - Beginning Value - Cash Flow) / (Beginning Value + Cash Flow)

Then chain-link the sub-period returns:

TWR = [(1 + r₁) × (1 + r₂) × ... × (1 + rₙ)] - 1

Example: Portfolio begins January at $1,000,000. On March 15, client deposits $200,000. Portfolio value just before the deposit was $1,050,000. End of June value is $1,350,000.

• Period 1 (Jan 1 - Mar 15): r₁ = ($1,050,000 - $1,000,000) / $1,000,000 = 5.00%
• Period 2 (Mar 15 - Jun 30): r₂ = ($1,350,000 - $1,250,000) / $1,250,000 = 8.00%
• TWR = (1.05)(1.08) - 1 = 13.40%

Money-Weighted Return (MWR/IRR) — For Illiquid Assets:

GIPS requires MWR for private equity, real estate (closed-end), and other asset classes where the manager controls cash flow timing (capital calls, distributions). Since the manager decides when to deploy and return capital, the timing of cash flows reflects manager skill.

Since Inception IRR (SI-IRR):

For private equity composites, firms must present the since-inception IRR, which solves for the discount rate that sets the NPV of all cash flows equal to the current NAV.

Key GIPS Requirement: For TWR calculations, firms must value portfolios at least monthly and on the date of any large external cash flow. Daily valuation is best practice.

Test your understanding with our GIPS practice questions in the CFA Level III question bank.