What is the Difference Between Time-Weighted and Money-Weighted Return?

By EC Assets Research Team · Published 19 August 2026 · Updated 19 August 2026

Time-Weighted vs Money-Weighted Return: Time-weighted return strips out the effect of contributions and withdrawals and measures the manager; money-weighted return keeps them in and measures the investor. The two can differ by more than ten percentage points on the same portfolio, and each answers a question the other cannot.

What the Two Measures Actually Answer

A portfolio has two performances. One belongs to whoever chose the holdings; the other belongs to whoever chose when to put money in. Time-weighted return (TWR) isolates the first. Money-weighted return (MWR) — the internal rate of return of the cash flows — captures the second.

Neither is more correct. They answer different questions, and the standard error is to quote one while meaning the other. A manager judged on money-weighted return is being marked on decisions made by the client; an investor told the time-weighted number is being told how the strategy performed, not what happened to their capital.

How It Works

Time-weighted return breaks the period at every external cash flow, computes a return for each sub-period, and links them geometrically:

$$1 + \text{TWR} = \prod_{i=1}^{n} (1 + r_i)$$

Because each sub-period return is computed on the capital actually present during it, the size and timing of flows drop out. The result is what one unit invested at the start would have earned had it stayed invested.

Money-weighted return is the rate that sets the present value of all cash flows to zero:

$$\sum_{t} \frac{CF_t}{(1 + \text{MWR})^t} = 0$$

This is the internal rate of return. Every flow is weighted by how much money was exposed and for how long, so a large contribution before a bad period drags the result down even if the strategy never changed.

Worked Example

An investor starts with 100. Year one returns 20 percent, ending at 120. The investor then contributes 900, bringing the portfolio to 1,020. Year two returns −10 percent, ending at 918.

Time-weighted:

$$(1.20 \times 0.90) - 1 = 8.0% \text{ cumulative} ;\Rightarrow; 3.92% \text{ per year}$$

Money-weighted: solving $100x^2 + 900x - 918 = 0$ for $x = 1 + \text{MWR}$ gives

$$\text{MWR} \approx -7.51% \text{ per year}$$

The same two years, two answers

Both figures are correct. The manager did not underperform; the investor's capital arrived just before the down year, and nine-tenths of it was exposed only to the loss.

When It Applies (and Limitations)

Control determines the measure. Where the investor controls the timing of flows, the manager should be judged time-weighted. Where the manager controls them — a private capital fund drawing and returning capital on its own schedule — money-weighted is the fair measure, because timing is part of what the manager was hired to do. This is why performance standards require time-weighted returns for composites of discretionary portfolios and money-weighted returns for funds with manager-controlled cash flows.

TWR demands a valuation at every flow. Breaking the period requires a portfolio value on each cash-flow date. For illiquid holdings those valuations are estimates, and the resulting TWR inherits their error. Approximation methods such as Modified Dietz exist precisely because daily valuation is not always available.

IRR has mathematical pitfalls. A cash-flow series that changes sign more than once can admit multiple internal rates of return, and the measure implicitly assumes interim distributions are reinvested at the IRR itself — an assumption that flatters strong funds.

IRR can be engineered. In private capital, drawing on a subscription credit facility delays the first capital call and shortens the period over which the IRR is computed, raising the reported figure without changing a single investment outcome. This is why multiple on invested capital is reported alongside it: MOIC is timing-blind, IRR is not.

Annualising short periods exaggerates. A money-weighted return computed over a few months and annualised produces figures that are arithmetically valid and practically meaningless.

Why It Matters for Institutional Investors

Manager evaluation versus outcome reporting. A board should see both. Time-weighted answers whether the manager delivered; money-weighted answers whether the institution's capital grew. Presenting only the flattering one is the most common reporting failure in this area.

Cross-asset comparison. Comparing a private equity IRR against a public market time-weighted return is comparing different measures. Public market equivalent methods exist to put private returns on a comparable footing, and using raw IRR against an index return systematically favours the private fund.

Attribution of timing decisions. The gap between TWR and MWR is itself information: it measures the cost or benefit of when capital was deployed. A persistent negative gap suggests capital is arriving after strength and leaving after weakness — a governance finding, not a manager finding.

Fee calculations. Performance fees on private funds are usually tied to IRR-based hurdles. Whether a subscription line is in use, and how it affects the clock, changes when carry begins to accrue.

Client conversations. An investor who contributed heavily before a drawdown will not recognise the time-weighted number as their experience. Explaining the divergence before it is noticed is more comfortable than explaining it afterwards.

References

1. CFA Institute. Global Investment Performance Standards (GIPS) for Firms. (https://www.cfainstitute.org/en/ethics-standards/codes/gips-standards)
2. Kaplan, S. N., & Schoar, A. (2005). Private Equity Performance: Returns, Persistence, and Capital Flows. Journal of Finance, 60(4), 1791–1823.
3. Phalippou, L. (2009). The Hazards of Using IRR to Measure Performance: The Case of Private Equity. Journal of Performance Measurement, 12(4).
4. Bacon, C. R. (2008). Practical Portfolio Performance Measurement and Attribution (2nd ed.). Wiley.