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It is highly likely that the default setting for 4.x compatibility is correct for you and wouldn't need to change it. 4.x compatibility option is obsolete now and has been removed in TSCO releases 11.3 and above.
Let me explain the difference between the two choices:
Very (4.x and prior) old versions of TSCO imported VM metrics as sub-resources (BYGMxxx) of host. In newer versions of TSCO we started imported VMs as separate entities. The option to continue importing the VM metrics as sub-resources was available to ensure that any custom reports that were built using BYGM metrics will continue to work. We kept the BYGM option up until release 11.0 to allow enough time for the users to migrate their reports to use the metrics from VM entities.