Alpha.

In plain English

Alpha measures how much an investment beat or trailed its benchmark, the index it is fairly compared against. Positive alpha means a fund or manager added return beyond what the market handed everyone; negative alpha means they did worse. It is the number people use to judge whether active managers actually earn their fees. Alpha is measured against a matching benchmark, so a small-company fund is judged against a small-company index, not the S&P 500. Most active funds struggle to produce lasting positive alpha after costs.

01Why it matters

If you pay extra fees for an actively managed fund, alpha is the proof of whether that manager gave you anything a cheap index fund would not have, which directly affects what you keep.

02The math, step by step

A fund returns 12 percent in a year while its matching benchmark returns 10 percent (illustrative numbers). That 2 percentage point edge is positive alpha of about 2 percent. If the fund charged a 1 percent fee, you still came out ahead. But if it returned 9 percent against the same 10 percent benchmark, that is negative alpha, and you paid a fee to trail the index.

03What this is NOT

04Receipts

Every figure on this page is sourced to a primary document. Tap to open the original.