Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined

by Lasse Heje Pedersen

Overview

Financial market behavior and key trading strategies—illuminated by interviews with top hedge fund experts

Efficiently Inefficient describes the key trading strategies used by hedge funds and demystifies the secret world of active investing. Leading financial economist Lasse Heje Pedersen combines the latest research with real-world examples to show how certain tactics make money—and why they sometimes don’t. He explores equity strategies, macro strategies, and arbitrage strategies, and fundamental tools for portfolio choice, risk management, equity valuation, and yield curve trading. The book also features 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 reveals how financial markets really work.

Product Details

ISBN-13:	9780691196091
Publisher:	Princeton University Press
Publication date:	09/17/2019
Edition description:	Reprint
Pages:	368
Product dimensions:	6.10(w) x 9.10(h) x 0.90(d)

About the Author

Lasse Heje Pedersen is a finance professor at Copenhagen Business School and New York University’s Stern School of Business, and a principal at AQR Capital Management.

Table of Contents

The Main Themes in Three Simple Tables vii
Preface xi
Who Should Read the Book? xiv
Acknowledgments xv
About the Author xvii
Introduction 1
i. Efficiently Inefficient Markets 3
ii. Global Trading Strategies: Overview of the Book 7
iii. Investment Styles and Factor Investing 14
Part I Active Investment 17
Chapter 1 Understanding Hedge Funds and Other Smart Money 19
Chapter 2 Evaluating Trading Strategies: Performance Measures 27
Chapter 3 Finding and Backtesting Strategies: Profiting in
Efficiently Inefficient Markets 39
Chapter 4 Portfolio Construction and Risk Management 54
Chapter 5 Trading and Financing a Strategy: Market and Funding Liquidity 63
Part II Equity Strategies 85
Chapter 6 Introduction to Equity Valuation and Investing 87
Chapter 7 Discretionary Equity Investing 95
Interview with Lee S. Ainslie III of Maverick Capital 108
Chapter 8 Dedicated Short Bias 115
Interview with James Chanos of Kynikos Associates 127
Chapter 9 Quantitative Equity Investing 133
Interview with Cliff Asness of AQR Capital Management 158
Part III Asset Allocation and Macro Strategies 165
Chapter 10 Introduction to Asset Allocation: The Returns to the Major Asset Classes 167
Chapter 11 Global Macro Investing 184
Interview with George Soros of Soros Fund Management 204
Chapter 12 Managed Futures: Trend-Following Investing 208
Interview with David Harding of Winton Capital Management 225
Part IV Arbitrage Strategies 231
Chapter 13 Introduction to Arbitrage Pricing and Trading 233
Chapter 14 Fixed-Income Arbitrage 241
Interview with Nobel Laureate Myron Scholes 262
Chapter 15 Convertible Bond Arbitrage 269
Interview with Ken Griffin of Citadel 286
Chapter 16 Event-Driven Investments 291
Interview with John A. Paulson of Paulson & Co. 313
References 323
Index 331

What People are Saying About This

From the Publisher

"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

"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)

Editorial Reviews

"Pedersen's book can be recommended to a wide spectrum of readers interested in financial markets in general and hedge funds in particular."—-Jacek Klich, Central Banking

"Encyclopedic in its cataloguing of active management strategies and authoritative in its analysis of the practical issues of their implementation. Pedersen grounds his exposition in landmark scholarly articles and, where quantitative analysis is required to elucidate a concept, conveys his message without resorting to arcane mathematics."—-Martin S. Fridson, Financial Analysts Journal

"This is an interesting and stimulating book for finance scholars combining the skills of an active funds manager and educator at some of the world's premier business schools."—-Kevin Daly, Economic Record

"Despite the author's high level of understanding he manages to deliver a high quality but also easily understandable guide to the strategies."—-Mats Larsson, Investing by the Books

From the Publisher