As you rightly realise, we can't have a situation where all money is blindly invested in passive index trackers, since everyone will be following the herd and n

As you rightly realise, we can't have a situation where all money is blindly invested in passive index trackers, since everyone will be following the herd and no one will be leading it. If active managers are under-performing, then at some point as passive funds grow we will reach an equilibrium point where they are causing such price distortion that they will produce opportunities for active managers to profit from mispricings, correcting the situation.