Hi Vidas,

Yes, “control of the cash flow” is a crucial point. To evaluate the ability of a portfolio manager, the best way is to measure the growth rate of the funds he/she manages. However, for some funds, they don’t have full control of the cash flows, meaning that the clients may request to withdraw money (e.g. redeem) or invest extra into the funds at their wills. The withdrawal or injection of cash can be timed badly (e.g. withdrawal before the market performs well or injection before the market collapses). This is “out of control” by the fund managers. So it is not fair to measure the growth rate by the money-weighted return (IRR) because badly-timed injection or withdrawal (especially in large amount) will make the whole all performance very bad.

On the contrast, if the manager has control of the cash flow (e.g. his decision to pay cash back to investor as he’s seeing a market collapsing), we should use money-weighted return.

Please refer to the followings videos for more information:

http://minute-class.com/finance/time-weighted-rate-of-return/ http://minute-class.com/finance/money-weighted-rate-of-return/