The Case for Money-weighted Performance Attribution

Performance attribution has evolved in parallel with performance measurement by accepting the time-weighted return as the preferred calculation method.  In addition, the investment industry has accepted the assumption that increasing the frequency of calculation leads to improved accuracy in both the calculation and attribution of return.  These assumptions have led to the wholesale abandonment of the money-weighted return calculation, both for performance measurement and performance attribution.  This paper proposes that, while there is an irrefutable case for accepting the time-weighted return as the preferred method for measuring the return of an investment manager, there is an equally compelling case for accepting the money-weighted return as the appropriate method for evaluating the source of that active return; that is, that the money-weighted return is the correct method for performance attribution.