Alpha

Definition

Alpha refers to return generated above a relevant benchmark after accounting for systematic market exposure. In practical allocator terms, alpha answers a simple question: did the manager add value beyond the market they were exposed to? Alpha can be measured in different ways depending on asset class and strategy (public markets vs private markets), but the concept remains consistent: isolate skill-driven return from returns explained by broad market movements. Allocator Context Allocators use alpha to evaluate whether a strategy is a true “return driver” or primarily a source of market beta packaged as active management. In public markets, alpha discussions typically tie to factor exposures and benchmark-relative results. In private markets, allocators assess “alpha” through underwriting discipline, entry pricing, operational outcomes, and realized value creation, recognizing that clean statistical alpha is harder to calculate due to illiquidity and valuation lag. Decision Authority Alpha expectations are usually embedded in manager selection criteria and committee memos. Committees often want a clear explanation of where alpha comes from (sourcing edge, underwriting, governance influence, operational capabilities) and what would cause alpha to disappear (capacity constraints, market crowding, style drift). Why It Matters for Fundraising Allocators do not allocate to “alpha” as a slogan; they allocate to a credible alpha mechanism. Managers that can explain the repeatable drivers behind outcomes—without overstating certainty—move through diligence faster. Vague claims of alpha without attribution typically trigger deeper scrutiny or rejection. Key Takeaways Alpha is return beyond market exposure Allocators care about the mechanism, not the label In private markets, alpha is validated through evidence and realizations Capacity and drift are common alpha killers