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Time-Weighted Rate of Return (TWRR)

Related terms: performance return, investment performance metric, manager evaluation return, portfolio performance measure

What is Time-Weighted Rate of Return (TWRR)?

Time-Weighted Rate of Return (TWRR) is a performance metric used to measure the rate of return on an investment portfolio, accounting for external cash flows like deposits and withdrawals. TWRR isolates the impact of portfolio management by neutralising the timing and size of these external flows, making it a preferred method for evaluating fund managers or investment strategies over time.

How Time-Weighted Rate of Return (TWRR) Works

The calculation of TWRR involves breaking the investment period into sub-periods based on cash flow events. The return for each sub-period is calculated separately and then compounded to determine the overall return. This method provides a clear view of how well an investment strategy performs independently of investor actions.

Why Time-Weighted Rate of Return (TWRR) is Important

TWRR is crucial for comparing the performance of portfolio managers or funds, as it ensures that external cash flows do not distort results. By focusing solely on the investment decisions, it offers an unbiased measure of a strategy’s effectiveness. TWRR is widely used in family office reporting, institutional investment performance reviews, and fund comparisons.