1. Overview of TWR vs. IRR

Time-Weighted Return (TWR)

• Definition: A measure of a portfolio’s rate of return that removes the impact of external cash flows (contributions/withdrawals).
• Use Case: Evaluating the skill of an investment manager or strategy, independent of investor-driven cash flow timing.
• Interpretation: If TWR is 5%, it means each dollar in the portfolio from the start (and left there uninterrupted) grew by 5% over the measurement period.

Internal Rate of Return (IRR) (Also called Money-Weighted Return)

• Definition: The discount rate that sets the net present value (NPV) of all cash flows (in and out) plus the final value to zero.
• Use Case: Measuring the actual performance from the investor’s perspective, factoring in both the size and timing of contributions and withdrawals.
• Interpretation: If IRR is 5%, the investor’s money effectively grew by 5% per year (or per period), taking into account when and how much they invested or withdrew.

2. Why Two Measures? Which Is “Correct”?

1. TWR: Emphasizes how the manager performed with the funds they actually managed, ignoring unpredictable external cash flows.
2. IRR: Measures what the investor personally experienced in terms of actual money put in or taken out.

Neither is “better” in every scenario:

• TWR is preferred for manager comparisons and performance reporting standards (like GIPS).
• IRR is preferred when you want to see how your own money grew.

3. Example Calculation / Visualization