I’ll never understand how supposedly “sophisticated” institutional investors have allowed themselves to fall into the trap of using IRR as an investment performance metric, notwithstanding their fiduciary responsibility to make investment decisions in the best interests of their clients.

Ludovic Phalippou famously said in a paper published almost a decade ago that “IRR is probably the worst performance metric one could use in an investment context,” partly because it “can be readily inflated.”

Phalippou also mentioned that IRR “exaggerates the variation across funds, exaggerates the performance of the best funds, … and provides perverse incentives to fund managers.”

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