Book Review: Efficiently Inefficient by Lasse Heje Pedersen

One of the first few books that I read about asset management firms and hedge funds was Inside the Black Box (Review | Amazon) by Rishi Narang. It was a great high level book which covered all the different components of a hedge fund such as market data, backtester, order management system, risk models, portfolio management, transactions cost analysis etc. As I continued to learn more about the industry, I wanted to read a more in-depth book that covered more than just the basics. Efficiently Inefficient by Lasse Pedersen is such a book that covers a variety of topics on hedge funds.

The book is divided into four sections:

1. Active investment
2. Equity strategies
3. Asset allocation and Macro strategies
4. Arbitrage strategies

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The first section covers broad topics such as hedge fund structure, strategy performance measures, backtesting, as well as portfolio construction and risk management. Once the basics are covered, the next section dives into equity strategies: fundamental investing (long and short), dedicated short bias, and quantitative equity investing. Similarly, third section covers asset allocation, macro investing and managed futures. Finally, the fourth section discusses different types of arbitrage strategies such as fixed-income arbitrage, convertible bond arbitrage and merger arbitrage. For each strategy, Lasse discusses what they are, how they work, why they work (very important), when they work and why sometimes they might not work. Lasse also analyzes each strategy from a risk perspective by highlighting different types of risks encountered with each strategy. For example, convertible bond arbitrage exposes investors to credit default risk.

I have looked at a few books on investment strategies and hedge funds and very few come close to covering a wide variety of strategies and still dive deep enough into each one of them like Efficiently Inefficient does. Most books either focus on a type of strategies in depth or cover a wide variety of them but barely touch the surface. In my opinion, Efficiently Inefficient is a great balance of breadth and depth of information provided about smart money.

My most favorite part about the book is that it realizes theoretical knowledge is not everything. Learning from actual investors’ experiences is just as important as learning from theory. For each strategy discussed, Lasse includes an interview with the pioneer of that strategy. For example, an interview with George Soros is included in the chapter on macro investing and an interview with Ken Griffin is included in the chapter on convertible bond arbitrage. It’s great reading about how these brilliant investors make use of these strategies in real life!

Overall, I would rate Efficiently Inefficient as one of the best books I have read on trading strategies and active investment. It’s easy to read and covers numerous topics with just the right amount of detail. I would highly recommend this book!

You can find the book on Amazon!