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.
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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
Market Liquidity: Asset Pricing, Risk, and Crises by Yakov Amihud, Haim Mendelson, and Lasse Heje Pedersen, Cambridge University Press, 2013.
This book is about the pricing of liquidity in securities markets. The authors present theory and evidence on the positive effect of liquidity on asset prices, why liquidity varies over time, and how liquidity risk affects prices. The book then explains how liquidity crises create downward price and liquidity spirals. The analysis has implications for traders, risk managers, performance evaluation, economic policy, regulation of financial markets, management of liquidity crises, and academic research.