The Case Against Time-Weighted Return for Alternative Investments

Timothy F. Peterson, CFA, CAIA, CIPM, Cane Island Alternative Investors

This article explains why the adoption of a time-weighted rate of return methodology as a performance measure for illiquid, private investments is misguided. The increased adoption of time-weighted return for illiquid alternatives is the result of greater awareness of, and adherence to, several industry reporting standards, as well as a general increase in portfolio allocations to illiquid alternative investments. After describing the nature of alternative investments and their strategies, the author adduces six tenets of time-weighted return, each of which is incompatible
with the circumstances and goals of alternative investment performance measurement. Considerable attention is given to the risks inherent in valuing illiquid assets. In an effort to balance theoretical idealism with pragmatic business requirements, the article concludes with a decision framework for reporting combined portfolios of liquid and illiquid investments.