Alpha.
A definition, in plain English — with the books that teach it.
What it means
Alpha measures the excess return a portfolio or fund generates above what its benchmark or risk model predicts. A positive alpha means the manager added value beyond what market exposure alone would explain; a negative alpha means underperformance after accounting for risk taken. Alpha is often quoted on an annualized basis. Because fees, taxes, and transaction costs erode it, genuine sustained alpha is rare — most active funds produce negative alpha net of expenses over long horizons.
Example
A large-cap equity fund returned 12% last year while the S&P 500 returned 10%. If beta-adjusted expected return was 10.5%, the fund's alpha was approximately +1.5 percentage points — meaning the manager added 1.5% above what market exposure alone predicted.
