Financial market behavior and key trading strategies-illuminated by interviews with top hedge fund expertsEfficiently 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 lhpedersen.com

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