Michael Burry, the hedge fund legend whose prescient bets on the subprime mortgage crisis led to a silver screen depiction by Christian Bale in “The Big Short,” has earned respect.
Recently, Burry stated publicly that he sees the frenzy around passive investing as another dangerous bubble, and that when the massive inflows eventually reverse, “it will be ugly.”
“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,” Burry said in a recent interview with Bloomberg.
“This is very much like the bubble in synthetic asset-backed CDOs before the great financial crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows,” Burry continued.
This first point seems to be the one that subject matter experts, generally speaking, find more troubling.