[icelancer]

>>People will withdraw money from their passively managed funds when the market starts tanking.

Yes, some will. Many will also counter this by buying up the same assets as the price drops.

>>in my view, the more money that ends up being managed passively, the easier it will become to beat the market as an active investor.

This is absolutely true but also has nothing to do with your friend's legitimately unbelievable scenario.