Money-Weighted Return (and Why It Differs From TWR)

Money-weighted return is the rate at which every dollar in a portfolio grew, given exactly when each dollar arrived and left. It is an internal rate of return: the single discount rate that makes the beginning value plus all cash flows equal the ending value. Because contributions and withdrawals change the answer directly, it measures what the investor actually earned rather than how the manager performed. It is the right number when whoever runs the portfolio also controls the timing of the money. Dollar-weighted return is the same thing under a different name.

Two clients hold identical portfolios, holding for holding, and end the year with different returns. Neither statement is wrong. One added money before a good quarter and one added money before a bad one, and a money-weighted return is designed to capture exactly that. Below is the formula, a worked example carried through from our other guides so you can compare methods on one account, a calculator, and the four things that quietly break an IRR.

The formula

Money-weighted return is the value of r that solves this equation:

EMV = BMV × (1 + r) + Σ [ C_i × (1 + r)^W_i ]

Term	Meaning
EMV	Ending market value of the portfolio
BMV	Beginning market value of the portfolio
C_i	An individual external cash flow (contributions positive, withdrawals negative)
W_i	The fraction of the period remaining after that flow, meaning (CD − D_i) / CD

Read it as compounding. The opening balance compounds at r for the full period, so its exponent is 1. A contribution that arrives halfway through compounds at the same rate for half the period, so its exponent is 0.5. Add up what everything grows into and it has to equal the ending value. There is no closed-form solution. You solve it numerically, which is what Excel’s IRR and XIRR do and what the calculator below does.

Modified Dietz is this formula with the compounding stripped out. Replace (1 + r)^W with the linear approximation 1 + W r, rearrange, and you get the Modified Dietz equation exactly. That is why the two methods land within a few basis points of each other on ordinary flows and why Modified Dietz is sometimes called the simple internal rate of return. It is not a rival method. It is the same idea, solved in one step instead of iteratively. The Modified Dietz guide covers that method in full.

Worked example

The same separately managed account used in our time-weighted return and Modified Dietz guides, so the three answers are directly comparable.

Date	Event	Amount
Jan 1, 2026	Beginning market value	$1,000,000
Feb 15, 2026	Client contribution	+$200,000
Mar 31, 2026	Ending market value	$1,300,000

Step 1: weight the flow

Q1 2026 runs Jan 1 through Mar 31, so CD = 90 days. Jan 1 to Feb 15 is 45 days, so D = 45. W = (90 − 45) / 90 = 0.50 The contribution had half the quarter to compound.

Step 2: write the equation

$1,000,000 × (1 + r)¹ + $200,000 × (1 + r)^0.5 = $1,300,000

Step 3: solve for r

Iterate until both sides balance. At r = 9.1090%:

Component	Grows into
$1,000,000 × 1.091090	$1,091,090
$200,000 × 1.091090^0.5	$208,910
Total	$1,300,000

The money-weighted return for the quarter is 9.1090%. This is a quarterly figure. It is not annualized, and it should not be.

Calculate your own

Money-weighted return calculator

Enter the period, the beginning and ending market values, and every external cash flow. Contributions are positive, withdrawals negative. Income and gains generated inside the portfolio are not cash flows. Fees paid out of the portfolio are.

Period start

Period end

Beginning market value

Ending market value

External cash flows (contributions positive, withdrawals negative)

9.1090%

Solved over 90 days with 1 cash flow. Period is under one year, so this figure is not annualized. Modified Dietz on the same inputs gives 9.0909%.

Why it differs from time-weighted return

Run all three methods on the account above and you get three answers:

Method	Return	What it answers
Time-weighted	9.6875%	How did the portfolio perform?
Money-weighted (IRR)	9.1090%	How did the client’s money perform?
Modified Dietz	9.0909%	Estimate of the time-weighted return

The portfolio returned 8.00% before the contribution and 1.56% after it. The client put $200,000 to work immediately ahead of the weaker stretch, so more of their capital experienced the weaker stretch. The manager did not get worse. The timing did. Flip the flow and the gap reverses. Same market path, same manager, but the client takes $200,000 out on Feb 15 instead of putting it in:

Method	Contribution on Feb 15	Withdrawal on Feb 15
Time-weighted	9.6875%	9.6875%
Money-weighted	9.1090%	10.3882%

Time-weighted return does not move, because it is built not to. Money-weighted return jumps 128 basis points on a decision the manager had no part in. That is the whole distinction, in one table. Which one you should put in front of a client depends on who controlled the money, and we work through that decision here.

When money-weighted return is the right number

Private equity, real estate, and other drawdown structures

The general partner decides when capital is called and when proceeds are returned. Timing is part of the job, so measuring the manager on a number that ignores timing would remove the thing you are trying to judge. Since-inception IRR is the convention here, and it is a money-weighted return.

What the GIPS standards allow

Under the 2020 GIPS standards, a firm must present time-weighted returns unless it controls the external cash flows into the portfolio and the composite or pooled fund meets one of these conditions: closed-end, fixed life, fixed commitment, or holding illiquid investments as a significant part of the strategy. Where both tests are met, money-weighted returns may be presented instead. Note the shape of the test. Control over the cash flows is necessary but not sufficient on its own. Both halves have to hold.

Answering “how did I do?”

When a client asks what their own money earned, the money-weighted return is the honest answer, and it is the one that reconciles to the change in their balance. Many advisers show both: time-weighted to evaluate the strategy, money-weighted to describe the client’s actual experience. Label them clearly, because unlabeled they look like a contradiction.

Since-inception IRR and the metrics that travel with it

Private funds report IRR since inception rather than by period, alongside a set of multiples. A fund with these flows:

Date	Event	Amount
Mar 31, 2021	Capital call	$2,000,000
Mar 31, 2022	Capital call	$3,000,000
Sep 30, 2023	Distribution	$1,500,000
Jun 30, 2024	Distribution	$2,500,000
Jun 30, 2026	Remaining NAV	$4,200,000

produces a since-inception IRR of 15.38%, and:

Metric	Formula	Value
DPI, distributions to paid-in	Distributions / paid-in capital	0.80x
RVPI, residual value to paid-in	Remaining NAV / paid-in capital	0.84x
TVPI, total value to paid-in	(Distributions + NAV) / paid-in capital	1.64x

IRR and TVPI are reported together because neither is sufficient alone. IRR knows about time but can be manipulated by it. TVPI knows nothing about time but cannot be manipulated by it. Read them as a pair, and remember that until the fund is fully realized, both depend on a NAV that somebody estimated.

What breaks an IRR

Accidental annualization

The most common error by a wide margin. Excel’s XIRR always returns an annualized rate. Feed it the quarterly example above and it reports roughly 43.0%, not 9.11%, because it has projected a strong quarter across a full year. Nothing is wrong with the function. It answers a different question than the one most people meant to ask. Two things follow. Do not annualize a period shorter than a year for client reporting. And when you compare your system’s number against a spreadsheet, confirm both are on the same basis before concluding one is broken.

Day-count conventions move the answer too. The 9.1090% above weights the flow by the fraction of the period remaining, the same convention used in the Modified Dietz guide. XIRR instead uses actual days over 365 for every flow, which on this account works out to 43.0285% annualized, or 9.1183% restated to the quarter. Annualizing our period figure at 365/90 gives 42.4115%. All three are defensible. None of them are interchangeable. Document which one your reports use.

More than one sign change

An IRR is a polynomial root, and a cash flow stream that crosses from negative to positive and back can have more than one valid solution or none at all. This shows up in real portfolios that get fully drawn down and refunded, and in funds with recallable distributions. The calculator above flags it. A solver that does not flag it will simply hand you whichever root it stumbled into first.

Subscription lines of credit

A fund that borrows to make investments and calls LP capital months later shortens the time LP money is outstanding, which raises the IRR without changing a single underlying deal. Take the fund above and delay both capital calls by twelve months, leaving every distribution and the ending NAV untouched:

Measure	Calls as scheduled	Calls delayed 12 months
Since-inception IRR	15.38%	22.64%
TVPI	1.64x	1.64x

Same deals, same dollars, same investors, 726 basis points of IRR. This is why the multiple is reported next to the rate.

Comparison against a benchmark

An index has no cash flows, so a money-weighted portfolio return next to a plain index return is not a like-for-like comparison, and it will flatter or damage you at random depending on when the client happened to move money. The fix is not to switch methods. It is a public market equivalent: the index return restated using the portfolio’s own cash flow timing. GIPS requires a since-inception money-weighted benchmark return alongside a money-weighted composite return, and contemplates a public market equivalent as that benchmark.

Common errors

Treating internal income as a cash flow

Dividends, interest, and realized gains generated inside the portfolio are not external flows. Only money crossing the portfolio boundary counts. Booking a dividend as a contribution will strip out real performance. The reverse catches people more often: advisory fees debited from the account are external flows, even though the income that funded them is not.

Sign errors

Every IRR implementation has a sign convention, and they are not all the same one. Excel’s XIRR expects money going into the investment as negative and money coming out as positive, with the ending value as a final positive. The calculator above uses the portfolio’s perspective instead, matching the rest of this site: contributions positive, withdrawals negative, with the beginning and ending values in their own fields. A sign error usually announces itself as a wildly implausible rate, which is the one mercy here.

Comparing a money-weighted return to a time-weighted peer figure

Manager league tables, composite performance, and nearly every published mutual fund return are time-weighted. Dropping a client’s money-weighted number into that context is a category error, and the difference will be read as skill.

Reporting an IRR on a portfolio with no meaningful invested base

An account that opens at zero, is funded on the last day of the quarter, and closes the period barely moved will produce a rate that is arithmetically valid and completely uninformative. Suppress the number or footnote the period rather than printing it.

This is a general explanation of calculation methods, not compliance advice. If you are claiming GIPS compliance or preparing performance for regulatory review, confirm the current requirements with your verifier or compliance counsel.

The practical takeaway

Use money-weighted return when the person being measured controlled the timing of the money, and when the question is what the investor actually earned. Use time-weighted return for anything being compared to a benchmark or to another manager. If you show both, label both, and never present them side by side without a sentence explaining why they differ. Clients handle two numbers fine. They do not handle two numbers with no explanation.

Advantage Portfolio Hub records dated capital calls, distributions, dividends, and fees across every entity, account, and holding, and calculates both returns on this page from them: a Modified Dietz estimate chained monthly, and a since-inception money-weighted return solved as an annualised IRR on the actual dated cash flows, actual/365, the same convention as Excel’s XIRR. DPI, RVPI and TVPI sit alongside it, because an IRR without a multiple next to it is the problem this guide describes. Start a free trial

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Educational content. Advantage Portfolio Hub is a software provider, not an investment adviser, accountant, or law firm. Nothing here is investment, tax, accounting, or compliance advice.