- Category: Management
What is Alpha?
Alpha is a measure of investment performance on a risk-adjusted basis. Alpha takes the volatility of an investment (mutual fund, separate account, hedge fund) and compares its risk-adjusted performance to a benchmark index. The excess return of the investment relative to the return of the benchmark index is the Alpha.
Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of an investment. Simply stated, alpha represents the value that a portfolio manager adds to a fund's return.
The formula for alpha is expressed as follows:
|α = Rp – [Rf + (Rm – Rf) β]|
Rp = Realized return of portfolio
Rf = Risk-free rate
|Rm = Market return
β – beta
The name of our firm is a summary of our investment philosophy and goal. We are constantly seeking Alpha producing managers in every asset class that will add value to client portfolios. In theory, this is a relatively simple task. In reality, it’s an ongoing process of manager evaluation and research. We pay careful attention to quantitative and qualitative factors as well as operational and administrative evaluations to determine those managers who have the best chance of maintaining their edge in the marketplace.