How is TWRR different from XIRR?

TWRR or Time-Weighted Rate of Return is a measure of the compound growth of an investment irrespective of money flows. In order to calculate TWRR an investor needs to know when investment contributions or withdrawals were made, how much they were, and where the portfolio was valued at the time. Returns must be calculated for each period between contributions or withdrawals and then all the periods are multiplied together to get the compounding effect of the return. If the investment is for more than one year, the geometric mean of the annual returns is taken to find the time-weighted rate of return for the measurement period.

The beginning value is the account value at the beginning of a set period. The ending value is the account value at the end of a set period. A simple rate of return is calculated by subtracting the beginning value from the ending value and then dividing by the beginning value.

XIRR or extended internal rate of return is a measure of return that is used when multiple investments have been made at different points of time in a financial instrument. It is a single rate of return when applied to all transactions (investments and redemptions) that would give the current rate of return.

TWR is used by the investment industry to measure the performance of funds investing in publicly traded securities.  By contrast, IRR is normally used to gauge the return of funds that invest in illiquid, non-marketable assets—such as buyouts, venture, or real estate funds.

Managers of public securities funds typically do not control investor cash flows. Investors in these funds enter and exit at will. On the other hand, investors in many private or alternative funds face restrictions on their ability to invest additional assets or redeem existing assets. These restrictions can take the form of multi-year “lock-ups” or no ability to achieve liquidity absent the sale of underlying assets.