Performance Measurement Methods: TWR vs. IRR

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  • Performance

Investors and portfolio managers alike grapple with the best calculation methodology to use in performance measurement. We've created a fact sheet to help you distinguish the two primary measures: the time-weighted rate of return (“TWR”) and the internal rate of return (“IRR”).

Both return metrics have a place in presenting meaningful performance. Due to its straightforward nature, the TWR is the required calculation for most asset classes under the GIPS® standards, while only fixed life, drawdown fund structures that fall under the definition of private equity are allowed to present IRRs.

Ultimately, the most appropriate method of performance measurement depends on the investment strategy, structure, and the intended use. We also touch on additional risk measures and/or multiples shown alongside both return measures to provide better context.

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About the Author

Douglas Finlay, CIPM, is a Senior Principal Consultant with ACA Performance Services, a division of ACA Compliance Group. Douglas joined ACA in 2007 and has worked with over 50 clients including several asset owner clients. Douglas earned his B.A. in History from the University of the South (Sewanee). He also holds an M.B.A. with a concentration in Finance from the University of Tennessee at Chattanooga, where he was awarded the John C. Stophel Distinguished Student Award. He is a member of CFA Institute and the CFA Society of East Tennessee.