What is money-weighted return and when should I use it?

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AcadiFi · Accepted Answer

Money-weighted return (MWR) is the internal rate of return (IRR) of a portfolio's cash flows, including external contributions and withdrawals. Unlike time-weighted return, MWR is affected by when cash flows occur — it measures the actual return earned by the investor given their specific timing decisions.

Mathematically, MWR satisfies: 0 = −MV_begin + Σ CF_t / (1 + MWR)^t + MV_end / (1 + MWR)^T, where CF_t are cash flows at time t (positive for withdrawals, negative for contributions, depending on convention).

Worked example: Continuing the Sanderling client from the TWR example:

- Jan 1: Start $1,000,000 (outflow from investor perspective: −$1,000,000)
- Apr 1 (t=0.25): Contribution $200,000 (outflow: −$200,000)
- Sep 1 (t=0.667): Withdrawal $100,000 (inflow: +$100,000)
- Dec 31 (t=1): Ending value $1,285,000 (inflow: +$1,285,000)

Solve for r: 0 = −1,000,000 − 200,000/(1+r)^0.25 + 100,000/(1+r)^0.667 + 1,285,000/(1+r)^1

Numerically, MWR ≈ 16.4%. This differs from the 17.29% TWR because the investor contributed more capital right before stronger sub-periods and withdrew before a stable one — but the timing of external cash flows is client-driven, not manager-driven.

When to use MWR:

(1) Private equity and venture capital — since capital calls and distributions are manager-controlled, MWR (IRR) captures the manager's ability to time deployments and exits. GIPS requires IRR reporting for PE.

(2) Individual investor experience — shows actual dollar-weighted outcome the investor experienced.

(3) Projects and real estate where timing decisions are integral.

Limitations: IRR calculations can have multiple solutions with unusual cash flow sign changes, can mislead comparing across different capital bases, and don't translate well to composite reporting across many accounts with different cash flow patterns. For these reasons, TWR remains the standard for evaluating traditional asset managers.

What is money-weighted return and when should I use it?

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