This translation has been automatically generated and has not been verified for accuracy.Michael Burry’s successful trades ahead of the financial crisis reached legendary status thanks to Michael Lewis’ book The Big Short and Mr. Burry was played by Christian Bale in the movie version of the story. Recently, Mr. Burry was back in the news after predicting a bubble in passive index funds that ‘will be ugly’ when it unwinds.
The mechanical allocation of index fund assets can result in a ‘big gets bigger’ situation in which the largest companies receive the most new investment even if they are prohibitively expensive or their respective profit outlooks deteriorate.Liquidity – whether there will be enough buyers to step in when passive funds endure heavy selling - is another major issue for Mr. Burry. Roughly– over US$4-trillion – are invested in index strategies.
I also believe that passive investing will cause a significant increase in volatility at some point, although the degree of damage is impossible to predict.
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