Today’s guest is Lasse Pedersen, finance professor at Copenhagen Business School, principal at AQR Capital Management, and author of the new book “Efficiently Inefficient”. Pedersen earned his Ph.D. in finance from Stanford University and has over a decade of experience in the industry.
The conversation opens with an examination of the two opposing views on how markets operate. One view holds that markets are fully efficient and reflect real values, while the other contends that market prices are inefficient and tied more to investors’ emotions than anything else. Pedersen discusses his own interpretation — that markets are neither fully efficient nor fully inefficient, but rather a combination of the two — and that it’s this equilibrium that provides the stability needed for investors to make gains.
Michael Covel and Lasse Pedersen discuss the commonalities in the varied strategies of some of the most successful investors in the world, many of whom are interviewed in Lasse’s new book. One such commonality with these investors is their constant awareness of risk management, and the concept of gambler’s ruin. But at the same time, as Lasse is quick to point out, many of these financial legends freely admit that some of their greatest lessons were learned through their losing trades.
Other topics include the rise of quantitative investing, the role of hedge funds in the economy, and how leverage can effectively be used as an investment tool.
In this episode of Trend Following Radio:
- Discretionary vs. quantitative trading
- The importance of sticking to your financial plan
- The various investment styles of the successful
- How reflexivity affects market prices
- Backtesting to identify effective investment strategy
- The role of hedge funds
“I think that good quant investment managers can really be thought of as financial economists who’ve codified their beliefs into a repeatable process. They are distinguished by their diversification, sticking to their process with discipline, and the ability to engineer portfolio characteristics.” – Cliff Asness
Mentions & Resources:
- Lasse Pedersen
- Lasse Pedersen white paper
- Cliff Asness
- David Harding
- John Paulson
- Lee Ainslie
- George Soros
Get the foundation to making money in up, down and *surprise markets on the Trend Following mailing list.