I’m reviewing a client’s calculation process and learned that they previously employed a mid-day approach: note that they calculate returns daily but simply assumed that the flows occurred mid-day. I have never liked mid-day for cash flows. Why?

As you may recall, GIPS(R) mandates that effective 1 January 2010 compliant firms revalue portfolios at the time of large cash flows … who is going to revalue their portfolio mid-day? Firms revalue at the start and/or end of the day, but not mid-day. Using the start or end of day approach for cash flows yields an EXACT return. However, if you use the mid-day approach, you’re actually using an approximation approach to derive your return. One might argue that mid-day is good if you can’t decide between start and end … sorry, but I don’t buy it.

Most firms use either start or end of day weighting for cash flows: to me this is the way to go. In fact, we’re seeing an increasing number move to start for in-flows and end for outflows, which seems to work best.