What does alpha mean in reference to mutual funds?

Alpha

A coefficient which measures risk-adjusted performance, factoring in the risk due to the specific security, rather than the overall market. A high value for alpha implies that the stock or mutual fund has performed better than would have been expected given its beta (volatility).

Alpha is basically a technical measure of performance over a capital price asset model (CAPM). It is based on the amount of risk taken compared to the return expected. If a fund performs better than the benchmark, the alpha is increased (0.0% represents a matching return and may indicate your active fund is a closet index fund; any number above or below would indicate the risk you assumed). Alpha is risk.