Alpha is a term used as a measure of relative performance.
It indicates when a strategy has managed to beat the market return over a given period.
It represents the excess return of an investment, relative to the return of its benchmark.
If an investment has a positive (+) Alpha, it means it has outperformed its benchmark, while a negative Alpha indicates underperformance.
Alpha is particularly relevant in active management, where fund managers aim to achieve returns that exceed the market benchmark average.
Understanding Alpha is a useful tool for investors, as it helps assess the effectiveness of a manager's strategy and informs decisions about selecting funds or investments that can potentially deliver superior returns compared to the market.
Alpha is a more valuable measure in challenging market conditions, especially over a medium to longer-term period.
It is easier to achieve returns in rising markets and over shorter periods, therefore a positive Alpha could be less reliable than when measured over periods of at least 3-years or more.