With the 2020 edition of the GIPS standards, firms claiming compliance with the GIPS standards now have a choice of whether to use time-weighted returns (TWRs) or money-weighted returns (MWRs). This is fantastic news for the alternatives community. In the 2010 version of the GIPS standards, a series of since-inception MWRs was required for private equity funds, but no other investment structure or strategy had the option to present MWRs without also showing a series of annual TWRs.
The biggest difference between the two types of returns is that TWRs remove the effect of external cash flows in return calculations while MWRs take into account the timing and amount of cash flows.
Firms are now permitted to present MWRs in lieu of traditional TWRs if the firm controls the timing of the external cash flows into the composite or pooled fund and the composite or fund has one of four of the following characteristics:
- Fixed commitment
- Illiquid investments as a significant part of the investment strategy.
Prior to the release of the 2020 GIPS standards, MWR presentations required return statistics through each annual period end, similar to TWR requirements. While still recommended, only one period of MWRs is now required – since-inception through the most recent annual period-end.
The ability to choose whether to present MWRs or TWRs and to show single since-inception return statistics has been well received as this allows firms greater flexibility to provide performance presentations that more closely reflect performance data the target market is used to tracking. A firm can also choose to switch to MWRs if they have been showing TWRs historically, with disclosure of the change and the date of the change. This disclosure is required to be shown for a minimum of 1 year
In addition to the since-inception MWRs for the composite and benchmark, the following items must be presented as of the most recent annual period end. This applies to all pooled funds, and only composites which have committed capital.
1. Composite/pooled fund since-inception paid-in capital;
2. Composite/pooled fund since-inception distributions;
3. Composite/pooled fund cumulative committed capital;
4. Total value to since-inception paid-in capital (investment multiple or TVPI);
5. Since-inception distributions to since-inception paid-in capital (realization multiple or DPI);
6. Since-inception paid-in capital to cumulative committed capital (PIC multiple); and
7. Residual value to since-inception paid-in capital (unrealized multiple or RVPI).
MWR performance can have fewer data inputs than composites of SMAs which can be a relief for firms that have been historically using TWRs and now meet the new requirements for presenting MWRs. Start-up firms may use Excel initially for calculating the MWR rather than investing in a portfolio accounting system from day one. This is not a long-term solution, however; even in the short-term, firms need to be aware of the limitations and complexities before they go to market with performance. Read our article on calculating money-weighted returns in Excel here.
Have a question as your firm is considering if they should show MWR performance? Send them our way. Cascade Compliance has over 34 years of combined experience working with the GIPS standards, and its employees have worked with hundreds of firms in the U.S. and abroad. One of the best parts of working with clients is getting to share expertise and knowledge of best practices across the industry. Whether you are a client of ours or not, we are here to help you get better at what you do and answer any questions you may have.