- Michael Burry, the investor made famous by "The Big Short," told Bloomberg Wednesday that he sees a bubble in passive investing.
- Many other money managers have called out the investment strategy, which they say isn't the best course of action for investors in the current market environment.
- Read more on Markets Insider.
Michael Burry, the investor that famously shorted mortgage securities before the 2008 housing crisis, told Bloomberg on Wednesday that he sees a "bubble" in passive investing.
That bubble is ignoring small-cap stocks, said Burry, who was a key figure in Michael Lewis' bestselling book "The Big Short" and was played by Christian Bale in the movie with the same name. The problem is happening because the pillars of passive investing - exchange-traded funds and index-based assets- mostly focus on bigger companies. This puts downward pressure on the stocks of smaller companies and has effectively "orphaned smaller value-type securities globally," he wrote to Bloomberg in an email.
Burry isn't the only investor calling out passive investing. Over the last few years, as passive investing has grown in size and popularity, many investors have called out flaws in the approach, which minimizes buying and selling to protect investors from dips in performance that can come with frequent trading.
In today's current market environment, where a number of recession indicators are flashing and investors are becoming increasingly nervous, money managers have also argued that passive strategies can set up investors for major losses if an unexpected market downturn occurs.
Active managers should be positioning client portfolios for a downturn or recession, Bill Adams, the chief investment officer of fixed income for MFS Investment Management, told Markets Insider. "No one's good enough to tell you when the recession comes. But it's starting to look and feel and smell a lot like it's on the horizon."
A passive investor buying passive strategies is just buying the market, Adams said, not necessarily positioning portfolios for a specific outcome.
Here are some other big name investors that have spoken about issues with passive investing.