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Key Words: There’s a ‘bubble’ in passive investing, says investor made famous by ‘Big Short’

The concentration of investor flows into large-cap stocks thanks to the rise of the ETF industry means small-cap opportunities are out there, says the investor who correctly called the subprime mortgage meltdown. Read More...
Bloomberg

Michael Burry, former hedge-fund manager who predicted the housing market’s plunge.

Michael Burry, the doctor-turned-investor profiled in Michael Lewis’ book “The Big Short” for his call on the trouble lurking in mortgage-backed securities in the 2008 financial crisis, has a new big idea.

“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,” Burry told Bloomberg News.

Many market observers have for years expressed concern about the rush of money into passively-managed funds, though few have gone so far as to call it a “bubble.” Academic research published in June shows that three index fund managers together manage more than $1.8 trillion, and that they could control as much as one-third of all voting shares of S&P 500 companies in the coming years.

Critics worry that such concentration of money in passive investments could amplify any market sell-off, but ETF managers point to big declines in December as proof that ETFs can withstand market shocks.

Related: Investors got spooked by the Christmas market massacre, new fund flow data shows

Burry’s firm, Scion Asset Management, has disclosed big stakes in four small-cap companies, including GameStop Corp. GME, +7.03%  , and Tailored Brands Inc. TLRD, +7.73%   Burry has asked management of both companies to buy back their shares, and told Bloomberg that he is taking an activist approach because he believes there needs to be a “critical mass of smaller-value seeking active managers like me.”

See: All that glitters might be just what your portfolio needs now

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