Alpha
The excess return of an investment relative to the return of a benchmark index. Positive alpha indicates outperformance, while negative alpha indicates underperformance.
Alpha measures the value that a portfolio manager or investment strategy adds (or subtracts) beyond what could be explained by market movements. If a fund returns 12% when its benchmark returned 10%, and its beta-implied return was 10.5%, the alpha is approximately 1.5%.
Generating Alpha
Alpha can be generated through:
- Security selection — picking individual stocks or bonds that outperform
- Market timing — adjusting exposure ahead of market moves
- Factor exposure — tilting toward factors like value, momentum, or quality
Consistently generating alpha after fees is extremely difficult. Academic research shows that most active managers underperform their benchmarks over long periods. This is a key reason many investors prefer low-cost index funds and ETFs. For those who pursue alpha through systematic strategies, factor investing offers a disciplined framework.