Alpha

Alpha is the return earned above the market. If the market rose 10% and your portfolio rose 13%, that 3-point gap is alpha, and it is used to measure a manager's skill.

More precisely it is the excess after adjusting for risk. Beating the market by holding more volatile stocks is not skill, just more risk taken — so the part explained by beta is stripped out and the remainder counted as alpha.

The difficulty is producing alpha consistently. Research repeatedly finds that a fund which outperformed for a year or two is barely more likely than a coin flip to do so again.

Fees shrink it further. A fund charging 1.5% a year must generate 1.5 points of alpha merely to match the market. That arithmetic is the background to the rise of index investing. For individual investors, cutting costs, taxes and needless trading is a more realistic target than chasing alpha — it is return you keep regardless of skill.