> The fundamental problem he seems to be pointing at is that notional replicating portfolios can work like an engineering marvel in good times and become inoper

> The fundamental problem he seems to be pointing at is that notional replicating portfolios can work like an engineering marvel in good times and become inoperable in bad (liquidity) times. He is confused. That was the problem with the synthetic OTC instruments that he used which nearly tripped his winning position because no one wanted to actually trade with them. And even that was largely the case because he was buying not even CDOs but synthetic instruments that were derivatives of the CDOs. Index funds on the other hand own the shares in companies that publicly trade where the market markers must provide liquidity hence a single trade at +/- 10% will not only move the quote but would trigger other buyers and sellers to decide to want to play.