Turkey's Hot-Hand Funds Just Froze, Stranding Nearly 456,000 Investors

What happened

Two weeks after jumping into a hot Turkish equity fund on a relative's tip, 28-year-old Mehmed Kervanci was hammering the sell button on his phone and getting nowhere. "When the order to sell wasn't processed, we panicked," he said. Kervanci, who is unemployed, had put 2.5 million liras, or $51,000, toward savings for his upcoming wedding. "Deposits weren't providing good returns, so we were looking to invest somewhere else. We are devastated."

Authorities said they will wind down around $20 billion in funds as they investigate alleged Ponzi-like setups linked to illiquid shares, and it is unclear how much money will be recovered. On Wednesday, the Capital Markets Board said 455,758 investors are locked in more than 130 funds now under liquidation. Over the past six years, Turkey's fund investor base has nearly doubled.

Voices from the selloff

"Now all the shares are plummeting every day," said Cem, a 30-year-old trader who asked to withhold his last name. "Who in his right mind would buy those stocks so we can be repaid?" He had 2.3 million liras across two Tera funds and could not get out as the rout deepened. The cash was supposed to help with a home purchase, and part of it came from gold he received at his wedding.

"It's driving me crazy. I haven't been eating properly for days," he said.

At the end of August, Emil Gurol Akyuz shifted 2.4 million liras out of gold and into two Tera equity funds, aiming to protect his savings as bullion declined. "I was reluctant at first, but the funds kept rising," said Akyuz, a university graduate looking for work. "My nerves are wrecked. I can't sleep - barely two, three hours a day."

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"These were all regulator-approved funds," said Istanbul entrepreneur Latif Ersoy, who put about 300,000 liras into three Pusula funds earlier this year. After a drawdown of 90%, "it really doesn't matter now whether I'll be repaid."

Why it unraveled

Turkey has seen plenty of market blowups, usually centered on the lira or the banking system. This time the trouble started with suspicions that a cluster of funds juiced performance. Policy tweaks rolled out at the end of August then fed a rush for the exits this month. The chairman of Tera, Emre Tezmen, was arrested early Wednesday.

Orkun Saka, a lecturer at City St. George's, University of London, called the eye-popping returns "mostly artificial," noting that when a stock has a tiny free float, a fund's own buying can become the pricing signal that boosts the value of its own portfolio. As prices buckled, managers sold more to raise cash, which risked a loop of deeper losses and more withdrawals.

According to Fonbul and Fintables, investors pulled around 600 billion liras from investment funds from Aug. 31 through Sept. 23. Turkish shares suffered their biggest one-day drop in over a year on Sept. 16. Earlier in the month, Tera said it planned to acquire Pusula Portfoy, but questions lingered about meeting redemptions. On Sept. 16, Tera said it could not fulfill payout requests from clients trying to exit.

What this means for your money

This saga is a reminder that sizzling gains can mask fragile setups, especially when they depend on thinly traded stocks. Funds managed by Tera Portfoy Yonetimi AS and Pusula Portfoy Yonetimi AS drew in savers trying to outpace inflation, which has averaged near 50% over the last three years. Now, with more than 130 funds in liquidation and nearly 456,000 people waiting, the open questions are how much of that roughly $20 billion gets clawed back and how long it takes.

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