How alpha works
Alpha is the return an investment earns above its benchmark after adjusting for risk. If a fund returns 12% while its index returns 10%, the extra 2% is alpha, the part attributed to skill rather than simply riding the market. Positive alpha means you beat the market for the risk taken; zero alpha means you matched it; negative alpha means you lagged it. It is the scorecard for active management.
Worked example
You build a stock portfolio that returns 15% in a year when its benchmark index returns 11%. On the surface that is 4% of outperformance. But if your portfolio took on more risk to get there, part of that gap is just extra beta, not skill. True alpha is what remains after stripping out the return you would expect from the risk you carried.
Why alpha is hard to keep
Most active strategies fail to produce durable alpha after costs, because any repeatable edge gets crowded and competed away. Genuine alpha tends to be small, fleeting, and expensive to find. On Volity you pursue your own edge across shares, forex, and CFDs, but measure it honestly against a buy-and-hold benchmark, not against zero. Beating the market is the bar, not just making money.
Why it matters
Alpha separates real skill from a rising market, which is why a 20% return in a year the index rose 25% is actually underperformance. Judge any strategy, including your own, against the right benchmark. Related: Sharpe ratio and beta.
Learn more in our stocks trading guide.
