An R-squared of 100 means that all movements of a fund are completely explained by movements in the index. In this instance, the benchmark index is the best-fit index. Best fit signifies the index that provides the highest R-squared. A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates a fund has underperformed, given the expectations established by the fund's beta.
Some investors see alpha as a measurement of the value added or subtracted by a fund's manager.
There are limitations to alpha's ability to accurately depict a manager's added or subtracted value. In some cases, a negative alpha can result from the expenses that are present in the fund figures but are not present in the figures of the comparison index. Of course, the value of beta is dependent on another statistic, known as R-squared. Morningstar regresses the fund's monthly excess returns against monthly excess returns of several well-known market indexes. Best fit signifies the index that provided the highest R-squared when the fund was regressed against it.