Alpha
Alpha is the portion of returns attributable to manager skill beyond what would be expected from market exposure.
Allocator relevance: Used to assess whether returns are skill-driven and repeatable rather than beta-driven or cycle-driven.
Expanded Definition
Alpha attempts to separate manager edge from broad market effects. In practice, alpha can be overstated when leverage, liquidity premia, factor exposure, or concentrated thematic bets are mislabeled as “skill.” In private markets, measurement is less clean than in liquid markets, so allocators rely on attribution logic and process evidence.
A credible alpha story connects outcomes to decisions: sourcing, underwriting standards, portfolio construction, and value creation—not just headline IRR.
How It Works in Practice
Allocators compare performance against benchmarks and peer sets, evaluate factor exposures, and review realized vs unrealized drivers. They also test repeatability: can the manager perform across vintages and regimes, or was success a product of timing?
Decision Authority and Governance
Alpha persistence is tied to discipline. Governance and risk limits help prevent style drift, overconcentration, or underwriting deterioration as AUM scales.
Common Misconceptions
- One strong fund proves alpha.
- Alpha can be evaluated without understanding risk and liquidity.
- High gross returns imply high net alpha.
Key Takeaways
- Alpha must be explained, not asserted.
- Factor and cycle effects should be separated from skill.
- Repeatability and process integrity are central to evaluation.