Process Significant Cash Flows
- Tom Fahey (Unlicensed)
- Jacob Mathews (Deactivated)
Many firms estimate true multi-period time-weighted returns by compounding monthly sub-period dollar weighted returns, where the sub-period returns are generated by Modified Dietz or Internal Rate of Return formula calculations. When estimating time-weighted returns using this method, intra-period external cash flows into and out of a portfolio can distort the sub-period returns.
Daily valuations and single-period return calculations are one solution to this problem. However, many firms do not have regular daily valuations available for all types of entities. Another way to address this problem is to create a special valuation only when there are large external cash flows. In Eagle Performance, this is called Significant Cash Flow Processing (SCF).
Common terminology used in SCF is described in the following table.
Term | Definition |
|---|---|
Cash Flow | Any external contribution or withdrawal from a fund or account. |
Money-Weighted Return | Investment return that reflects both timing and dollar amount of customer cash flows. |
Time-Weighted Return | Manager Return that eliminates the effect of the timing and dollar amount of customer cash flows. |