|Definition||A measure of the performance of an active investor relative to the performance of a passive index over the same period of time.|
|Related Concepts||Efficient Market TheoryRegression Toward The MeanBuy Side|
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What is Alpha?
John Spacey, October 02, 2016
Alpha is a measure of the return of an investment as compared to a suitable market index. It is typically used to compare the results of active management of investments with investing in a passive index fund with low fees.According to the efficient market theory, it is difficult to "beat" the market. Fund managers were historically judged on their ability to make money for clients. With the introduction of low fee passive index funds, managers are increasingly judged on their ability to achieve alpha greater than their fees. This is a difficult task. Additionally, many investors demand that alpha be achieved without taking significant risk. Sophisticated investors will evaluate a fund based on its alpha relative to risk measurements. An alpha of 1 indicates that an investment beat a comparable index by one percent, typically annualized. An alpha of -1 indicates that an active investment underperformed an index by one percent.
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