Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined
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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 and interviews with top hedge fund managers to show how certain trading strategies make money―and why they sometimes don't.
Pedersen views 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. Pedersen analyzes how the market price of stocks and bonds can differ from the model price, leading to new perspectives on the relationship between trading results and finance theory. He explores several different areas in depth―fundamental tools for investment management, equity strategies, macro strategies, and arbitrage strategies―and he 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 effectively demonstrates how financial markets really work.
Free problem sets are available online at http://www.lhpedersen.com
"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
"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)
- Publisher : Princeton University Press (April 13, 2015)
- Language : English
- Hardcover : 368 pages
- ISBN-10 : 0691166196
- ISBN-13 : 978-0691166193
- Item Weight : 1.69 pounds
- Dimensions : 6.4 x 1.1 x 9.5 inches
- Best Sellers Rank: #685,125 in Books (See Top 100 in Books)
- Customer Reviews:
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Table I aims to demonstrates that financial markets are neither efficient nor inefficient, but efficiently inefficient. Financial markets are efficiently inefficient because they allow some money managers to outperform the market on behalf of their investors after fees.
Table II subdivides the different trading strategies that smart money, including hedge funds, uses to capitalize on the efficiently inefficient nature of financial markets. These strategies can be subdivided at a high level into equity strategies, macro strategies, and arbitrage strategies.
Table III covers the different investment styles and their systematic implementation. The different investment styles can be reduced to some version of value investing and momentum investing.
Mr. Pedersen usually strikes the right balance between his prose and the more technical aspects of active investment, equity strategies, asset allocation and macro strategies, and arbitrage strategies. The interviews that the author has conducted with hedge fund gurus such as James Chanos, George Soros, and John Paulson add some additional color to the different levered trading strategies in which they tend to specialize.
In summary, “Efficiently Inefficient” can be easily ranked among the best books out there that focus on hedge funds and their respective modus operandi used to outperform the other market players.
Why learn about active investment management if markets are efficient? Pedersen argues throughout for the concept of "efficiently inefficient" markets, essentially that markets are efficient after accounting for the transaction costs and risks faced by active managers pursuing these strategies.
They compliment each other well. Efficiently Inefficient is more readable than Expected Returns but not as in depth.
In a nutshell the book could be outlined as:
This section has five chapters which provide an overview of the theoretical aspects of investing. It covers an overview of the hedge fund industry in chapter one followed by a brief explanations of the “greek” alphabet of performance measurement in chapter two. The remaining chapters discuss issues in back-testing, perspectives on risk management followed by discussion of trading costs and leverage.
Part II of the book discusses the three primary equity strategies which the author has broken down as Discretionary Equity Trading, Dedicated Short Bias and Quantitative Equity Investing. This book outlines the theoretical principles of each of these primary strategies and ends each respective chapter with an interview with a respected practitioner of the strategy. Discretionary Equity investing is what would probably be familiar to most investors. It is the Graham & Dodd realm of investing. The next chapter on Dedicated Short bias gets into the thesis, details and complications of short selling and ends with an interview with noted short seller James Chanos. The final chapter in this section gets into Quantitative Equity investing. Arguably, this is the chapter that hones in on what has been in the investing limelight in recent years as it discusses investing in factors such as value, momentum, size and volatility as well as statistical arbitrage. A lot of the material in this chapter relates to the recent interest in “smart beta.” The interview that concludes this chapter is with Cliff Asness whose firm is also the author’s employer and one of the leaders in creating smart beta products.
This section of the book gets beyond the realm of equity security selection into larger asset allocation picture. Included here is a chapter on Global Macro Investing which ends with an interview with arguably the most famous global macro manager ever, George Soros. A chapter on managed futures follows with discussions of trend-focused analysis and an interview with David Harding of Winton Capital.
The final section of the book has separate chapters on Fixed-Income Arbitrage, Convertible Bond Arbitrage and a final chapter on Event-Driven Arbitrage. As with the other chapters, each ends with an interview with a noted practitioner of each respective strategy. In these chapters, the author interviews Nobel Laureate Myron Scholes, hedge fund managers Ken Griffin and John Paulson.
Pedersen’s book could be used as a supplementary text for a college or MBA program but it does not read pedantically like a college text book. While some math appears, it is kept to a decent minimum. The clear and concise discussion of the theoretical basis for each strategy is followed nicely by an interview with a practitioner in that space. The interviews do follow in the spirit of books by John Train and Jack Schwager (albeit briefer) and help in providing color to each chapter. Arguably Pedersen’s work provides an efficient and very readable survey on the state of the investing environment today.
Top reviews from other countries
A brief flick through what I can read it looks useful - but only MBA level- not technical- if that's what you want then it provides a good review of fairly standard stuff but neatly gathered together in one place