EFFICIENTLY INEFFICIENT

How Smart Money Invests and Market Prices Are Determined 



Efficiently Inefficient describes the key trading strategies used by hedge funds and demystifies the secret world of active investing. The book combines the latest research with real-world examples and interviews with top hedge fund managers to show how certain trading strategies make money and why they sometimes don't.

I view markets as neither perfectly efficient nor completely inefficient. Rather, they are inefficient enough that money managers can be compensated for their costs through the profits of their trading strategies and efficient enough that the profits after costs do not encourage additional active investing. Understanding how to trade in this efficiently inefficient market provides a new, engaging way to learn finance. The book analyzes how the market prices of stocks and bonds can differ from the model prices, leading to new perspectives on the relationship between trading results and finance theory. It explores several different areas in depth--fundamental tools for investment management, equity strategies, macro strategies, and arbitrage strategies--and looks at such diverse topics as portfolio choice, risk management, equity valuation, and yield curve logic. 

The book's strategies are illuminated further by interviews with leading hedge fund managers Lee Ainslie, Cliff Asness, Jim Chanos, Ken Griffin, David Harding, John Paulson, Myron Scholes, and George Soros. Efficiently Inefficient demonstrates how financial markets really work.


WHO SHOULD READ THE BOOK?

Anyone interested in financial markets can read Efficiently Inefficient. The book can be read at different levels, both by those who want to delve into the details and those who prefer to skip the equations and focus on the intuitive explanations and interviews. It is meant both as a resource for finance practitioners and as a textbook for students. First, I hope that the book is useful for finance practitioners working in hedge funds, pension funds, endowments, mutual funds, insurance companies, banks, central banks, or really anyone interested in how smart money invests and how market prices are determined.

Second, the book can be used as a textbook. I have used the material to teach courses on investments and hedge fund strategies to MBA students at New York University and master’s students at Copenhagen Business School. The book can be used for a broad set of courses, either as the main textbook (as in my course) or as supplementary reading. The book can be read by students ranging from advanced undergraduates to Ph.D. students, several of whom have gotten research ideas from thinking about efficiently inefficient markets. The course webpage contains more information for students and professors.



REVIEWS AND PRESS

CFA Institute: Book review by Fridson, 2016: "encyclopedic in its cataloging of active management strategies and authoritative in its analysis of the practical issues of their implementation. Pedersen grounds his exposition in landmark scholarly articles."

Journal of Quantitative Finance: Book review by Pekkala, 2016 

Investing by the Books: Book review by Larsson, 2016 

Two Plus Two Magezine: Book review by Willet 

Business News Network: Top financial reads of 2015



Cliff's perspective and ValueWalkEfficient Inefficiency: The Oxymoron That Explains the Investing World. Quote: "From now on, there are two kinds of investors: the efficiently inefficient ones and the merely inefficient ones who didn’t read this book."



The Chronicle JournalLearn strategies to help beat the market: "For serious investors I can't think of any book better for describing market beating strategies than Lasse Heje Pedersen's new book. Pedersen's pedigree combines the best of academic and finance industry qualifications."

Frankfurter Allgemeine: read in German. Quotes: "This is an exceptionally interesting book because it combines the skills of a modern, theoretically savvy financial economist, educated at first-rate universities, with many years of experience in a major hedge fund (AQR)", "It is a Manifesto, showing how Financial Economics operate: the financial markets are neither completely efficient, nor completely inefficient, and the inefficiencies are less the result of animal spirits, but the result among other things of liquidity shortages and the lack of collateral.


TV AND RADIO


MoneyLife radio show: play audio

Trend following radioplay audio

Book signing at Princeton University: watch video

Millionaerklubben radioplay audio in Danish


FROM THE BACK COVER

"This valuable and intriguing book provides a contemporary survey of investments across a wide spectrum of asset classes and strategies. Combining a wonderful narrative with a rigorous analytical structure, Efficiently Inefficient serves the needs of students, serious investors, and professionals. It is an important contribution to the investment literature."--Gary P. Brinson, CFA, GP Brinson Investments

"For a book on investments, Efficiently Inefficient sets a completely different and higher standard. Pedersen blends the best and latest research, accessible to both MBA students and professionals, with the insights of some of the world's leading hedge fund managers. It works beautifully."--Darrell Duffie, Stanford University

"Efficiently Inefficient is a truly modern and masterful introduction to how finance will be studied and practiced in the twenty-first century."--Andrei Shleifer, Harvard University

"How are markets efficient enough to stump most investors, yet inefficient enough to allow hedge fund managers to earn huge profits? Lasse Pedersen, who has contributed greatly to the 'new finance' of liquidity and financial frictions, answers this question with a tour-de-force combination of original research and provocative interviews with hedge fund managers."--Laurence B. Siegel, CFA Institute Research Foundation

"Lasse Pedersen is a gifted financial market theorist who understands that theory is most satisfying when it is combined with a deep practical understanding of institutional detail and market frictions. This terrific book showcases his strengths in all of these dimensions."--Jeremy Stein, Harvard University, former Governor of the Federal Reserve System

"This accessible book explains hedge fund strategies and how to design, construct, evaluate, implement, and risk manage them. The section on securities lending and borrowing is interesting and novel, and Pedersen’s discussion of macro and central bank strategies is one of the best I have seen in any book on hedge funds. His account of portfolio construction is superior."--Robert Kosowski, Imperial College Business School

"Efficiently Inefficient bridges academic finance and the practice of finance. Students will appreciate the insights of top investment managers and the sections on transactions costs and liquidity are especially valuable. I will use the book in my graduate course on investment and I highly recommend it to all those working in the investment management industry."--Campbell R. Harvey, editor of the Journal of Finance (2006–2012)


TABLE OF CONTENTS

The Main Themes in Three Simple Tables 
Preface

Part I Active Investment
Chapter 1 Understanding Hedge Funds and Other Smart Money 
Chapter 2 Evaluating Trading Strategies: Performance Measures
Chapter 3 Finding and Backtesting Strategies: Profiting in Efficiently Inefficient Markets
Chapter 4 Portfolio Construction and Risk Management 
Chapter 5 Trading and Financing a Strategy: Market and Funding Liquidity 

Part II Equity Strategies
Chapter 6 Introduction to Equity Valuation and Investing 
Chapter 7 Discretionary Equity Investing
               Interview with Lee S. Ainslie III of Maverick Capital
Chapter 8 Dedicated Short Bias
               Interview with James Chanos of Kynikos Associates
Chapter 9 Quantitative Equity Investing 
               Interview with Cliff Asness of AQR Capital Management

Part III Asset Allocation and Macro Strategies
Chapter 10 Introduction to Asset Allocation: The Returns to the Major Asset Classes
Chapter 11 Global Macro Investing
                 Interview with George Soros of Soros Fund Management
Chapter 12 Managed Futures: Trend-Following Investing
                 Interview with David Harding of Winton Capital Management

Part IV Arbitrage Strategies
Chapter 13 Introduction to Arbitrage Pricing and Trading
Chapter 14 Fixed-Income Arbitrage
                 Interview with Nobel Laureate Myron Scholes
Chapter 15 Convertible Bond Arbitrage 
                 Interview with Ken Griffin of Citadel
Chapter 16 Event-Driven Investments
                 Interview with John A. Paulson of Paulson & Co.

References