What is Time-Weighted Return (TWR)?

The Time-Weighted Return (TWR) is a method of measuring an investment’s performance while eliminating the impact of cash inflows and outflows. It calculates the compound growth rate of an investment over multiple time periods, making it an ideal metric for comparing portfolio performance across different managers and strategies.

TWR is widely used in investment funds, portfolio management, and performance benchmarking because it provides an accurate return measure that is not influenced by investor contributions or withdrawals.

How Time-Weighted Return Works

TWR breaks the investment period into separate sub-periods based on when cash flows occur. The return for each sub-period is calculated separately and then compounded to determine the overall return.

TWR Formula

TWR=(1+R1)×(1+R2)×(1+R3)×…×(1+Rn)−1TWR = (1 + R_1) \times (1 + R_2) \times (1 + R_3) \times … \times (1 + R_n) – 1

Where:

• R1,R2,R3,…RnR_1, R_2, R_3, … R_n are the individual period returns.

Step-by-Step Calculation

1. Divide the time frame into sub-periods based on when external cash flows occur.
2. Calculate the return for each sub-period: Rt=(Et−Bt)BtR_t = \frac{(E_t – B_t)}{B_t}
   • BtB_t = Beginning value of the period
   • EtE_t = Ending value of the period (before cash inflows or outflows)
3. Chain-link the sub-period returns using the TWR formula.

Example Calculation

Period	Beginning Value	Ending Value (Before Cash Flow)	Return (%)	Cash Flow
Q1	£10,000	£10,500	5%	+£2,000
Q2	£12,500	£13,000	4%	£0
Q3	£13,000	£12,350	-5%	£0

TWR Calculation: TWR=(1+0.05)×(1+0.04)×(1−0.05)−1TWR = (1 + 0.05) \times (1 + 0.04) \times (1 – 0.05) – 1 =(1.05)×(1.04)×(0.95)−1= (1.05) \times (1.04) \times (0.95) – 1 =1.0407−1=4.07%= 1.0407 – 1 = 4.07\%

The TWR is 4.07%, reflecting the investment’s true growth without cash flow distortions.

Why Use Time-Weighted Return?

• Removes Cash Flow Bias – TWR is not affected by investor contributions or withdrawals.
• Industry Standard for Fund Performance – Used by asset managers to compare fund returns objectively.
• Fair Benchmarking – Allows performance comparison across different portfolios.

TWR vs. Money-Weighted Return (MWR)

Feature	Time-Weighted Return (TWR)	Money-Weighted Return (MWR)
Adjusts for Cash Flows?	Yes	No
Measures Portfolio Growth?	Yes	Yes, but includes investor cash flows
Used for Fund Performance?	Yes, preferred for benchmarking	Less common
Investor Control Impact?	No	Yes, cash timing affects returns

FAQs

What is time-weighted return?

TWR is a performance metric that calculates an investment’s compounded return while removing the impact of cash inflows and outflows.

Why is time-weighted return important?

It ensures fair performance comparisons by focusing on market returns rather than investor decisions.

How does TWR differ from money-weighted return?

TWR isolates investment performance, while MWR factors in investor cash flows, making it more relevant for personal returns.

Is time-weighted return better for fund managers?

Yes, because it reflects pure portfolio performance, not investor behavior.

Can TWR be negative?

Yes, if the overall compounded return is negative, TWR will reflect a loss.

Do mutual funds report TWR?

Yes, most investment funds use TWR as the standard metric.

Does TWR consider reinvested dividends?

Yes, reinvested dividends are included in the return calculation.

Is TWR used in forex and crypto trading?

Yes, traders use TWR to measure performance over multiple periods while eliminating the impact of deposits/withdrawals.

How often should TWR be calculated?

It can be daily, monthly, or quarterly, depending on the investment strategy.

What is a good TWR?

A good TWR depends on market conditions and benchmarks. If it outperforms the relevant index, it is considered strong.