Alpha is an indicator of how much the performance of a particular financial instrument or investment fund behaves better or worse than the overall market. Alpha can be positive or negative and is expressed in percentage points.
Alpha is most often taken as a measure of an individual investor's or fund manager's ability to beat the broad market and beat the so-called benchmark.
If the S&P 500 index, which rises +10% in a given year, is the benchmark for the U.S. market, then any fund or individual asset performance above 10% would mean achieving a positive Alpha, and any performance below 10% would mean achieving a negative Alpha.
If an equity fund earned a return of 15% in a given year, that would mean an Alpha of +5.00, or a performance five percentage points higher than that of the benchmark. If the fund had made a profit of +6.50% over the same period, this would have meant an Alpha of -3.50, a result three and a half percentage points worse than the benchmark.