Alpha is a financial investment term used to describe the return on investment (ROI) differential of an investment/trading strategy’s outperformance of the overall market’s performance. This is usually referring to how much a fund or portfolio manager’s returns beat a market index or benchmark considered to represent the market’s movements. If the equities market in 2019 returned 9%, and a hedge fund manager’s portfolio yielded 12% over the same time period, the fund manager’s alpha would be 3%, or +3.0. Alpha is difficult to obtain, even more difficult to sustain over time, and is commonly used to rank various funds in different sectors, including mutual funds and index funds as well. Alpha is popular because, in addition to fund managers and investors seeking alpha to generate higher profits and showcase their expertise. But it is equally as popular because so many funds and PM’s struggle to even match market index returns, which raises the notion that most people are better off simply investing in passive index funds.

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