Alpha is a measure of an investment's active return compared to a market benchmark. It represents the excess return generated by an investment strategy above what would be expected given its level of risk.
An alpha of 1.0 means the investment outperformed its benchmark by 1%. An alpha of -1.0 means it underperformed by 1%. An alpha of 0 means the investment performed exactly as expected based on its risk level.
Fund managers strive to generate positive alpha, as it indicates they are adding value through their investment decisions. However, consistently generating alpha is extremely difficult, which is why many investors choose passive index funds that simply match market returns at lower costs.