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GLOSSARY
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Time-weighted returns
A time-weighted return is determined by calculating the rate of return between two or more periods, multiplying those returns together geometrically, and then taking the geometric mean of the result. Example: [(1.15*1.20*1.25)1/3]-1 = 20% return. Time-weighted returns are an approximation of an IRR and are usually easier to calculate than the IRR. The term is a misnomer as it does not consider the time value of money, but rather produces a return that does not penalize fund managers for timing decisions; the calculation treats a dollar distributed today the same as a dollar distributed ten years ago. Time-weighting was created to overcome the fact that the public securities manager has no control over the timing of the cash flow into or out of his management by his clients due to liquid secondary markets. The investment manager’s performance is therefore measured strictly on the investment decisions they make, not on the timing of cash flows
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