We've discovered a way to enhance performance, at least in the short term: if you have a portfolio begin late in the month, to make the monthly return look better, treat the return as if it was for the full month!
What do we mean by this? Well, consider the Modified Dietz formula for a second:
Instead of the 5% we know we earned, we will see a 50% return! Quite impressive, yes? And so, what happened?
The problem is, as you hopefully can see, that we are trying to measure a monthly return for an asset that was held for just three days. The culprit is our weighting formula. Instead of our "CD" (number of calendar days) be three, which we know it is, we're using 30. And therefore, instead of the flow being present for the full time (of three days of a three day period), it is shown as being present but for a mere three days of a thirty day period, or 10% of the time. This causes our denominator to be smaller than it should be, resulting in a return that is much higher than it really is.
Does this mean that Modified Dietz cannot be used in cases like this? Well, no, it can be; you just have to get your weight right.
Of course, if you have a bad three days, your negative return will be exploded, too, so this practice serves no valid purpose, and should be abandoned.