Has passive investing grown too big?

Hedge fund manager Michael Burry is almost a mythical figure. His shorting of the US housing market before the great financial crisis was the inspiration for the Oscar-winning movie The Big Short.

So when he suggests that there is another bubble developing, people pay attention.

This is what he did in an interview with Bloomberg last year, when he argued that index funds, and exchange-traded funds (ETFs) in particular, are distorting asset prices in stock and bond markets. As more money flows into these products, he said, this distortion is only growing bigger, which means that the likely severity of the resulting crash is getting worse.

“Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates any more,” Burry said. “And now passive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies – these do not require the security-level analysis that is required for true price discovery.”

Read more article on Moneyweb

Recommended For You