Alpha
A fund's return in excess of what its benchmark exposure would predict, after adjusting for the beta of the strategy. Often shorthand for "skill-driven excess return".
Alpha is the return a fund earned over and above what its market exposure alone would predict. Mechanically, it is the intercept of a regression of fund returns on benchmark returns: fund return = α + β × benchmark return + ε. A positive α means the fund has, on average, earned return that the benchmark exposure does not explain.
Alpha is widely cited but easily misinterpreted. A few-year positive α can arise from luck, from factor tilts (small-cap, value, momentum) that the benchmark omits, or from temporary mispricings that revert. Statistically significant alpha over long horizons is rare in any retail managed-fund cohort, and disclosed academic studies of NZ and global active-fund alpha after fees consistently find a wide dispersion of outcomes.
NZ retail PIE fact sheets sometimes quote alpha against a stated benchmark; ManagedFundsNZ does not publish alpha estimates because they require manager-disclosed regression methodology and a defensible benchmark choice, both of which vary by fund.
Related terms
-
beta
Beta
A measure of how much a fund moves in response to its benchmark. Beta of 1 means the fund moves one-for-one with the benchmark; beta of 0.7 means it moves 30% less.
-
tracking-error
Tracking error
The standard deviation of a fund's return differences against its benchmark. For an index fund, low tracking error means tight replication; for an active fund, high tracking error means more active risk relative to benchmark.
-
index-vs-active
Index fund vs active fund
An index fund mechanically tracks a published market index. An active fund's manager makes discretionary buy/sell decisions trying to beat or differ from a benchmark.