Why is your return different from the fund's headline?
A fund advertises +20% over two years. Your statement, covering exactly those two years in exactly that fund, shows a loss. Neither number is wrong. They answer different questions, and knowing which is which is one of the most practically useful distinctions in performance measurement.
Time-weighted return: how did the manager do?
Time-weighted return (TWR) chops the period at every cash flow and chain-links the sub-period returns:
TWR = (1 + r₁) × (1 + r₂) × … − 1
Because each sub-period return is computed on the money that was there for that sub-period, the size and timing of deposits and withdrawals drop out entirely. That is deliberate: a manager does not control when clients add or remove money, so the measure that judges the manager should be blind to it. This is why regulators and performance standards require TWR for advertised returns on funds whose investors control the cash flows; the exception is below.
Money-weighted return: how did you do?
Money-weighted return (MWR) is an internal rate of return. It is the single rate r that makes every cash flow, discounted back, net to zero:
Σ CFₜ ÷ (1 + r)ᵗ = 0
It fully counts how much money was exposed to each period. Big contribution before a bad stretch? The MWR knows. It is the return your actual wealth experienced.
The worked example
A fund returns +50% in year 1 and −20% in year 2.
The fund's number (TWR): 1.50 × 0.80 = 1.20 → +20% cumulative, or a CAGR of √1.20 − 1 = +9.5% a year.
The investor's number (MWR): you started with €1,000. After the +50% year it was €1,500. Encouraged, you added €9,000, bringing the balance to €10,500 at the start of year 2. Then −20%:
€10,500 × 0.80 = €8,400
You put in €10,000 in total and hold €8,400. Solving for the internal rate of return on the flows (−1,000 at t=0, −9,000 at t=1, +8,400 at t=2):
1,000(1+r)² + 9,000(1+r) = 8,400 → r ≈ −14.7% per year
The fund honestly reports +9.5% a year. Your money honestly lost about 15% a year. The entire gap is when the money arrived — nine-tenths of your capital was present only for the losing year.
Which one to use
- Judging a manager or comparing funds → TWR. It isolates the investment decisions from the flow decisions.
- Judging your own outcome, or any portfolio where the timing of contributions was itself a decision → MWR. It is the only one your wealth obeys.
A recurring finding in industry return studies is that investor money-weighted returns tend to trail the funds' own time-weighted returns, and the mechanism is exactly the one above: money arrives after good stretches and leaves after bad ones. Stated as measurement, not as instruction — this course does not tell anyone when to add or remove money.
Private funds are the exception. A private-equity manager decides when capital is called and returned, so the flows are the manager's decisions and a money-weighted return, reported as an IRR, is the right measure of the manager; the GIPS standards allow it for such funds. It is still not comparable with a listed fund's time-weighted figure. A large early distribution fixes a high IRR that later years cannot dilute, and a subscription credit line that delays the capital call raises the IRR without changing the cash returned. Read a private fund's IRR beside its cash multiple, distributions plus residual value over paid-in capital, and beside a public-market equivalent, the same cash flows invested in a listed index on the same dates.
In the data
Only one side of this is public. The instrument's adjusted price path, below, is everything a time-weighted return needs:
The money-weighted figure also needs the dates and sizes of the contributions and withdrawals, and no market data holds those, because they are the account's own. The consequence is structural rather than practical: a TWR can be reproduced from public data by anybody, an MWR by nobody except the account holder.
Try it now
- Reproduce the example on paper: verify that 1.50 × 0.80 − 1 = +20%, and that √1.20 − 1 ≈ 9.5%.
- Change the story so the €9,000 arrives at the start rather than after year 1, and recompute the ending balance and the MWR. Notice the TWR did not move at all.
- Now the two-sided version. The chart above is the instrument's path and nothing else — which is everything a TWR needs and everything anybody can reproduce. Measure any two-year stretch of it and write the TWR down. Beside it, write what your own MWR would have been under a contribution schedule of your choosing. That schedule is not on this page and never will be: it is not market data. Two true numbers, two different questions.