Glossary

Time-Weighted Return (TWR) — Definition and Formula

Time-weighted return measures portfolio performance independent of investor cash flows. Definition, formula, worked example, and why TWR is the methodology required by GIPS.

By NakedPnL Research·May 7, 2026·4 min read

TL;DR

TWR measures the compound rate of growth of one unit of currency invested for the full period, neutralising deposits and withdrawals.
It is computed by chain-linking sub-period returns separated by each external cash flow.
TWR is the metric NakedPnL surfaces on every public profile, alongside total PnL and trade count.

Definition

Time-weighted return (TWR) is the compound rate of growth that one unit of currency would have experienced if it had been invested for the entire measurement period. It deliberately strips out the timing and size of investor cash flows so that the resulting figure reflects the manager's investment decisions, not the investor's contribution schedule. TWR is the return methodology required by the Global Investment Performance Standards (GIPS) for the calculation of composite returns.

Formula

Step 1 — split the measurement period at every external cash flow.
Step 2 — for each sub-period i, compute:
  r_i = (NAV_end_i - NAV_start_i - net_external_flow_i) / NAV_start_i
Step 3 — chain-link the sub-period returns geometrically:
  TWR = ((1 + r_1) * (1 + r_2) * ... * (1 + r_n)) - 1

External flows include deposits, withdrawals, transfers in, and transfers out — anything that changes the funded base without being a return.

Worked example

A trader starts the quarter with a NAV of 100,000. After 30 days the NAV is 110,000 and the trader deposits 50,000, raising the NAV to 160,000. After another 60 days the NAV is 168,000. Sub-period 1 return is (110,000 − 100,000) / 100,000 = 10.0%. Sub-period 2 return is (168,000 − 160,000) / 160,000 = 5.0%. The chain-linked TWR is (1.10 × 1.05) − 1 = 15.5%. A naive percentage-change calculation would have shown only (168,000 − 100,000) / 100,000 = 68%, conflating the deposit with investment performance.

How NakedPnL computes it

NakedPnL fetches a NAV snapshot from each connected venue at 23:55 UTC every day and detects external flows from the venue's deposit and withdrawal feed. Every sub-period return is calculated with Decimal.js arbitrary-precision arithmetic to avoid floating-point drift, hashed with SHA-256, and appended to the trader's audit chain. The chain is independently re-verifiable in the browser via the Web Crypto API on each profile's verifier page.

Internal rate of return (IRR) — money-weighted alternative
Compound annual growth rate (CAGR) — applies only when no intra-period flows occur
Cash flow — the events that TWR is designed to neutralise
GIPS — the standard that requires TWR for composite returns

Frequently asked questions

Why is TWR preferred over a simple percentage change?

Simple percentage change conflates investment performance with funding events. If a trader deposits new capital mid-period, a naive calculation will count that deposit as a return. TWR isolates the manager's skill by measuring growth per unit of currency that was actually invested at each point.

How is TWR different from IRR?

TWR is time-weighted: every sub-period contributes equally regardless of how much capital was at risk. IRR is money-weighted: it solves for the discount rate that sets the net present value of all cash flows to zero, so periods with more capital deployed weigh more heavily. TWR measures the manager; IRR measures the investor's experience.

Does TWR account for fees?

TWR is a methodology, not a fee policy. NakedPnL displays gross-of-fees TWR computed from raw venue NAV. Trading commissions and funding charged inside the venue are already reflected in NAV; external manager fees are not.

References