Alpha
Excess return above benchmark. Positive alpha = beat the market. Most actively managed funds have negative alpha after fees.
What You Need to Know
Alpha measures investment returns above or below a benchmark index. If S&P 500 returned 10% and your fund returned 12%, alpha is +2%. If it returned 8%, alpha is -2%.
Positive alpha = value added by active management or skill Negative alpha = underperformance, usually from fees and trading costs Zero alpha = matched the benchmark
The problem: Most actively managed funds have negative alpha over 10-20 year periods. SPIVA reports 85-90% of active managers underperform their benchmarks after fees.
Manager charges 1% expense ratio. Market returns 10%. Manager must generate 11%+ returns to deliver positive alpha. The extra return must exceed the fee—and most managers can't do this consistently.
Better approach: Accept market returns (beta) via low-cost index funds with 0.05% fees rather than paying 1%+ for likely negative alpha.
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/glossary/alpha
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Related Terms in Investment
12b-1 Fee
Hidden mutual fund fee (0.25-1% annually) for marketing and distribution. Comes out of your returns. Avoid funds with high 12b-1 fees.
AUM (Assets Under Management)
Total market value of investments managed by an advisor or fund. Used to calculate 1% annual advisor fees—$500K AUM = $5K/year.
Bear Market
20%+ sustained market decline from recent peak. Characterized by fear, pessimism, and falling prices. Buying opportunity for long-term investors.
Beta
Volatility compared to market. Beta of 1.0 = moves with market. Beta of 1.5 = 50% more volatile. Measures risk, not return.
Bull Market
20%+ sustained market rise from recent low. Characterized by optimism, economic growth, and rising prices. Opposite of bear market.
Dividend Yield
Annual dividend payment divided by stock price. 3% yield on $100 stock = $3 yearly dividend. Measure of income return.