I like these topics. Take "situation normal", run it to the extreme and see what happens.
So lets do that. Lets assume there is one fund in the world, which owns every single commercial enterprise in the world. If you assume the fund needs all the money in the world to buy every enterprise in the world....and once it has bought everything what happens when a little old lady in Cyprus pull her money from under the mattress and decides to invest in this fund that has nothing left to buy.....ok I'm running into a few thought problems here, nothing a shot of whisky can't fix.
Ok lets try something different.
If 100% of money was in index funds there would be no buying and selling (no market?) and no rebalancing because stocks wouldn't go in and out of indexes??? I feel like I'm hitting a limitation of theory vs practical reality. How can you test something like this?
The point I want to try to make is that I think healthy competition is the saviour. Guarantee you a slick haired self-styled hedge fund manager will assess the situation, short it and make a truckload of money out of it.
That fabled invisible hand should guide our funds to the most attractive investment opportunities, be they the man who runs the ice cream van business or the MSCI world index. Speaking as someone who works in funds management, I know there will always be enough investors out there who believe they can find a manager (and pay for a manager) who will generate alpha for them. To paraphrase James Bond..."the index is not enough".
For me, I don't want to track an index in a falling market. I want a manager who will find a way to preserve my capital. If he underperforms in a rising market then so be it. I would prefer slightly lower returns as a trade off for slightly lower volatility.