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Time-Weighted Return vs. Internal Rate of Return
Tamarac Reporting supports time-weighted (TWR) and internal rate of return (IRR) performance methodologies.
The daily performance values are calculated based on the ending value, beginning value, and flow of each day. This return is stored and linked together to produce Tamarac Reporting's time-weighted returns. In other words, Tamarac uses a daily linked return for our TWR methodology. Net and gross of fee options are available, as is cumulative and annualized. However, all returns for periods shorter than 12 months are cumulative.
IRR is available in addition to TWR. We use a simple actual IRR calculation with a million iteration limit. This method is more resource intensive, but more accurate than a modified equation such as the Dietz or average capital base.
The TWR is a set of smaller returns that are linked together using the geometric linking formula.
Our legacy calculation provides precision that exceeds industry requirements. The account's performance is separated from external factors (represented by the flows), and thus provides more detail than the minimum standard required for daily TWR calculations. It performs well in most circumstances, but in some instances it can result in an undefined state, preventing us from offering the additional options that we've made available with our enhanced calculation.
End Value / (Beginning Value + Net Flow)
(End Value - Outflow) / (Beginning Value + Inflow)
The November 2015 release introduced a new performance calculation option that allows you to:
Show returns for closed accounts
Show returns across holdings gaps
See IRR across previously held positions
Ensure that data will not be skewed by very large outflows (the account end value is now adjusted for any outflows)
With the enhanced calculation, the new TWR formula always remains defined, resolving the reporting limitations associated with the legacy calculation, and allowing you to get deeper, more transparent reporting.
To take advantage of the enhanced calculations, contact your Tamarac Service Team. You will need to have intra-group flows enabled before you can use the enhanced calculations.
The IRR cannot be computed directly. The IRR must be computed using a trial and error procedure in which you “guess” an answer, plug the guess into the equation, then modify the guess depending on the results. The new guess is plugged back into the equation, and the process is repeated until a satisfactory degree of precision is achieved. Tamarac Reporting will estimate up to 1 million guess-and-check iterations.
EMV = BMV*IRRD/T + Flow1*IRRD1/T + Flow2*IRRD2/T +…+Flown*IRRDn/T
T = days from beginning date to ending date
D = days until ending date