How Turkey's investment fund bubble burst

Turkey's investment fund sector faces a deepening crisis after regulators last month ordered the liquidation of 131 funds managed by seven asset managers following warnings by some that they could not meet redemption payments.

The funds had reached more than $20 billion in assets over just three years, as nearly half a million investors including politicians, former officials and celebrities sought bumper returns to offset a depreciating lira and high inflation.

This expansion continued even after Turkish authorities alleged that some funds were being used for market manipulation.

The crisis dragged stocks into a bear market, with the main index having its worst month since 2008 in September.

The following sets out the crisis and what may come next.

How the fund boom began

Turkey has kept monetary policy tight to tame inflation and encourage lira-denominated savings, boosting interest in funds offering returns above inflation and local deposit rates.

Some of the investment funds became concentrated in a single stock or asset, while others had only a handful of investors.

Some of these funds traded recently listed small-cap shares, where lower liquidity allowed prices to move sharply, which in turn boosted the daily returns of the funds holding them.

Warning signs

Turkish officials warned about manipulation through investment funds in November 2025.

"We know that these manipulations are being carried out particularly through certain funds," Finance Minister Mehmet Simsek said, adding that regulatory gaps would be addressed.

Omer Gonul, then the chairman of Turkey's Capital Markets Board, said regulators were monitoring funds used to circumvent rules and warned that managers could face penalties including licence cancellations.

Two funds at centre of crisis

Two asset managers at the centre of the turmoil, Tera Portfoy and Pusula Portfoy, expanded rapidly before the crisis. Tera and Pusula have not responded to Reuters requests for comment.

Turkey's portfolio management industry assets rose to $329 billion in August 2026 from $246 billion a year earlier, data from the Capital Markets Board shows.

Tera's assets under management increased more than 10-fold to $14.3 billion over the same period, while Pusula's assets jumped 13-fold to $13.2 billion as more investors trickled in.

By the end of August, Tera was sixth and Pusula eighth among Turkey's portfolio managers, each with a share of total managed assets exceeding 4%, making them the sector's biggest non-bank companies.

Cumulative return of 15,000%

Some funds reported sharp rises in assets and investors.

Tera's TLY hedge fund returned 747% in lira terms between January and July 2025, when it had fewer than 200 investors.

After becoming available to a broader investor base in July, its cumulative return climbed to more than 15,000% in lira terms by September.

TLY attracted 102,616 investors and grew to $5 billion in assets, making it the largest of the funds being liquidated.

It was followed by Tera's TP2 money market fund, with $4.6 billion in assets and around 167,000 investors. TP2 provided a 123% return to investors over the same period, when the inflation rate was 60%.

Who has been caught up in the crisis?

Regulators have widened their investigation into suspected market manipulation in stocks and fund markets. Justice Minister Akin Gurlek said that the number of suspects had risen to 217, with 56 jailed pending trial.

Fatma Betul Sayan Kaya, a deputy chair of President Tayyip Erdogan's ruling AKP, resigned from her party posts after an opposition politician alleged that she and her husband had made substantial profits trading Ozata Denizcilik shares ahead of the turmoil. The shares are part of a broader market manipulation investigation.

Kaya said on X she considered it necessary to take political responsibility while the allegations were examined. She did not comment further.

Those jailed include senior executives linked to Tera and Pusula. Erkan Kilimci, a former central bank deputy governor who later became a Tera executive, was also jailed, broadcaster NTV said.

Kilimci said in a LinkedIn post before he was jailed that it was "unlucky" to have his name caught up in the allegations due to the senior Tera post he occupied for three months.

Kilimci's post did not directly comment on the allegations and Reuters was unable to reach his representatives for further comment. Kaya's adviser did not respond to a request for comment.

What happens next?

Istanbul's main index closed 2.5% higher on Thursday as sweeping changes to its constituents took effect, removing stocks caught up in the crisis.

The SPK said liquidating the funds will take six months and investors in certain funds with net investments below 1 million lira ($20,396) will get full repayment.

Those with 1 million lira or more invested will receive an interim payment of 1 million lira.

Turkey's Savings Deposit Insurance Fund has opened accounts for investors seeking to return what authorities describe as "excessive gains" from fund sales.

JPMorgan analysts said the fund sector turmoil brought "meaningful downside risks" to Turkey's 2026 GDP growth forecast of 3%.

It remains unclear how much the total loss to investors will be. Attention is turning to the prices at which fund assets can be converted into cash as many funds hold thinly traded stocks, potentially complicating the process.