Alpha
InvestingDefinition
Alpha measures the excess return of an investment compared to a benchmark index like the S&P 500. If the market returned 10% and your portfolio returned 13%, your alpha is +3%. It represents the value a fund manager (or your own stock picking) adds beyond what you could have earned by simply buying an index fund.
Positive alpha is extremely rare over long periods. Academic research consistently shows that after fees, more than 90% of actively managed funds fail to generate positive alpha over a 15-year period. This is the core argument for index investing - if almost nobody can consistently beat the market, why pay higher fees trying?
Alpha is always measured relative to a benchmark, so the benchmark choice matters. A tech fund measured against the S&P 500 might show alpha simply because tech outperformed, not because the manager was skilled. A fairer benchmark would be a tech index.
Positive alpha is extremely rare over long periods. Academic research consistently shows that after fees, more than 90% of actively managed funds fail to generate positive alpha over a 15-year period. This is the core argument for index investing - if almost nobody can consistently beat the market, why pay higher fees trying?
Alpha is always measured relative to a benchmark, so the benchmark choice matters. A tech fund measured against the S&P 500 might show alpha simply because tech outperformed, not because the manager was skilled. A fairer benchmark would be a tech index.
How it works
Your fund
13%
−
S&P 500
10%
=
Alpha
+3%
Formula
Alpha = Portfolio return − (Beta × Market return)
Example
A hedge fund charges 2% management fee + 20% performance fee. The S&P returned 10%. The fund returned 14% gross, but after fees the investor keeps ~11.6%. Alpha after fees = 1.6%. Most years, the fees eat all the alpha.