Modified Dietz Method
Sable supports two return calculation methods. Understanding the difference is critical for reconciliation with BTIG.
Method Comparison
| Method | Capital Updates | Cash Flow Timing | Use Case |
|---|---|---|---|
| Simple (AIC Method) | Monthly boundaries | Deferred to next month | Internal reporting |
| Modified Dietz | Continuous | Time-weighted within period | GIPS compliance, BTIG reconciliation |
Simple Flat Capital (AIC Method)
Formula
Monthly Return = Period P&L / Beginning-of-Month Capital
How It Works
- Capital is fixed for the entire month - determined at month start
- Cash flows during the month don't affect that month's denominator
- Cash flows are recognized at the next month boundary
- Monthly returns compound geometrically for longer periods
Example
Starting Capital (Oct 1): $100,000,000
Cash Inflow (Oct 15): + $50,000,000
P&L for October: + $2,000,000
October Return = $2,000,000 / $100,000,000 = 2.00%
The $50M that came in on Oct 15 is ignored for October's return calculation.
Modified Dietz
Formula
Return = (EMV - BMV - CF) / (BMV + Σ(CFᵢ × Wᵢ))
Where:
- EMV = Ending Market Value
- BMV = Beginning Market Value
- CF = Sum of all cash flows
- Wᵢ = Weight = (Days remaining in period) / (Total days in period)
How It Works
- Cash flows are time-weighted based on when they occurred
- Early-month cash flows count more than late-month cash flows
- Denominator adjusts for the "effective capital" that was working
Same Example with Modified Dietz
Weight for Oct 15 cash flow = (31 - 15) / 31 = 0.516
Numerator = $152M - $100M - $50M = $2M
Denominator = $100M + ($50M × 0.516) = $125.8M
Return = $2M / $125.8M = 1.59%
Comparison
| Method | Return | Why |
|---|---|---|
| Simple | 2.00% | $50M ignored, only $100M in denominator |
| Modified Dietz | 1.59% | $50M partially counted (51.6% weight) |
The $2M profit looks less impressive when you account for the fact that $50M was working for half the month.
Daily Modified Dietz
For compounding daily returns into monthly:
Daily Return = (EMV - BMV - CF) / (BMV + W × CF)
Where W = 1.0 (cash flow at start of day)
Monthly TWR = EXP(SUM(LN(1 + daily_return))) - 1
When to Use Each Method
Simple Method
- Internal management reporting
- When cash flows are small relative to portfolio size
- When cash flows typically occur at month boundaries
Modified Dietz
- GIPS (Global Investment Performance Standards) compliance
- Reconciliation with prime brokers (BTIG uses this)
- When cash flows are large relative to portfolio
- External reporting to investors
Key Insight
The methods agree when there are no cash flows. Differences only appear during months with contributions or withdrawals.