Passive investing challenges fund managers

Index funds buying stocks based on weighting, not value, may inflate valuations of certain companies, says hedge-fund manager David Einhorn.

Last year, four in every five U.S. stock mutual funds failed to beat the S&P 500.

Research by University of California PhD student Hannah Unterberg shows passive fund inflows create asymmetric price pressure on stocks favored by active managers.

When active managers face redemptions, they must sell their chosen stocks, causing those stocks to underperform relative to index holdings.