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Alpha is a way of describing an investment portfolio’s performance. Learn more with the MoneySense Glossary.
Alpha refers to an investment return greater than the aggregate return of the market in which the investment trades. Actively managed funds aim to beat the market, adding alpha with the help of skillful investment decisions. In contrast, passive index funds are designed to deliver the market return only, with no alpha.
If your portfolio underperforms the market, your alpha is negative. If you exactly match the market return, it’s zero. Positive alpha results when your investments outperform the market.
Example: “Warren Buffett, considered one of the greatest investors of all time, achieved annualized results of 19.8% from 1965 to 2023. Over the same period, the S&P 500 increased on average 10.1% per year. Thus, Buffett achieved almost double the market return, adding alpha of 9.7% per year on average.”
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