Course on "Efficiently Inefficient"

The book has been used in courses around the world as the main or supplementary textbook in courses such as Investments, Hedge Fund Strategies, Asset Management, Alternative Investments, Behavioral Finance, and Institutional Finance. For example, the book as been the main text in classes at UCLA, Harvard University, the Wharton School of the University of Pennsylvania, UC Berkeley, London Business School, HEC Paris, Stockholm School of Economics, and my own classes for MBA students at NYU Stern School of Business and Masters students at Copenhagen Business School.

Professors who would like to use the book in their course: please contact me for the full course material, including slides, spreadsheets, syllabus, exams, etc.

Website for the book: Click here

Feedback from Professors:

"The book fills a huge void and was a big success in my MBA class at UCLA Anderson School of Management. This impressive work blends a coherent conceptual framework that professors seek for their classes with a hedge fund manager's insight and practical knowledge that students crave." - Mikhail Chernov

"This valuable book offers a unique combination of practical insights, cutting-edge research, and institutional facts. Lasse Pedersen is a brilliant scholar and he’s written a brilliant book. I'm delighted to find a book that is both cutting edge and accessible to advanced undergraduates. I plan to use it again next year at Harvard!" - Owen Lamont

Course content

The course describes some of the main trading strategies used by active traders and provides a methodology to analyze them. The course covers individual equity markets (discretionary equity investing, short selling, quantitative equity strategies), tactical asset allocation across equity indices, currencies, fixed-income, and commodities (global macro investing, managed futures strategies), and relative-value arbitrage strategies (fixed income arbitrage, convertible bond arbitrage, event driven investments). In class and through exercises, the trading strategies are illustrated using real data and students learn to use "backtesting" to evaluate a strategy. The course also covers issues related to how trading works, performance measurement, transaction costs and liquidity risk, optimal trading, margin requirements, risk management, and portfolio construction.


There are exercises for each of the main topics. To truly understand the material in the course, students are encouraged to solve these exercises. To facilitate this learning, students taking my course form 11 groups in the first class, and each group presents its solution to a set of exercises (in the class following the class where the exercises were assigned). The sample lecture plan has an example of exercises used in class (this is an ambitious number of exercises, many classes use a small fraction of these). The exercises are available in the free compendium.

Table of Contents of the Efficiently Inefficient

The Main Themes in Three Simple Tables


Introduction (free download subject to the copyright of Princeton University Press)

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.


Sample Course Plan

Overview (Introduction, Ch. 1): Efficiently inefficient markets; trading strategies; understanding hedge funds and other smart money

Exercises 1.1-1.4

Active Investment (Ch. 2-4): Performance measures; finding and backtesting strategies; portfolio construction; risk management

Exercises 2.1-2.4 or 3.1-3.4

Active Investment (Ch. 5): Trading and financing a strategy

Exercises 4.1-4.2 or 5.1-5.4

Equity strategies (Ch. 6-7): Equity valuation; discretionary equity investing

Exercises 7.1-7.6 or 7.7-7.10 (Buffett exercise)

Equity strategies (Ch. 8-9): Short bias, quant equity

Exercises 8.1-8.2

Equity strategies (Ch. 9): Quant equity, continued

Exercises 9.1-9.7 or 9.8-9.12

Macro strategies (Ch. 10-11): Asset allocation and global macro investing

Exercises 11.1-11.7

Macro strategies (Ch. 12): Managed futures investing

Exercises 12.1-12.4

Arbitrage strategies (Ch . 13, 15): Arbitrage pricing; convertible bond arbitrage

Exercises 15.1-15.4

Arbitrage strategies (Ch. 14): Fixed income arbitrage

Exercises 14.1-14.7

Arbitrage strategies (Ch. 16): Event driven investment

Exercises 16.1-16.8 or 16.9-16.11

Conclusion: Summary and guest lecture