Alpha: What Does It Mean?

Alpha is a measure of an investment's performance relative to a benchmark index, such as the S&P 500, after adjusting for the risk taken. A positive alpha means the investment outperformed the benchmark; a negative alpha means it underperformed. For example, an alpha of 2 means the investment returned 2% more than the benchmark on a risk-adjusted basis. Portfolio managers and investors use alpha to evaluate whether active management is actually adding value or simply riding broader market returns. Consistently generating positive alpha is considered one of the hardest goals in investing, which is a major reason many experts recommend low-cost index funds for everyday investors.