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Excess Returns

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Definition of 'Excess Returns'

Investment returns from a security or portfolio that exceed a benchmark or index with a similar level of risk. It is widely used as a measure of the value added by the portfolio or investment manager, or the manager's ability to "beat the market." Also known as alpha.
Investopedia Says

Investopedia explains 'Excess Returns'

For example, consider a large-cap U.S. mutual fund that has the same level of risk (i.e. beta = 1) as the S&P 500 index. If the fund generates a return of 12% in a year when the S&P 500 has only advanced 7%, the difference of 5% would be considered as excess return, or the alpha generated by the fund manager.

Critics of mutual funds and other actively-managed portfolios contend that it is next to impossible to generate excess returns on a consistent basis over the long-term, as a result of which, most fund managers underperform the benchmark index over time. This has led to the tremendous popularity of index funds and exchange-traded funds.

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