What are alpha and beta?

A beta of 1 means moving in step with the market, above 1 means moving more than it, below 1 less, and a negative beta means tending to rise when the market falls. Beta is estimated from past returns against a benchmark. Alpha, often called Jensen’s alpha, is the return left after allowing for that beta, and in an efficient market its expected value is zero. A fund with a high beta can look skilled in a rising market without having any alpha.

Say the market rises 10% and a fund with a beta of 1 returns 13%. About 10 points came from the market and 3 points are alpha. If fees cost 2 points, 1 point of alpha is left. Simple example. Terms vary by fund.

Market exposure is cheap to buy through an index fund, so investors pay hedge fund fees for alpha, and a fund needs alpha greater than the extra fees it charges over that index fund to beat it.