Alpha is a term used in investing to describe a strategy used by a trader or portfolio manager to beat the market returns for a period of time. It is considered an active return on investment, where the performance of an investment against the market index or benchmark is considered to represent the market’s movement on the whole. Hence the excess return of an investment relative to the return of a benchmark index is the investments alpha. The value may be positive or negative and is the result of the investment made.
Alpha is used to rank active mutual funds and also all other types of investments. It is represented as a single number (like +2.0 or -6.0), which means 2% better or 6% worse than what was set by the benchmark index of the market. This basically represents the percentage measuring how the portfolio or the fund performed compared to the benchmarked index which is referenced.