Passive investment strategies have grown in popularity among investors, but they present a "frightening" risk to the markets, warns a Morgan Stanley strategist.
The flow of investment from active management funds to passive investment funds is significant; it increased to nearly $500 billion in the first half of 2017, according to Bloomberg data. Morningstar data revealed investors have pulled an estimated $26.7 billion from Goldman Sachs Asset Management's mutual funds so far this year, the Financial Times reported on Sunday.
Hans Redeker, global head of foreign exchange strategy at Morgan Stanley, is worried by this flow of cash.
"I do not like what I see, because you have to consider when you have people getting more involved with passive investment strategies, the market will be less able to react to minor distortions or minor declines on the fundamentals side. You will not see the market direction. You will see just a continued inflow of funds," he told CNBC's Squawk Box on Monday.
The appeal of passive funds is they generally charge lower fees than active managed funds, which boosts investors' returns. But while this helps individual investors, it is problem for the wider market.
"From an aggregate point of view it is frightening. It means that at one point you will not have the active end in the market to stabilize it. You would have just the passive guys getting into herd mentality," he warned.