Wrong TWR rate for short sales

[lucabol]

Hi Mark,
I'm afraid this is a bad bug. I held short BP from 4/30 to 7/10, my TWR (between) is -33.22 (??). My gain is 33.48. ROI is NA. Same problem goes for all the other shorts. It seems you are just taking the price, without regard if it's hold long or short.

Thanks,
.luca

[Mark]

Hi luca,

I see this too. Fund Manager is using the standard TWR equation of:

(End_i - Beg_i) / Beg_i

for each period between a contribution. TWR is only time weighted (not money weighted), and factors out how much you actually own during any period. The GIPS standard does not specifically describe how to handle short positions. I can think of 3 possibilities on how to deal with short position calculations for TWR:

1) Leave it as is, and document that this is for the underlying investment's performance, ignoring how much you own, even ignoring that you own a negative amount.

2) Take the absolute value of the denominator, so you get a positive TWR when the value goes up, no matter whether you own long or short.

3) If either the beginning or ending values are negative, report TWR as N/A, similar to how ROI works for short positions.

I'm guessing you'd prefer to have it work like option #2?

[lucabol]

Hi Mark,
I would think that you would invert the nominator and use the absolute value of the denominator in case of short positions.

BTW: I wonder if TWR for the whole portfolio is impacted by such things. Do you average the individual TWRs in any way or do you calculate the inflow/outflow in the portfolio to caclculate TWR?

Thanks,
.luca

[Mark]

Hi luca,

I don't think we'd need to invert the numerator. For example, if your short position started at a value of -1000 and increased to -900 because the price went down, your equation would look like:

(-900 - -1000) / -1000

which is:

+100 / -1000

which is why it is currently reporting -10% in this case. By taking the absolute value of the denominator, we would end up with +10%.

The TWR for the whole portfolio uses the same equation. It calculates the portfolio values (beginning and end) between each cash flow. It uses these to calculate the return within that period, and then geometrically links all the period returns together at the end. So, there is no averaging of individual TWRs involved in getting the portfolio TWR. If you'd like to read more about the TWR calculation, please see:

http://www.fundmanagersoftware.com/help/yields_twr.html

I'll take a look at this for short positions, and see about making a change, that either gives a positive return, or reports N/A for short positions.

[lucabol]

You are right. My brain is off tonight (London time zone). I hope you can make the calculation work.

On a side note, it always surprises me that I'm one of the few who has short positions to track in FM. I would have thought we would have ROI working for them by now, but the demand must not be there.

Thanks as always for the prompt replies,
.luca

[Mark]

Hi luca,

We'll have this improved for the next release. If you are short or long for the full yield period, we'll calculate the TWR, using the absolute value in the denominator, so you'll get the number you're expecting. If you go both long and short within a yield period, then we'll report "N/A".