Fund Return Calculations

Fund Return Calculations

The canonical skill for computing fund-level performance metrics. Any command that needs fund returns MUST invoke this skill, which delegates ALL calculations to scripts/fund_returns.py.

Trigger Conditions

Activated when any command needs:

• Time-weighted rate of return (TWRR)
• Internal rate of return (IRR) at the fund level
• Investment multiples (TVPI, DPI, RVPI)
• Total gross expense ratio (TGER)
• Periodic returns (quarterly, annual)

Business Context

Fund-level returns are the definitive measure of manager performance reported to LPs, boards, and benchmarking organizations. Calculation methodology must follow industry standards (NCREIF/PREA) to ensure comparability. Small errors in return calculation erode trust and can trigger reporting restatements.

CRITICAL: Computational Trust

ALL fund return calculations MUST use scripts/fund_returns.py. Do NOT compute TWRR, IRR, multiples, or expense ratios by reasoning through the math in natural language. The Python functions handle:

• Day-count conventions
• Cash flow timing
• Iterative IRR solving
• Geometric chain-linking for TWRR
• Fee netting for gross-to-net conversion

Workflow

Time-Weighted Rate of Return (TWRR)

1. Divide measurement period into sub-periods at each external cash flow (contribution or distribution)
2. Calculate holding period return for each sub-period: (EMV - BMV - CF) / BMV
3. Geometrically chain-link sub-period returns: TWRR = [(1+r1)(1+r2)...(1+rn)] - 1
4. Call scripts/fund_returns.py:calculate_twrr(nav_series, cash_flows)
5. Report gross (before fees) and net (after fees) TWRR
6. TWRR is the primary periodic return metric (quarterly, annual)

Internal Rate of Return (IRR)

1. Construct cash flow series: contributions (negative), distributions (positive), ending NAV (positive)
2. Call scripts/fund_returns.py:calculate_irr(cash_flows, dates)
3. IRR hierarchy:
   • Since-inception IRR (primary for closed-end funds)
   • Trailing 1-year, 3-year, 5-year, 10-year IRR
4. Report gross and net IRR
5. IRR is the primary since-inception metric, especially for closed-end funds

Investment Multiples

1. TVPI (Total Value to Paid-In) = (Cumulative Distributions + Current NAV) / Cumulative Contributions
2. DPI (Distributions to Paid-In) = Cumulative Distributions / Cumulative Contributions
3. RVPI (Residual Value to Paid-In) = Current NAV / Cumulative Contributions
4. Validation: TVPI = DPI + RVPI (must tie exactly)
5. Call scripts/fund_returns.py:calculate_multiples(contributions, distributions, nav)

Total Gross Expense Ratio (TGER)

1. Numerator: total fund expenses (management fees + fund-level expenses + transaction costs)
2. Denominator: average fund NAV over the period
3. TGER = Total Expenses / Average NAV
4. Call scripts/fund_returns.py:calculate_tger(expenses, nav_series)
5. Report components: management fee ratio, other expense ratio, transaction cost ratio

Gross-to-Net Conversion

1. Gross return: before management fees and fund expenses, after property-level expenses
2. Net return: after all fees and expenses
3. Difference is approximately the TGER (exact only for TWRR, approximate for IRR)
4. Both gross and net MUST always be reported together

Annualization

• Periods < 1 year: do NOT annualize (report actual period return)
• Periods >= 1 year: annualize using geometric method
• IRR is inherently annualized
• TWRR annualization: (1 + cumulative return)^(365/days) - 1

Output Structure

• Return summary table (TWRR, IRR, multiples -- gross and net, multiple periods)
• Cash flow detail (contributions, distributions, NAV by period)
• Expense detail (TGER components)
• Period returns (quarterly and annual chain-linked returns)

QA Checks

• TVPI = DPI + RVPI (exact arithmetic tie)
• Gross return > net return (fees are positive)
• IRR solved by validated code, not estimated
• TWRR sub-periods align with actual cash flow dates
• NAV used for RVPI is current (note as-of date)
• Returns not annualized for periods < 1 year
• Period returns chain-link to since-inception return
• TGER denominator uses time-weighted average NAV

Edge Cases

• New fund (< 1 year): Report actual returns, do not annualize. IRR may be misleading with J-curve -- note this.
• Fund in wind-down: DPI approaches TVPI as assets are sold. RVPI should be small. Flag if RVPI is large relative to TVPI.
• Recallable distributions: Treat as distributions for DPI but note recallability in commentary.
• Multiple closings: IRR should reflect actual cash flow timing per LP (or use aggregate for fund-level).

Notes

• This skill assists with return calculation and preparation. Output does NOT guarantee submission-readiness for NCREIF, GIPS, or other reporting standards.
• Final reporting submissions require review by fund accounting and compliance.

Standards References

• NCREIF/PREA Fund Return Methodology
• NCREIF Fund Index -- Open End Diversified Core Equity (ODCE) methodology
• GIPS (CFA Institute) for performance reporting standards
• ILPA reporting guidelines for private fund multiples