Alpha is the return a fund earned above or below what its benchmark's moves would predict, in percentage points a year.
Alpha measures what a fund manager added, or lost, compared with the fund's benchmark, after allowing for how much market risk the fund took.
The usual version starts from the fund's beta. The expected return is the risk-free rate plus beta times the benchmark's return above the risk-free rate. Alpha is the fund's actual return minus that expected return.
For example, over three years a benchmark returned 12% a year and the risk-free rate was 7%. A fund with a beta of 1.1 would be expected to return 7% plus 1.1 times 5%, or 12.5%. If it returned 14%, its alpha is 1.5 percentage points a year.
Some fact sheets use a simpler figure, the fund's return minus the benchmark's, often called excess return. Alpha depends on the period chosen and says nothing certain about the next one. It is most meaningful when R-squared is high, so the benchmark explains most of the fund's moves.
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