Investor Michael Burry, one of the central figures in the book turned film The Big Short, has given his opinion on a number of topics; from central banks fueling distortions in credit markets, to opportunities in small-cap value stocks and the “bubble” of passive investing.
In an email interview with Bloomberg Mr Burry said passive investments such as index funds and exchange-traded funds are inflating stock and bond prices in a similar way debt obligations did for subprime mortgages more than 10 years ago.
The flows will reverse at some point, he said, and “it will be ugly” when they do.
“Like most bubbles, the longer it goes on, the worse the crash will be,” Mr Burry, who oversees around $340 million at Scion Asset Management in Cupertino, California, said.
Passive investments have now taken over nearly half the stock market as more investors shun stock-pickers and flock to index funds, according to Bank of America Merrill Lynch.
Equity passive funds alone are said to have become a $3 trillion market in less than 10 years.
“The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.”
Mr Burry rose to fame by betting against mortgage securities before the 2008 financial crisis, which was depicted in Michael Lewis’ book “The Big Short”. The bestseller was eventually turned into a comedy-drama, starring Brad Pitt, Ryan Gosling, Christian Bale and Steve Carell.