Money-weighted return
The internal rate of return on a portfolio's actual cash flows, so it reflects when money was added or withdrawn. The fair measure when the manager, such as a private equity general partner, controls that timing.
Where you will meet it
Money-weighted return appears in 7 learning outcomes on the CFA syllabus. A few of them:
- Contrast money-weighted with time-weighted rates of return
“A money-weighted return is the internal rate of return of the portfolio's cash flows, so it is affected by when the investor added or withdrew money.”
- Differentiate the internal rate of return and time-weighted return when applied to alternatives
“The money-weighted internal rate of return is therefore the appropriate measure there.”
- Explain why private-market results cannot be read like listed-market returns, and compute and interpret the paid-in multiples DPI, RVPI and TVPI and when each is useful
“The GP controls when capital is called and returned, so private funds report money-weighted IRRs and multiples, not time-weighted returns, and comparing them with an index needs a public market equivalent (PME).”
- Judge whether a private client's investment programme is working, using performance reports and periodic reviews
“Time-weighted return is the right tool for judging the manager, while money-weighted return reflects the client's own experience including the timing of contributions and withdrawals.”
See also
General partner · Internal rate of return
Practise it
Practise money-weighted return until it is automatic: questions that explain every wrong option.
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