Generation (Of) Alpha

Though the title may sound similar, this is not about a post on people who were born in between the entirety of 2010s and early 2020s. Rather, we are exploring the financial parlance for the word alpha, which is the excess above market returns.

Picture generated by ChatGPT

Using one of the U.S. markets’ indices as an example, the S&P 500, it returned around 17% for the whole of 2025. Meanwhile, Nvidia, a constituent of the S&P 500, returned close to 36% for the same period. Thus, the alpha generated by Nvidia was 36 – 17 = 19%.

Alpha is relative to a selected benchmark index, so choosing the right benchmark is important for accurate interpretation. In the above example, though the S&P 500 was used, other major indices like the Dow Jones 30 and NASDAQ could also be utilised as they are the main representations of the U.S. market in general (which Nvidia is part of as well). Conversely, although the Russell 2000 is a major index, it is not appropriate to compare it with Nvidia, a large-cap counter, for alpha as the former is the primary benchmark for small-cap equities.

On top of individual companies, alpha can be calculated on whole investment portfolios, too, in gauging performance. For instance, a portfolio made up entirely of U.S. equities could be compared with the S&P 500 or Dow Jones, and a portfolio of Singapore counters could be used with the Straits Times Index. Sometimes a mixed local-foreign portfolio is weighed up against relevant indices. Ultimately, it is up to the individual investor on which to apply on, provided it is relevant and reasonable.

Generating alpha on a portfolio level requires the employment of active investing, be it via individual counter selection and/or going into active funds. On a multi-portfolio level (e.g. the Portfolio Multiverse concept), on top of what was suggested in the previous sentence, the Trading Portfolio is a way to do so, in which it may be a possible option for passive investors with index funds in the main portfolio. Another way for passive investors is either to adopt a core-satellite structure (core of passive index funds with satellite of active funds/individual securities) or to create another portfolio for active investing. The combinations are varied and flexible.

For our Bedokian Portfolio, we adopted the core-satellite methodology, and some of our satellite counters are part of index exchange traded funds (ETFs) in our core; while this may be viewed as an overlap (e.g. “why buy Nvidia when you already have the S&P 500 ETF?”), the securities were selected based on different merits. For this case, we have the S&P 500 for U.S. market exposure, but we are vested in Nvidia for the artificial intelligence growth potential with its chips, subject to our own weightage limit for individual company counter (i.e., the 12% limit). This is one of our ways in the generation of portfolio alpha.

Disclosure

The Bedokian is vested in the S&P 500 via the SPY ETF, and in Nvidia.

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