What it is
Alpha is a metric used to evaluate the active return on an investment compared to a suitable market index or benchmark, after accounting for risk. It represents the value that a portfolio manager adds or subtracts from a portfolio's return. A positive alpha means the investment outperformed its benchmark, while a negative alpha indicates underperformance. It's often seen as a measure of skill.
Investors look for fund managers or strategies that consistently generate positive alpha, as this suggests superior stock selection or timing abilities. Alpha is distinct from beta, which measures market-related risk. While beta explains returns due to market movements, alpha captures the excess returns not explained by market risk. It is a critical component in assessing the true value of actively managed funds.
Why it matters
Alpha tells you if an investment manager is actually adding value beyond market returns. Look for positive alpha to identify skilled management.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice