Alpha is the part of a return that can’t be explained by exposure to the market. If BTC rises 20% and a BTC strategy returns 25%, roughly 5% is alpha — the rest is beta, the return you’d have earned by holding.
Alpha is what a strategy adds. Beta is what the market gave.
Why the distinction matters
Anyone can earn beta by buying and holding. Paying fees for a strategy that delivers beta is paying for something you could have had for free.
A strategy is worth running when it earns return that holding wouldn’t have, or earns the same return with meaningfully less drawdown. Both are alpha.
How it’s measured
Regress the strategy’s returns against the benchmark’s. The slope is beta — how much the strategy moves per unit of market move. The intercept is alpha — the return left over when market movement is accounted for.
In practice, alpha is noisy and hard to distinguish from luck over short periods. Statistically significant alpha requires years of data, which is why claims based on a few months mean little.
Why it decays
Alpha comes from an inefficiency — something the market prices wrongly. Once enough capital trades on it, the inefficiency closes. Every edge is temporary; the question is how long it lasts and whether the strategy adapts.