Is alpha worth it? Even ‘winning’ funds add little
- Robin Powell
- Sep 25
- 6 min read
Updated: Sep 29
How much is investment “skill” really worth? A new study crunches the numbers, and the result is sobering: even in the rare cases where active funds deliver outperformance, the value added is surprisingly small — often just a handful of basis points, and usually less than the fees charged. The implication is clear: asset allocation and costs matter far more than manager selection.
Alpha has long been the Holy Grail of investing. Advisers and fund managers hold it up as proof of skill: a return above the market that justifies higher fees. Investors chase it with zeal, convinced that if they can just find the right manager, outperformance will follow.
But what if we’re asking the wrong question? The real issue isn’t whether alpha exists — it does, in some cases. The question is: what is it actually worth to an investor’s portfolio?
That’s precisely what Andrew Ang and Debarshi Basu set out to answer in their recent paper, How Much Should You Pay for Alpha? Measuring the Value of Active Management with Utility Calculations. Their conclusion is sobering: even in the rare event you find a manager capable of generating alpha, the payoff is surprisingly small.
As Ang told me in an interview: "The willingness-to-pay is pretty small. For equities, it’s under about 20 basis points. For bonds, it’s around 10."
From theory to utility: reframing alpha
Most discussions of alpha treat it in isolation — as if it were a trophy you can stick on the shelf. Ang and Basu instead frame it in terms of utility: how much better off an investor would actually be by adding an active fund to a sensible portfolio.
In their words, "We compute the certainty-equivalent return of adding a fund to a mean-variance efficient portfolio. This provides a direct measure of an investor’s willingness-to-pay."
Translated into plain English, this means converting performance into pounds and pence. It’s not about bragging rights; it’s about what you should pay for the privilege of holding a fund, given risk, diversification, and your overall allocation.
As Ang explained: "You don’t care about alpha in isolation. You care about whether adding the fund makes your whole portfolio better."
Alpha’s fair value is tiny
So what did they find? For US active equity funds, the average willingness-to-pay is 18–19 basis points, while the median is just 7–10. In practice, that means the typical fund adds only a sliver of value.
And the proportion of funds worth owning is slim. "Only about 10 to 12 percent of active funds actually add value in this framework," Ang told me.
Bond funds fare no better. The median willingness-to-pay is around 10 basis points — hardly life-changing.
Here’s the uncomfortable truth: even if you’re lucky enough to choose one of the rare “winning” funds, the benefit is likely less than the annual admin charge on your ISA.
As the paper notes, "Our results show that most investors should be extremely cautious in allocating capital to active funds, even when measured alphas appear positive."
Even ‘pure alpha’ disappoints
Some argue the real prize lies in isolating alpha — stripping out market exposure and leaving only manager skill. Ang and Basu tested this too, creating synthetic “pure alpha” funds that hedge away beta.
Even then, the results were underwhelming. "Even for a synthetic ‘pure alpha’ fund with a 6 percent expected excess return, the willingness-to-pay is less than 50 basis points."
As Ang put it: "You might think that if you strip out all the beta, you’d be left with something very valuable. But in utility terms, it’s still small."
The message is clear: alpha shrinks dramatically once you view it in the context of a total portfolio.
Robust across regimes
What about different market conditions? Surely alpha would be more valuable when bonds diversify equities, as they did in the decade after 2008?
Ang and Basu tested this by varying stock–bond correlations. As the correlation becomes more negative, willingness-to-pay does rise. But even at a correlation of –30%, the number is still modest — around 33 basis points.
Context matters, but not enough to rescue alpha from its meagreness.
Investor lessons: five angles that matter
What should investors and advisers take from this? Here are five lessons.
1. Price skill like any other good.Alpha isn’t magic; it’s a product. Like any product, it has a fair price. Ang and Basu’s framework lets us put a price tag on it. If a fund charges more than the value it adds, it fails the test.
2. Even “good” managers can be overpriced.As Ang told me: "Even if you happen to pick a good manager, you can still overpay. The question isn’t, did they generate alpha? It’s, was it worth the fee?"
3. Fiduciary duty reframed.Advisers must not just pick funds that look good on paper, but ensure they add value net of cost. Utility-based thinking should be a cornerstone of fiduciary duty.
4. Alpha as ‘insurance’.Some investors justify active management as a comfort blanket — a hedge against market stress. But as the study shows, the premium is rarely justified by the modest utility gain.
5. Demand transparency.Imagine if fund houses had to publish a “utility-based price tag” alongside their fees. Investors could instantly see whether the product offered value for money. It would transform the conversation.
The uncomfortable arithmetic of selection
At this point, the arithmetic speaks for itself. Out of 100 active funds, only 10 to 12 might add utility. And even those are worth less than 20 basis points on average.
As Ang summed up: "You’re talking about one in ten funds that might add utility, and even then, for a fee that’s often lower than what’s charged in the marketplace."
The search for alpha is like a costly treasure hunt where the prize, if you find it, turns out to be a handful of loose change.
Evidence-based takeaways: what to do instead
So where does that leave investors?
First, recognise that asset allocation and costs are first order, while manager selection is second order. As Ang put it bluntly: "Asset allocation is first order; active selection is second order. Get the big things right before worrying about picking managers."
Second, if you are considering an active fund, use willingness-to-pay as a litmus test. If the fee is higher than the estimated value added, the fund isn’t worth it.
Third, if you still want active exposure — perhaps for behavioural reasons — insist on fees close to the willingness-to-pay and a clear role for the fund in your portfolio.
Finally, focus on what consistently adds value: disciplined allocation, rebalancing, tax efficiency, and behaviour coaching. These are the areas where advisers earn their keep, and they don’t depend on the elusive promise of alpha.
Conclusion
So, is alpha worth it?
The evidence suggests not. Even in the unlikely event you pick a “winning” fund, the value it adds is tiny — usually no more than a few basis points, and often less than the fee you’re charged.
The burden of proof should lie with the fund manager or adviser recommending active management. Unless they can justify the fee against the willingness-to-pay framework, investors should think twice.
For most people, the rational answer is clear: if alpha can’t prove its worth, the index fund is the better bet.
Resources
Ang, A., & Basu, D. (2025). How much should you pay for alpha? Measuring the value of active management with utility calculations.
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